Hillshire Brands Management Discusses Q2 2013 Results - Earnings Call Transcript

Jan.31.13 | About: Hillshire Brands (HSH)

Hillshire Brands (NYSE:HSH)

Q2 2013 Earnings Call

January 31, 2013 10:30 am ET

Executives

Melissa Napier - Senior Vice President of Investor Relations

Sean M. Connolly - Chief Executive Officer, Director, Member of Executive Committee and Chief Executive Officer of North American Retail & Food Service Business

Maria Henry - Chief Financial Officer and Executive Vice President

Analysts

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

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

Timothy S. Ramey - D.A. Davidson & Co., Research Division

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

Robert Moskow - Crédit Suisse AG, Research Division

Robert Dickerson - Consumer Edge Research, LLC

Andrew Lazar - Barclays Capital, Research Division

Kenneth Perkins - Morningstar Inc., Research Division

Operator

Good morning, and welcome to the Second Quarter Fiscal 2013 Earnings Conference Call for Hillshire Brands. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Melissa Napier, Treasurer and Senior Vice President of Investor Relations for Hillshire Brands. Thank you, Melissa. You may begin.

Melissa Napier

Thank you, Caroline. Good morning, everyone, and welcome to our second quarter earnings call. Our results were released at 6:30 a.m. Central Time this morning, along with an 8-K disclosing our financial results from continuing operations, adjusting for the pending sale of our Australian Bakery. You can find the release and the 8-K along with the slides that we'll be reviewing today posted to our website under the Investor Relations section. We also plan on filing our 10-Q later this afternoon.

I'm joined today by Sean Connolly, our CEO; and Maria Henry, our CFO. Sean and Maria will provide their perspectives on the performance of the business during the quarter. We'll take your questions after management's prepared remarks conclude. [Operator Instructions]

I'd like to refer you to the forward-looking statement currently displayed and remind you that during today's call, we may make forward-looking statements about future operations, financial performance and business conditions. And actual results may differ from those expressed or implied in these statements. Also during the presentation, we may refer to non-GAAP financial measures. Explanations of non-GAAP financial measures are included in our release.

I'll now turn the call over to Sean.

Sean M. Connolly

Thanks, Melissa. Good morning, everyone, and thanks for joining us this morning. Before we jump into the details of the quarterly results, let me take a step back and frame up the big picture for everyone.

Hillshire Brands is a focused food company. One that is committed to delivering growth and profitability through brand building and innovation across our terrific portfolio of brands. We have a disciplined plan to create value that also includes an intense efficiency mindset. After half a year, I feel very good about the progress we're making against our plan. Q2 was another strong quarter for Hillshire Brands, and we're pleased with our overall performance in the first half of fiscal '13. We continued to make strides in growing volume, revenue and adjusted operating income in the first quarter and the first half. Our brands continue to grow stronger and healthier as we invest in MAP support and innovation in our core business. Our profit was meaningfully helped by both lower input costs and our disciplined approach to SG&A spending. Also we entered into an agreement to divest our Australian Bakery operation. Once that closes, we will be able to focus 100% of our time and energy on driving growth and innovation across our North American Retail and Foodservice segment.

We also moved our corporate headquarters from Downers Grove to Chicago without missing a beat, an important step in our cultural evolution. Based on all of those items, as well as our outlook for the balance of the fiscal year, we are raising our adjusted EPS guidance to a range of $1.60 to $1.70 per diluted share.

Now let's dive into the segment results. I'll provide some commentary here on what drove our Retail and Foodservice performance, and Maria will provide more insight into the numbers a bit later in the call. We have now achieved 4 consecutive quarters of year-over-year volume growth in Retail. Clearly, the first half comps were easier than the second half will be, but we feel good about the progress we're making with our brands.

Over the first half of this fiscal year, we've meaningfully increased our investment in MAP to support our brands, as you can see on this slide, and as you know, this is a crucial step in our 3-year plan to deliver significant value. By consistently supporting our brands with MAP, they will be better positioned in the marketplace and perform more consistently over time.

I think that the Jimmy Dean business exemplifies this well. Jimmy Dean is lapping record high volumes in breakfast sausage rolls this quarter due to unusually heavy holiday merchandising last year. Despite that tough comp, the total Jimmy Dean franchise grew overall volume and revenue year-over-year behind strength in sandwiches and bowls, both of which had very strong MAP support.

We were also pleased to see Jimmy Dean's new biscuit line get off to a strong start. These products are consistent with our strategy to continue to push into snacking categories.

