Sara Lee F2Q09 (Qtr End 12/27/08) Earnings Call Transcript

Sara Lee Corp. (SLE)

F2Q09 (Qtr End 12/27/08) Earnings Call

February 04, 2009 10:00 AM ET

Executives

Aaron Hoffman - Vice President, Investor Relations

Brenda C. Barnes - Chairman and Chief Executive Officer

L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer, Sara Lee Corporation

Analysts

Terry Bivens - J.P. Morgan

Vincent Andrews - Morgan Stanley

Eric Katzman - Deutsche Bank

Robert Nabco - Credit Suisse

Chris Growe - Stifel Nicholas

Alexia Howard - Stanford Bernstein

Andrew Lazar - Barclays Capital

Ken Zaslow - BMO Capital Markets

Tim Ramey - D.A. Davidson

Edgar Roesch - Soleil Securities Group

Presentation

Operator

Good morning and welcome to Sara Lee's Second Quarter Earnings Conference Call for fiscal 2009. Your lines have been placed on a listen-only mode. 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 Aaron Hoffman, Vice President of Investor Relations for Sara Lee Corporation. Thank you, Aaron, you may begin.

Aaron Hoffman

Thanks Martha. Good morning and welcome to Sara Lee's second quarter 2009 earnings conference call. We very much appreciate your time and your interest this morning. Joining me today are Brenda Barnes, our Chairman and CEO; and Theo de Kool, our Chief Financial and Administrative Officer.

Our second quarter 2009 results were released at 6:30 Central Time this morning via press release that you will find on our website at saralee.com. If you have any problems accessing the release, please call Gene Williams at 630-598-8100, as well our 10-Q was filed this morning and is available for you.

To begin, I will caution you that our remarks this morning contain forward-looking statements about Sara Lee's future operations, financial performance, and business conditions. These forward-looking statements are based on currently available competitive, financial and economic data, as well as 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 these statements. Consequently, I need to caution you not to place undue reliance on forward-looking statements. We've provided additional information in our press release and Form 10-K for fiscal 2008 that I encourage you to review concerning factors that could cause actual results to differ materially from these forward-looking statements.

I want to mention also that we will continue to practice beginning the first quarter, providing slides with the webcast of the earnings call. If you are interested in seeing them, you can find in the webcast on our website in the Investor Relations section. Also as stated in the press release, we have posted updated guidance on each of our business segments in the Investor Relations section of the website. That posting includes the reconciliations of non-GAAP numbers for reported results.

Now let me turn the time over to Brenda.

Brenda C. Barnes

Thanks Aaron. Good morning, everyone and thanks for joining us today. Let me just start by characterizing the quarter really as a bit of a tale to two worlds. We are very pleased with the performance in North America. The top and bottom-line results were quite strong across all three lines of businesses.

However, our overall results were adversely impacted by weaker volumes overseas where economic challenges are even more significant than those facing the domestic market and by the currency impact of the stronger dollar. Reported net sales for the quarter fell 2%, but increased 4.2% on an adjusted basis.

For the six months reported net sales increased 3.5% and on an adjusted basis increased to five.

Looking at the overall picture, you can see that the adjusted operating income is down 7.6% for the total company, which includes a $23 million commodity mark-to-market loss in the current quarter compared to an $8 million gain a year ago.

On a quarter-over-quarter basis spend mark-to-market resulted in variance of $31 million. For the first half of the year, that number was a loss of $68 million. Without these negative variances, our adjusted results would have been quite different. In North America, our adjusted net sales results have been very strong for the past three quarters, highlighted by exceptional performance in our retail business, up 8.4%, and our Foodservice segment that continues to book the negative trends in out of home industry.

The Fresh Bakery business segment reported a strong sales increase of 10.6% in the quarter.

In the second quarter, adjusted operating segment income rose by 61% in our retail business, over 22% in Foodservice and up $13 million, or over 400% in Fresh Bakery.

Supporting that growth, we saw Jimmy Dean, Hillshire Farm and Ball Park all realized double-digit revenue growth in the first half of the year, and the Sara Lee brand of fresh bread grew sales 16% in the same timeframe. I am particularly pleased to see these results in the face of a worsening economic picture and a turbulent commodity environment.