On Hillshire Farm, we were expecting to see lunchmeat begin to respond to our programming, and I'm pleased to say that it did. After a long time of very little MAP support, Hillshire Farm lunchmeat advertising is back in full swing. We returned to air late quarter 1 with a new campaign that takes the brand back to its quality heritage. As you all know well, Hillshire Farm lunchmeat has been struggling for some time now. So I'm pleased to say that with the support of our marketing tools, Hillshire Farm lunchmeat returned to volume growth this quarter.

And keep in mind that the new packaging and product improvements that we've talked about before have not hit the marketplace yet. Those will be rolled out in February, and we expect consumers to respond well to these upgrades.

To be clear, it's still early days, and we're not declaring victory in any way on the turnaround of Hillshire Farm lunchmeat. However, these are positive early signs on an important business for us.

Frankly, there are positive signs throughout our consumption data. This slide shows year-over-year growth in IRI's total volume sales for the full fiscal '12 and for the year-to-date of fiscal 2013. Now I won't go through every one of our brands, but as you can see on this slide, we are making solid progress across our Retail portfolio. Even businesses we don't spend a lot of time typically talking about, for example, State Fair is growing through increased distribution, and the Gallo restage has really taken hold. Additionally, a couple of Sara Lee businesses that had been leaky buckets are stabilizing.

Now we don't show our seasonal items here, but I want to mention them briefly. These are products like Hillshire Farm cocktail links, Jimmy Dean breakfast roll sausages, certain pies and desserts. We had a much better execution this year than last year, and I'm happy to say that these items delivered quality volume performance and grew revenues in the quarter.

So net, we've made some real progress strengthening our core across the Retail segment. We have several great new products that will be hitting the marketplace soon across our portfolio, including the brands you see here on this slide. We will be at the CAGNY conference in February, where we're going to talk about innovation in quite a bit more detail.

Now turning to Foodservice. This business had a solid quarter with volume, revenue and adjusted operating income versus the same quarter -- up versus the same quarter of fiscal year '12. The meat side of the business continued to grow volume and has gained traction with our branded placements such as Dunkin' Donuts new breakfast sandwiches made with Hillshire Farm Smoked Sausage.

On the bakery side of the business, we are still seeing declining consumption trends in the industry. So it's really a share gain there. However, the Tarboro plant changes are now behind us, and we're finalizing the upgrades at our other bakery plant in Traverse City, where we saw almost no disruptions during the process. Now while these upgrades have been challenging at times, we're now well-positioned in Foodservice bakery vis-à-vis our competitors.

So to wrap up Foodservice, it was a solid quarter, but we're very clear eyed that the near-term environment in Foodservice as a channel remains quite challenging.

Now before I turn the call over to Maria, let me summarize my thoughts for you. We've had a strong first half, and I am very pleased with our progress. We have great brands, and our plans to revitalize them are moving along nicely. Additionally, after 2 years of significant commodity inflation, we benefited from some temporary favorability in the first half. We will reinvest some of that in the second half to further strengthen our brands and advance our cost efficiency programs.

We do this in anticipation of a return to commodity headwinds as calendar year '13 unfolds. Overall, our philosophy on this is quite straightforward. We have been and will continue to be focused on building the business for sustained long term value creation. That means building stronger brands through consistent MAP and innovation, as well as a continuous improvement mindset on costs. Our goal is to take the necessary actions to drive the centerline of our profit trends continuously north over time, and we believe we're doing just that.

Over to you, Maria.

Maria Henry

Thanks, Sean. Good morning, everyone. Thanks for joining us. As you've seen in our numbers and just heard from Sean's comments, we posted strong earnings for the quarter and the first half of the fiscal year. We continue to execute our plan, and we are making progress.

As in the first quarter, our second quarter results reflect significant benefit from lower input cost. Consistent with our strategy, we continue to invest in MAP and innovation in the quarter, and I remain pleased with the early results that we are seeing from our investments in those areas.

Also on December 18, we announced the sale of our Australian Bakery business to McCain, and that segment has now been classified as a discontinued operation in our financials.

Now let's take a look at the quarter's financial results. As you can see on the slide, our adjusted operating income of $127 million was up 26% versus last year, and adjusted diluted EPS was up 29% to $0.62. The key drivers of our strong adjusted operating profit in the quarter were lower input cost and solid volume growth.

Our adjusted net sales grew 2.5% behind a 2.9% increase in volume. About half of that volume increase was attributed to higher commodity meat sales. If you exclude those sales, our volume grew 1.3%.

On gross margin, we had the benefit of deflationary input cost in the quarter. This was the primary driver of our 13% increase in adjusted gross profit and our 31.4% gross margin rate. Our MAP spend was 4% of revenue. This is up 43% from last Q2 when we had an MAP spend level of only 2.8% of sales.

The brands that saw the biggest year-over-year increases were Jimmy Dean and Hillshire Farm. We expect our MAP to further strengthen our brands and to position us to better maintain margins in the face of commodity cost increases in the future.

Our SG&A, excluding MAP, decreased by 1% in the quarter and by 6% for the first half versus last year. This reflects the benefit of our savings initiatives, some onetime favorable items and the timing of expenses and investments.

Now let's look at the segment. Retail led our overall strong company performance. Segment sales grew 2.2% on volume growth of 1.1%, with growth in Jimmy Dean, Ball Park, Hillshire Farm and Aidells. The 23% increase in Retail adjusted operating profit was driven by solid sales growth, as well as lower input cost. And we were again able to hold much of our pricing through this deflationary period.

Moving on to Foodservice/Other. Overall, this segment had a solid quarter. Volume grew 6.6%. Excluding sales of commodity meat, Foodservice volume grew 1.7%. We saw nice growth in Foodservice meats in the quarter, which was somewhat offset by declines in bakery.

Adjusted operating segment income growth of 8.5% benefited from lower input prices, but was negatively impacted by mix, with higher commodity turkey sales and lower bakery sales. Additionally, our manufacturing costs are higher in bakery from the changes we have made to our bakery manufacturing facilities to comply with the Food Safety Modernization Act. While the changes are behind us, they have resulted in higher ongoing costs from depreciation on new equipment and higher labor costs. We continue to believe that over time, these changes give us a competitive advantage in the market, but as Sean pointed out, the Foodservice space overall is challenging right now. So our near-term expectations are modest.

We announced the sale of our Australian Bakery business to McCain for AUD 82 million or USD 85 million. We now expect this deal to close within this quarter. It is subject to customary closing adjustments, and we expect to pay approximately $12 million in taxes on the sale.

The sales and earnings for Australian Bakery were included in our original guidance. Our expectation for that business was $136 million in sales and $0.03 of adjusted diluted EPS for fiscal '13. The sale of the business has now been incorporated into our updated guidance.

Our balance sheet and cash flow remain strong. Excluding significant items, the business generated $114 million in cash and $301 million in adjusted EBITDA during the first half. At the end of the quarter, we had $647 million of net debt, so we remain conservatively leveraged. The proceeds from the sale of the Australian Bakery business will provide additional capital flexibility.

We continue to evaluate our alternatives to deploy cash to achieve the highest return for our shareholders. Our near-term priority remains investing in our business, where we currently have significant opportunity.

We recently added Brian Davison as our Senior Vice President of Strategy, and he is working with us to evaluate our alternative. With the first half of the year behind us, we are updating our full year guidance. We are now expecting our net sales growth for the year to be up slightly despite the fact that our second half comps are more challenging.

We are raising our adjusted diluted EPS guidance to $1.60 to $1.70. This reflects the strong earnings we posted in the first half, some of which we will be reinvesting back into our business. I said on the last call that if we were tracking to favorability for the year, we will look to dial-up the investment in our business around brand-building, innovation and cost efficiency programs that will strengthen our position going into what appears to be a more challenging commodity environment in the second half and into our fiscal '14, and we are doing exactly that.

And in the second half, we will be making investments behind new products going into the market, in MAP to strengthen our brand equity and in some external expertise to work with us on capabilities development and to identify areas of productivity and cost opportunity. As we've discussed, the first half benefited from significant input cost favorability. We do not expect that favorability to repeat in the second half.

In addition to the loss of input cost favorability, as I discussed earlier, we continue to expect SG&A expenses, including corporate, to rise through the balance of the year. We expect our SG&A cost to be up in the second half, and as previously communicated, up for the full year versus fiscal '12. We're making investments in the second half to develop our capability in critical areas and to identify the remaining specific opportunities behind the $100 million cost savings we have committed to as part of our 3-year plan. As you'll recall, $35 million of that was yet to be identified as we started the year, and we're making good progress on what those programs will be.

Additionally, I'm happy to report that we are on track for the $40 million of savings that we expect to deliver in fiscal '13. Finally, we have some favorability in corporate that will stick for the year. So we now expect our corporate expenses for fiscal '13 to be in the mid-50s.

So let me sum it up. We had very strong earnings in the first half behind good growth and significant input cost favorability. We are investing some of that favorability back into our business. We do not expect to see net favorability from price commodities in the second half, and our SG&A cost will be higher in the second half and for the full year behind investments and timing of expenses.

We now open the call up for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question or comment comes from Ken Goldman from JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Can you talk about the competitive response, if any, that you've seen to some of your sales gains, both in the -- maybe some of the new products that are out there and especially on the Hillshire brand?