Let me address two charges that affected our reported North American results. In our Foodservice segment, we recorded a $107 million non-cash impairment charge to reflect the underperformance of our Foodservice Beverage business. With a significant exposure to the entertainment, gaming and travel industries, we saw volumes and profits decline swiftly as the U.S. economy worsened over the past six months. We have implemented a number of changes to adapt to the new landscape and we are confident that the business will come back overtime as tourism and travel increase.

Consistent with our strategy, we have an agreement to sell our low margin foodservice DSD coffee business to Farmer Brothers, which is expected to close in the third fiscal quarter. Overall, we feel very good that the rest of the segment has shown very strong results and more than made up for the miss in beverages.

We also took a $30 million charge related to multi-employer pension plan in Fresh Bakery segment to satisfy a partial withdrawal liability at one facility. This was originally disclosed in our first quarter 10-Q and the current estimate is higher than originally anticipated.

While we do participate in a number of these types of plans, this is the largest partial withdrawal we've had to recognize. Historically, our withdrawal liability has been immaterial.

In our international businesses, we are facing the same serious headwinds that you've been hearing about from economists and companies alike for months now.

With Spain facing severe unemployment and a declining GDP, along with deteriorating economic conditions in France and the UK, our International Beverage, International Bakery, and Household and Body Care segments are under pressure and the results for the quarter reflect that.

I am encouraged that the Beverage business continues to work its way through these issues, while making important investments in the UK and Russian instant coffee categories, and is still expected to generate positive adjusted operating segment income growth this year.

Importantly, our single service and sale products both parts and machines continue to grow behind on trend innovations.

Our International Bakery segment has clearly faced the worst of the European economy with the majority of its business in Spain. We continue to rationalize the business model to cope with this situation. And on a positive note, our private-label refrigerated dough business in France grew profitably in the quarter.

Household and Body Care has had a disproportionate amount of business in Spain, France and the UK, and is dealing with the pricing pressures in these countries as competitors fight for market share. In spite of the tough conditions, we have seen successful deodorant and other Body Care rollouts. The most significant weakness has come in the Air Care category, where volumes are down 9% in the first six months.

Outside of Europe, we are seeing very strong results, particularly from our recent expanded Indian joint venture. We continue to see higher year-over-year commodity prices and I'm pleased to report that our pricing has kept pace with these developments.

For the first six months, commodity costs were up $300 million including mark-to-market and we covered $345 million of that in pricing.

We had previously forecasted that commodity cost would rise by $420 million this year and that pricing would increase by the same amount. As we are now expecting a $395 million increase of commodity costs, our assumptions for pricing are similarly $25 million less.

While the markets for many of our key commodities have declined recently, our hedged positions, which provided us with protection when the markets rose rapidly over the past few years, will delay benefits from the drop and have resulted in the commodity mark-to-market losses I've mentioned earlier.

In all, our North American businesses have found real traction in the marketplace with customers and consumers, while our International segments are facing a tough environment, but continue to focus on avenues to improve results.

I am also bullish about the quick stir we've seen on projects to accelerate, an aggressive cost reduction program that builds on our transformation, taking efficiencies to another level.

After establishing a solid foundation of capabilities over the past several years, we now have the standardized processes and integrated IT infrastructure to further reduce our costs, while increasing productivity throughout the organization.

As a reminder, we expect about $150 million of one-time charges between fiscal 2009 and '11 with the majority coming this year. This should yield about 200 to $250 million of benefits when we achieve the full run rate in fiscal '11.

I will discuss accelerating in greater detail in a few weeks, at the CAGNY Conference.

Now let me turn to our current fiscal 2009 guidance. We anticipate sales to be between $12.8 billion and $13 billion for the full year, which incorporates a reduction from the anticipated sales of our Foodservice DSD coffee business of the third quarter and weaknesses in our International businesses.

On a reported basis, we are forecasting diluted EPS in the range of $0.72 to $0.79, which includes a $0.21 gain from the sale of our tobacco business in fiscal 1999, and $0.22 per share of net charges from significant items for the first six months of the year.

Our guidance does not include any additional significant items that may occur during the remainder of the year.

Our adjusted EPS guidance, which excludes the tobacco payment and significant items, is $0.73 to $0.80. This is a reduction of $0.04 per share mainly due to weaknesses in Household and Body Care and International Bakery, partially offset by a $0.01 currency benefit.