Sean M. Connolly

Ken, we don't comment a lot on our competitors in general. I think if you look at the categories we compete in right now, each of these companies have a lot going on in their own right. So it looks to me like everybody's focused on their own agenda and what they've got to do. We certainly have been doing that because we've got to get our own house in order, and we worry a lot more about that than what our competitors are doing. What I see overall is generally a pretty reasonable marketplace. We saw in one of our categories there was a little bit of hot merchandising over the holidays. But really overall, I've seen it be a fairly reasonable marketplace thus far this year.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

And then can you add a little bit of color on what you're seeing? I know you talked about it a little bit, but in the hog and the cattle markets, how much of your guidance raise was due, if you can quantify it, to some of the hogs and pigs report that was out there from the USDA, maybe some of the Cargill plant closing news that took cattle prices down. I'm just curious to what extent your confidence in the back half of the year was extended perhaps by some of those news items that may have come out of the commodity markets.

Maria Henry

Sure. We -- let me just talk about how we think about commodities. We all look at the same external data. And while we don't comment specifically about our commodity assumptions, the last time we spoke to you, commodities have moved. And so we expect commodities to go against us at the back end of this fiscal year. But in my comments, I noted that for the second half in total, we aren't expecting any favorability from our price commodity relationship.

Operator

Our next question or comment comes from Akshay Jagdale from KeyBanc Capital Markets.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Just along the lines of Ken's question. If you can just help us, I mean, in the back half, I think you're guiding to an EBIT decline of close to $97 million. I know there's been some changes in the numbers. So I don't know if I have that exactly right, but the magnitude is pretty severe in terms of the year-over-year decline. And in my opinion, there's 2 buckets, right? You've got the MAP spending, and you've got the commodity costs. So at least on the gross profit side. Those are the 2 main buckets that I'm looking at. Can you help us there? I mean, you're being very vague about the commodity side and MAP spending in general, but at least help me understand order of magnitude, what are the main drivers of that decline that you're projecting. I mean, at least rank them for us, that would be great.

Maria Henry

Sure. Let me give you some color there. We certainly don't mean to be vague. Let's talk about a number of things. First of all, I think this year really comes out to be a tale of 2 halves. In the first half of the fiscal year, we saw significant favorability from input cost. We don't expect to see that in the second half of the year. We also saw some favorability in terms of our SG&A spend. So the SG&A spend including corporate for the first half of this year benefited from some favorability. That includes some of the onetime items I talked about on the call after the first quarter. It also includes kind of the timing of how expenses hit our P&L. If you think about it, we just spun at the end of June. So we've had -- we're 2 quarters out. We're getting our new management team in place. That management team got hired through the first half of the year. That team then hired their teams underneath them and started the program that will -- that we are working on to achieve our midterm target. So things didn't really get going right at the beginning of the year. They paced through the first half of the year. Something that I can tell you for sure, we will not spend money in this company until we're ready and in order, and that we see clear returns on it. So the timing of the spend around the G&A really ramped through this year, and so the SG&A expenses will be up in the second half versus the first half. We are investing some of the favorability that we achieved in the first half back into our business in the second half. This is in the area of MAP, behind getting the new innovations into the market in the second half and also bringing some external expertise in to work with us on our fundamental capabilities in critical areas and also to help us identify the exact projects and programs that we'll be executing in order to achieve that additional $35 million of savings that we've been talking about since June. So it really is a tale of 2 halves, and that's how we think about it, and that's what's driving the various line items on the P&L.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay, and just one on MAP spending and just overall the effectiveness of your advertising campaigns. You made a comment that the products are responding well. What do you mean by that? I mean, is there a particular return on marketing dollars invested that you're looking at, if you could share that, and perhaps give us a sense of how you were doing before to get a sense of how much better it's gotten. So can you help me understand the comment about being more effective in sort of your MAP spending now or your brands responding well, that would be great.

Sean M. Connolly

A couple of points on that, Akshay, to think about. First of all, as everybody knows with the old Sara Lee business, the MAP, the absolute level of spend was light. And on top of that, the effectiveness of it, we deemed there was room for growth there. So we're attacking both of those. We're putting more MAP spend out there, and we've got new agencies in place. We've got new communication strategies. And then what we do is we allocate that MAP spend against the brands that are most ready for that MAP spend in terms of an ROI outlook. So what you see out there and what you'll continue to see is us putting the MAP resources primarily against our power brands. Now -- starting with Jimmy Dean. So Jimmy Dean continues to -- we've stepped up our MAP investment meaningfully on Jimmy Dean this year in the first half and it's delivered performance. The good news is, we will continue to do that in the second half because, as you can imagine, given our previous MAP budgets, we were the kind of company that was inclined to run out of money on MAP in the first half of the year. So as we go forward, really if you look at fiscal '13, the vast majority of our incremental MAP spend on the year comes in the second half, and it tends to go against the power brands. And we see it in volume results, frankly, and that's why I show you the scanner data in the slides we saw today. You see that on overall, our programming is driving improved trends and on businesses where we have MAP, like Jimmy Dean, and beginning really to start putting it against Hillshire Farm, as well as Ball Park, we're seeing very good response.