The EPS benefit from the $103 million of stock we repurchased in the second quarter was offset by modestly higher projected net interest expense, as borrowing rates are higher and interest rates on deposits have come down. We will continue to look at buybacks carefully, considering our share price and the bottle of market dynamics based today.

The final element of the outlook I'll discuss can be found on our website. We have provided an update on our segment sales and operating segment income guidance there. Notably, there is no change to segment income in North American Retail, Fresh Bakery, Foodservice and International Beverage.

As you would expect, we have lowered the anticipated performance for both sales and operating segment income for International Bakery as it has substantial exposure to Spain.

Similarly, we have reduced guidance for Household and Body Care to reflect weaknesses in the markets I've already discussed. So in total, four of our six segments should perform to our original expectations in spite of an array of headwinds, while businesses with the greatest exposure to the worst European markets are negatively affected.

I remain confident that the success we've seen for three quarters in North America will continue. And we are taking the right steps to ensure that our international segments will weather the storms facing Europe.

Worldwide, we will eliminate costs. We will continue to strengthen our market position in key geographies and product segments and we will expand our portfolio of consumer brands serving large and growing markets.

We are in fact on track to achieve long-term growth. And we are confident that the actions we've taken at Sara Lee over the past couple of years have been and will continue to pay off and that they will result in value creation for shareholders.

And now, before we take your questions I'd just like to take a minute to thank Theo de Kool, who is retiring from Sara Lee at the end of the fiscal year. He has been a true partner to me and the entire Management Team and for nearly two decades and really, particularly over the last four years of our transformation, Theo has shown a real commitment and dedication to building Sara Lee the right way and for the long-term.

I have no doubt that the successes we see in the future will be traced back to many of his contributions.

And now Theo, Aaron and I, are happy to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Terry Bivens with J.P. Morgan. Please go ahead.

Terry Bivens - J.P. Morgan

Good morning everyone.

Aaron Hoffman

Good morning.

Brenda Barnes

Hi Terry.

L.M. (Theo) de Kool

Hey Terry.

Terry Bivens - J.P. Morgan

I think the last time we looked at it, you had a under funded pension to the tune of about $300 million. Does the new guidance include any contribution in fiscal '09 to the pension?

L.M. (Theo) de Kool

Yes, we actually have increased our contributions in cash, our guidance with $55 million to $240 million and exactly one of the reasons why we have taken the guidance on the cash flow is slightly down.

Terry Bivens - J.P. Morgan

Okay. Second question; if you look at the decline in the MAP spending, I guess 18% in the quarter, 10% for the first half. It's been a long time since I have seen numbers like that. Why is that? And, second of all, how would you imagine that finishing the year?

Brenda Barnes

Yes. I would say, certainly in North America there has been a shift in timing, overlapping more investment in the first half in 2008, and this year there is more investment in the back half of 2009. So, over the course of the year, I think you'll see it relatively flat versus a year ago.

And then we've talked about before every time that according to when our innovations are rolling out and launching those new products. Internationally, there has been, with the economic conditions, there is a shift in, really what the trade is looking at and really asking for a lot of extra spending on the MAP side, probably is in the most effective tool right now.

So we are translating more of the investment we have there in lines that wouldn't show up this math. So how do we get some every day low price points in the marketplace to meet this really tough economic condition that many of the countries are facing? So that's part of the reason why it's come down a little bit internationally.

Terry Bivens - J.P. Morgan

Okay. Thanks very much.

Operator

Thank you. Our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Vincent Andrews - Morgan Stanley

Thank you. Good morning everybody.

Brenda Barnes

Good morning.

L.M. (Theo) de Kool

Good morning.

Aaron Hoffman

Good morning.

Vincent Andrews - Morgan Stanley

Brenda, if I could just ask you kind of a big picture question; what's going on in the EU in particularly, why isn't that a proxy for what can happen to the U.S. in 2009, given the severity of the economic crisis here?

Brenda Barnes

Well, I think we probably went into it faster, sooner and deeper than the international markets did. So I think what Europe is experiencing now is a little bit of a delay from what the U.S. has experienced so far this year. I am not saying that we are through the worst of it in U.S. I think the economic conditions are going to continue not to be terribly positive with lay offs and all that coming.