Operator

Our next question or comment comes from John Baumgartner from Wells Fargo.

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Sean, I've just been looking at some of the Nielsen data here, I think we've seen relatively broad-based reductions in the percent sold on promotion over the past few months. So with that, just wondering if you have any thoughts here either on your price gaps or maybe even the elasticity points with consumers going forward, and I guess even in the context of consumer tolerance to higher price points, if the category does have to raise prices with inflation coming through.

Sean M. Connolly

Well, that point you're raising, John, essential to the way we run the business. Overall, we're looking to drive the centerline of our profitability north over time, and for us to do that, we need to be able to sequentially build strength in our brands so that we can hold volumes in an environment where we take price. The way you do that is by investing in MAP and by competing based on brand equity and based on the benefits that we bring as opposed to competing on price. So it is clearly our strategy to, as the businesses become ready, compete less on price, to compete more on innovation, more on brand-building, and it's early, early days for us in that regard. So what we've had in the first half, I think, is better price points in terms of gaps to competition and key thresholds than we had say, our first half a year ago. But we're just really getting started in terms of the MAP and innovation agenda and building the kind of strength that can withstand changes in pricing in the future. But that is our game plan. That's the way we're going to run the business overall, and it is a far better alternative than competing on price and then having to see your volumes really take a hit when you do price.

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Okay. And then just on the Foodservice bakery side, the volume stabilization there, I think you had mentioned maybe some share gains. Is there anything company specific that you're doing in terms of innovation or new distribution that you're gaining in some of these accounts that's kind of helping stabilize those numbers?

Sean M. Connolly

I think with respect to the Foodservice team's go-to-market approach, because the channel is sluggish right now and then people are really tightening their -- they're continuing to tighten their belts away from home, we're not seeing nor are we forecasting underlying growth in the industry, which as I mentioned in my comments, means it's a share gain. And if you're going to win share, you've got to have a novel and provocative item. So what the team is doing on bakery is they're continuing to innovate, and we have a number of new things coming in there, and we keep trying. You try it, if it works, you scale it up. If it doesn't work, you pull it quickly, you do something else. So innovation is the name of the game, particularly on the bakery side of the business where we do, in fact, have a very strong bakery capability, and we have innovation capabilities there that I think few can match.

Operator

Our next question or comment comes from Alexia Howard from Sanford Bernstein.

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

Could I ask about the outlook for price and volume going forward? Obviously, you've talked about it being a year of 2 halves. I think we've seen pricing being pretty muted in the first half with volume coming through maybe a little bit better than expected. You've talked about wanting to get to positive sales growth for the full year. Are we likely to see a reversal whereby maybe pricing comes through based on commodity pressures in the second half or is it more of the same?

Sean M. Connolly

We want to continue to grow our sales line. There's no question about it, and as we showed in the slides, we've got tougher comps in the second half, but we don't expect a decline. And with respect to pricing, what we can say is, we expect to be pricing as calendar year '13 unfolds. Clearly, we can't get into details on what that looks like yet for competitive reasons, not to mention it's early. But overall, our goal is to have positive price recovery in deflationary times, and then to minimize the negative price recovery that we could see in inflationary times. And the net approach of that is the centerline of our profitability moving steadily north over time. That is our approach, but we're not going to get into pricing specifics now because it's too early. But clearly as we see calendar year '13 unfolding now, we expect it to become inflationary, and that is likely to prompt pricing moves of some sort or another.

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

Okay, and then just as a quick follow-up. Could I ask Maria about uses of cash? I think you came into the year thinking that cash -- free cash flow was going to be quite tight because of various expenditures that you had through the year. Clearly, the operating performance has come through better than expected. You seem to be -- you have a fair amount of cash and your net debt position is quite low. At what point do you start considering maybe introducing some share repurchases or are there other things that the cash is earmarked for?

Maria Henry

We do have a very strong cash balance that will be further augmented when we close the sale of the Australian Bakery. It's not our intent to sit on a cash balance for a long period of time. We continue to think about our capital deployment strategy consistent with what we've talked to you about before. Our first priority remains investing in our business because we see significant areas of opportunity to invest in our business. So that's our first priority. We've talked before about dividends and the fact that we started out conservatively there, and that we would look to increase that over time. That remains consistent. And then the next areas of priority are looking at M&A opportunities. We just hired Brian Davison who joined us early in January, and he is working with us on exploring those M&A opportunities and looking to see if there's potential to create real value through opportunities in the M&A market. And then we balance that with share repurchases. So clearly, we'll deploy our capital to the areas that deliver the highest and the best returns, and that's how we think about it.

Operator

Our next question or comment comes from Tim Ramey from D.A. Davidson.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Just an administrative question here. If I looked at your adjusted financial summary on Page 5, you don't show any interest expense here. And obviously, it looked like net interest expense was about $10 million in the quarter. What am I missing? Are you lumping that in with general corporate expenses? And did you say what your net interest expense forecast was for the full year? I think you might have said $50 million, but I might have missed that.

Maria Henry

No, I think the guidance that we've given on net interest expense for the year is $35 million to $40 million, and I still expect that it will be in that range.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

And if we're looking at Page 5, where is the net interest expense that flips to $0.62?

Maria Henry

Get to Page 5. I'm not seeing that on that page. But, Tim, I'd ask this; that you follow-up with Melissa, and she can show you where it is in the statement.

Operator

Our next question comes from Ken Zaslow from Bank of Montreal.

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

When you're talking about the guidance increase, can you just talk about how you can rank it in terms of how much was the increase related to operational improvements, corporate expense reduction and commodity price favorability? And then I know Maria you said that there was 2 halves to the year in terms of corporate and in terms of margin structure. So when we look forward, how do we think about which margin structure, because they're going to be pretty drastically different, which to build off of and how do we think about that?

Sean M. Connolly

Yes, just overall in terms of how we're thinking about guidance on the year, early in the fiscal year, we expected favorability in the first half and stiff headwind in the second half. And since then, Q2 generated even more favorability, and the outlook for H2, while still going in the other direction, has become less bearish. So the net of that is that instead of using H1 favorability to offset negative price recovery in the second half, we now have the flexibility to do other things. So we will flow part of that through to higher guidance, and part of that going back to the business. And I'm sure as you've anticipated from our previous comments, we've intended to do that all along should we find ourselves in an environment of favorability.

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

And then just on the second part of the question, when you think about going forward, obviously, the margin structures between the 2 halves are very different. How do we think about it to model forward into '14 and '15? And how do we think about where we -- where the base margin structure is? Would we use the second half as more the base to start off with or would you use the mix between the 2, and can you just address that?

Maria Henry

Sure. I think that it's neither the first or the second half, and so it's more of a mix to use your word. We had the significant favorability in the first half, and in the second half, we've got some specific investments that we're making in the areas that I've talked about. When you think about our business going forward, we are still tracking to what we've shared with you in terms of our midterm guidance and targets. So we are still on that trajectory to achieve those targets. This year, in total, will have favorability, which you know because we raised our guidance. So there's favorability in this year toward the trajectory of those midterm targets. But we're still tracking toward what we've shared with you as our fiscal '15 goal.

Operator

Our next question or comment comes from Rob Moskow from Crédit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

I noticed that your corporate expense guidance is quite a bit lower than it was previously. It's now about $55 million. I thought it was going to be $70 million. But Maria, I think you also said that you're hiring some consultants to help you find business-building opportunities and also go after the cost savings. So how can I reconcile those 2 things? And maybe, Sean, you can give me a little more color on what the external help is really doing for your business.

Maria Henry

Sure. Why don't I start out. On the corporate cost, we have some favorability in the corporate cost that some of it is onetime in nature, some of it is timing related. And so the $55 million that I've talked about today is roughly where I think we'll land the year. If I back out the timing and the onetime item, the corporate cost would have landed just south of $70 million, is how that would have shaken out. A little bit of a color on the things that flow through corporate that we've talked about before. Some of the onetime favorability in the first quarter is in there. I've talked to you before about the fact that our Transition Services Agreement related to previously divested businesses have gone longer than what we originally anticipated, and some of that benefit flows through the corporate line. So those are some of the dynamics there, as well as the timing of just hiring the staff for the corporate headquarters. So that's what's going on in corporate. On the consultants, we are having some external consultants work with us. The expenses for those consultants actually run through the operating SG&A.

Sean M. Connolly

Yes, just a bit more color on that, Rob, you asked for color. Obviously, we went into this year saying we commit to the $100 million in savings. We've got to go identify $35 million of it. Part of what this team will do is continue to help us lock down that $35 million. But in general in terms of what we're looking for, we've got a lot of different buckets across the P&L. So we're looking for margin expansion opportunities and cost efficiency opportunities. That could be anywhere from the trade line to the indirect expense line. So there are a variety of buckets that we will look at. As we have more to report to you guys on this, we will report it out. But really feel good that we've got some expertise on this, and remain very, very focused on efficiency and margin expansion.