But I think the severity that has hit Europe has been later and deeper than what we have seen here. So based on the trends we are seeing, we have seen some slight changes in the consumer behavior and a little bit of private label right going up in some categories.

But for the most part, all of our brands are holding up very low and quite strong and able to sustain actually the pricing that we put in the marketplace.

Vincent Andrews - Morgan Stanley

Okay. And just a quick one, you are not seeing any step down from retail perspective in terms of inventory levels?

Brenda Barnes

Well, on the food product side, the food products that we sell, we have short shelf life. So there is never really a significant increase in in-store inventory, the product goes bad. We have shelf space that we have to pull the product both on fresh bread and meat products and frozen for that matter.

So we don't ... we are not experiencing it to that extent in U.S. food side of the category. There is a little bit I think on the Household and Body Care side, and working down of inventories, but overall not severe.

Vincent Andrews - Morgan Stanley

Okay. Thank you. I will pass it along.

Operator

Thank you. Our next question comes from Eric Katzman with Deutsche Bank. Please go ahead.

Eric Katzman - Deutsche Bank

Hi. Good morning everybody.

Brenda Barnes

Hi, Eric.

Aaron Hoffman

Hey, Eric.

Eric Katzman - Deutsche Bank

I guess my question has to do maybe a little bit longer term oriented because I actually thought the quarter was a decent one, given that there's so much concern about what's going on in the EU and you seem to kind of offset that with North America.

But at your Analyst Day, I guess it was in November, you talked a lot about investments in International markets, behind beverages expanding in different regions. And I'm kind of wondering how are you feeling Brenda, about that in terms of what's going on in the world? Are you still kind of 100% behind those plans? Or given everything's changing so rapidly, are you going to take more of the defensive mode?

Brenda Barnes

I'd say strategically we're in the same camp. We believe that coffee overtime, it's growing in developing countries, it's growing in markets that maybe history were of more tea or and there is a general trend toward premiumization which maybe is a little bit affected for the near-term results, but we don't think long-term that that's a sustainable trend let's say.

So, we're still committed to; you know we talk about investments in Russia, we certainly have to modify our plans a little bit as the ruble value is coming down. But strategically, and how we are going to market is still going to be putting emphasis there.

Probably our tactics will change Eric, more than our strategic direction to do that.

Eric Katzman - Deutsche Bank

Okay. And then, I guess in terms of the inventory levels among retailers in the EU, I guess you mentioned Household and Body Care, but your other products there are also, I guess relatively short life, particularly bread. So do you see yourself performing a little bit better than the average or inline, assuming that the inventory has come down there?

Brenda Barnes

Yeah. Well, bread clearly has no, I mean absolutely no issue with stocking up. It's a very, very short shelf life, so there is no inventory really to be hit. That's what's so great about their category, it turns so fast for the retailer and they get their cash immediately on that. So that's fine.

Coffee and tea also is not infinite life but still is a fast turn product for the retailer that they depend on quite heavily.

So, I think our results I believe, are holding up quite well actually. While we are reporting declines we are not seeing significant declines in our market share on our key brands in Europe. So, that's not a reason why you could say spending a lot of money at this point you wonder if it's the right thing to do versus just staying the course in terms of supporting your core brands.

And pricing discounting is a pressure and people are requiring more from the retail side. I think that's probably going to be the toughest thing to weather the storm.

Eric Katzman - Deutsche Bank

Okay. Last question I'll pass it on. Can you just describe the Fresh bread and roll kind of category, it seems like you did fairly well there. Are you seeing much private label growth or are consumers still going to spend up on the idea that healthy bread is still worth the price?

Brenda Barnes

Yes. I'll talk that answer from the U.S. perspective and then if you want to...

Aaron Hoffman

That's all right Ma'am.

Brenda Barnes

Okay. That category has always had of a very large share of private label business. So just start with that, it's a high share has been a high share. And there are a handful of key branded players and several regional players. So the makeup of the market is that.

Private label, one or two key brands and regional brands, in any particular market the mix might be different. And it applies to whether you're talking bread, buns and rolls whatever the Fresh category is.