Robert Moskow - Crédit Suisse AG, Research Division

Got it. So they're not there to help you drive top line or marketing ideas or anything like that?

Sean M. Connolly

No. We've got -- we've had some outside help as all companies do in terms of innovation, market and consumer insights, things like that. But no, that's not what we're talking about here. This is really about efficiency, margin expansion, that kind of work.

Operator

Our next question comes from Rob Dickerson from Consumer Edge Research.

Robert Dickerson - Consumer Edge Research, LLC

So just -- again, just a little incremental color, I'm just trying to sum up kind of the entire feel from this -- the 2 phase year in the first half versus the second half. But I feel like kind of net-net, the overall takeaway should be, you did better. Obviously, you did a lot better than you had originally guided. And I'm assuming than you had originally expected the first half to be -- part of this is coming off of volumes, part's coming off the input cost complex. But then you're also saying because of that first half benefit that even though there are going to be input cost pressures in the back half, which we all kind of already knew because you've been talking about it for 6 months, that you're still then reinvesting back more in the back half of the -- in the back half in the business. So kind of despite the input costs, it still seems that and despite this kind of 2-part year that we see the guidance up, but the guidance is up, and you're investing up. So I guess kind of what I'm asking is, net-net, despite what we see in Q3 and Q4, it still feels like from a business perspective, a management perspective that this is still better for the business from an investment perspective. And so can you just kind of comment on where you are now, how you view the back half of the year in investment and how that should hopefully flow through into next fiscal year?

Sean M. Connolly

Yes. I think this is really straightforward. I think what you're seeing here is entirely consistent with how we've said we intend to run the business all along. It's really our philosophy on running the business. We are committed to building this business for sustained long term value creation. When we spun, we knew we had a lot of heavy lifting to do in year 1 to get the legs under the business and set it up to succeed for the future. But in general, what we're trying to do here is build stronger brands through consistent MAP and innovation, as well as a continuous improvement mindset on cost, things that we haven't had in the past. And that means if we find ourselves in an environment where our input cost moved significantly, we'll look to strike a smart balance between near end profitability and investing to get this business to achieve its full potential for the long term. And that means, if we experience material favorability across any given fiscal year, we will look to redeploy some of that into brand building and innovation, as well as capability building because that is exactly the right thing to do for the long haul. Conversely, it also means that if in any given year costs swing against us, we won't abandon marketing and innovation to inflate short-term performance. That's the way the business was run in the past, and we know what it gets us. But let me correct that. We know what it doesn't get us. So our goal is to take the actions necessary to drive the centerline of our profit trends continuously north over time. And as I said before, I believe we're doing just that and feel very good that what we're doing in the second half of this year because of the first half of this year, not only helps us with respect to putting the business in a stronger position F '14. Ultimately, we're looking at F '15 and F '16 and beyond trying to really unlock this portfolio.

Robert Dickerson - Consumer Edge Research, LLC

Okay, and then just quickly to that point, your original guidance is for the 200 basis point operating margin expansion by 2015. In Q2, we can see obviously with an input cost benefit, you can definitively post a 12% operating margin. So just some color around, I always hate to say "feel", but with respect to where you are now relative to where you are when you stepped into the job, Sean, do you feel as if there's even more opportunity than you may have originally thought?

Sean M. Connolly

Well, I would say we're absolutely on track. We're not updating our guidance that we gave before. We feel very good about the midterm guidance that we've given. Assumptions will change as the world around us changes, and our job is to navigate through those changes and keep us on track. And I feel very good that we're on track. I'm absolutely thrilled with the first half of the year, and the way the brands are responding in early days to the programming that we've put out there.

Operator

Our next question or comment comes from Andrew Lazar from Barclays.

Andrew Lazar - Barclays Capital, Research Division

First, Sean, I wanted to make sure I understood a little more about a comment you had made a couple of questions ago. You had said the fiscal second half now seems less bearish from a pricing input cost relationship perspective. So I wanted to get a better sense whether that meant prior, you either felt that input costs were going to be more onerous in the second half than now or that you wouldn't be able to take the desired amount of pricing that you feel like you can take now or that volume won't be as weak as maybe -- it hopefully won't be this time around with additional pricing. I'm trying to get a sense of what would be less bearish about that relationship than you thought previously.

Sean M. Connolly

Yes, let me -- I'll take you back after the first quarter as an example. Some asked why don't you guys take up your guidance after the first quarter, and our position was, a quarter doesn't make a year. We want to see what happens in the back half of the year because at the time, we thought that the inflation headwinds could be worse than they're manifesting themselves, and that we may need to save some of the favorability from the first quarter to really hold our profitability on the year. As it turns out, our original view was that the full year would be modestly deflationary, and we thought we'd get favorability in the first half and headwind in the back half. First half, favorability is better, in the back half the headwind is not quite what it was. So really, we do expect as we go through the calendar year, Andrew, that we will see inflation in our input costs. We're not going to get into today when we expect that to hit in terms of which month and what the pricing implications are for obvious competitive reasons. But it's also early, things are still moving. But as we get toward the end of the fiscal year, we expect it to turn inflationary, and we expect that will continue as we move into fiscal '14.

Andrew Lazar - Barclays Capital, Research Division

Got it. That's helpful actually, I appreciate that. And then one for Maria. You had mentioned in the prepared remarks that you thought it was quite positive that you were able to hold pricing through this kind of recent deflationary period. And I wanted to get a sense of -- my sense was you said that it obviously is more positive than maybe it might have been historically when you had some deflation, and I'm try to get a sense of, is that true? And if so, what's changed to allow you to hold price or is it just that everybody saw that this deflation was going to become temporary and therefore, the push to kind of reduce pricing was less severe because everybody can kind of see inputs rising as the year goes on?

Maria Henry

Sure. There's a number of things that affect that. One is the timing of how input costs change and how quickly input costs change either up or down, how a competitive landscape responds to those changes and then how all of that comes together. On the Retail side of the business, if I look at the first half, we had good pricing on the Retail side of the business, and we were able to take the benefit of the favorable input costs. As we talked about on Foodservice, that those relationships are different because part of our Foodservice business is on contract. And so with the deflationary cost, we did have some deflation on the price side. When I look at the total business with the amount of deflation in input cost that we saw in the first half and then I look at what we were able to do with pricing, overall, I'm very pleased with that relationship. Sean, you may want to comment more specifically on the retail environment.

Sean M. Connolly

Yes. No. You've asked before, Andrew, is this a pass-through business or is not a pass-through business? Should prices go down? And the answer is generally no. It's not a business anything like the green bean coffee market. However, it all depends upon what competitor strategies are at any given time. And if they're out to gain share, if they're out to take your distribution or if the market behaves sensibly reasonably. As I had mentioned I think on the first question of this call, in general, the market has been fairly sensible and reasonable, I think, thus far this year.

Operator

And our last question comes from Ken Perkins from Morningstar.

Kenneth Perkins - Morningstar Inc., Research Division

I appreciate the color on sort of the brand reinvestment. I'm just wondering since you've outpaced your expectations in the first half if you can give us a sense for what sort of incremental reinvestment opportunities you see over the near term that weren't in your original plans. I know in the MAP, specifically maybe brands or categories, just what opportunities you're seeing there would be helpful.

Sean M. Connolly

Yes. A couple of -- it's a great question. I think it's important to articulate that. We've got investments in the second half in MAP. We've got investments to get new products into the marketplace, call it slotting. We have a very robust slate of new items coming into the marketplace in the second half of the year, one of the more robust we've got. A lot of it is not new to the world invention. A lot of it is consistent with our strategy of strengthening our core business, is restaging what we've got, strengthening our core. So lunchmeat is a good example on Hillshire Farm, where we're taking the old package and product out. We've got entirely new package in. So what we're doing is we're ramping up support behind well-developed businesses like Jimmy Dean, where we have very detailed models in terms of what we call optimal spend analysis that consider ROI. And we are supporting new item innovation, and we continue to build the innovation pipeline out for F '14 and beyond because as soon as we're done with one fiscal year, the question becomes what's next. So that's something we hadn't done before. That's something that we've made a priority, is continuing to replenish that pipeline. So this is not a one and done type of deal.

Kenneth Perkins - Morningstar Inc., Research Division

Okay. Great, and then just following up on that in terms of the lunchmeat category. I know that, obviously, you have the new packaging. I'm just wondering, is there any other sort of innovation efforts in the pipeline that you could speak to in terms of that brand or expanding in a category?

Sean M. Connolly

I don't want to tip our hand in terms of what's coming after that, but I think the simplest way to think about it is, it comes down to what's happening with the consumer trends, how are they evolving, what are the key benefits they are looking for, and then a clear eyed view of, are we very good in that area or not? And if we're not, then we will hustle, and we will improve our offer or we'll create new stuff and we'll meet those needs. And we've got a full pipeline in terms of what we see over the next couple of years in that area and really frankly, across the portfolio in general, and you'll see a bit more of it at CAGNY.

All right. Well, I think that's it. We'll wrap up the call. Appreciate everybody calling in today. Have a good day.

Operator

That concludes today's conference call. Thank you for your participation. You may disconnect at this time.

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