Our volumes in our Fresh Bakery business are up and we are thrilled with that. If you remember over the last couple of years, we've been weeding out lines and items, rationalizing SKUs, getting efficiencies going and we are now experiencing total unit growth in addition to pricing growth. And so, we're gaining market share really the right way. So we're very, very pleased about that.

Having said that, there are some signs of small increases in private label sales. So that the trend on that is ticking up a little bit, not huge swings but just a little bit from the base from which it started.

But I do want to remind you too that we are a producer of private label in this segment and we are a producer of regional brands and we have the Sara Lee trademark. So we feel that we've got the right mix to deal with the consumer needs at all price points and levels in most markets. We don't have the private label in every single market but that's the real trend. It's again something we'll keep our eye on and right now our unit volumes are quite good.

Eric Katzman - Deutsche Bank

Okay. See you at CAGNY. Thank you.

Brenda Barnes

Thanks Eric.

L.M. (Theo) de Kool

I'd like to comeback to a number I gave to Terry Biven's question on cash contributions. I have said the contribution will be 240 in '09, it will likely be, actually be 265, that's 80 million versus last year.

Aaron Hoffman

Right. So we'll take the next question then.

Operator

Thank you. Our next question comes from Robert Nabco with Credit Suisse. Please go ahead.

Robert Nabco - Credit Suisse

Hi, thanks. IBC, I guess is coming out of bankruptcy and I want to know, have you taken a look at how their labor agreements have changed, and have you thought about the possibility that they are operating at a lower cost now? And if so, are there any regional markets where you think that they could make some inroads? That's my question. Thanks.

Brenda Barnes

Yeah, like any company we certainly look at all our competitors and what's going on and try to anticipate what next. We have public data just like you do and no more in terms of what their actual deal is. And I'm sure more will be available as they do come out of bankruptcy in terms of what the agreement is. So I'd rather not comment on what their likely actions are.

Robert Nabco - Credit Suisse

Okay. And maybe you could take a step back, Brenda. I think about a year ago, you gave an outlook for 2008 where you said we're in unprecedented times and bottles historically really don't work anymore on pricing versus volume and we haven't seen anything like this. If you just think about the last 12 months, where do we stand today and are those models equally invalid, because now we actually have some pricing coming down in some categories? Where do you think volume could go this year?

Brenda Barnes

Well, if we look at performance-to-date, I have to say that we're thrilled that we've been able to walk the line between price increases dealing with these commodity increases. A year ago, it probably wasn't such a guarantee because there was unprecedented territory. Now a year later and you look at our full year results, we have offset our commodity increases. So we're very happy about that.

But, we have also up in lines and still gained share during that same time period. So it's been a balancing act. I think we've all have been tested in it. So I actually feel quite pleased with our performance on that.

I would also answer the question you asked a minute ago, whatever IBC does, doesn't alter what we are doing in terms of our reinvention plan on Fresh Bakery. Our goal there is like we've talked, is significantly improved margins and we have a set of many, many actions that have to do with our model, our efficiency, our cost structure to get us to be the most efficient we can be to continue to both drive market share as well as our profitability.

Robert Nabco - Credit Suisse

Okay, thank you.

Operator

Thank you. Our next question comes from Chris Growe with Stifel Nicholas. Please go ahead.

Chris Growe - Stifel Nicholas

Hi good morning.

L.M. (Theo) de Kool

Good morning.

Aaron Hoffman

Good morning Chris.

Chris Growe - Stifel Nicholas

Hi. I just had a question for you. I guess Theo for the gross margin, it deteriorated in the quarter and I just wondered if you could speak to ... there is some cost saving benefits coming through I presume, but where would the pricing and cost inflation, I guess were the main components of driving that lower, is that correct?

L.M. (Theo) de Kool

Yeah, it's the impact of increasing your pricing and keep your margin more or less stable which makes the margin as a percentage to deteriorate. That's the main driver.

Chris Growe - Stifel Nicholas

Okay alright. And then I also was curious about the comments that you made earlier on, Brenda, about keeping international beverage profits that they would be up for the year. Is that inclusive of currency or is that more on like kind of an underlying basis?

Brenda Barnes

That's on an adjusted basis.

Chris Growe - Stifel Nicholas

So excluding currency?

Aaron Hoffman

That was exclusive of currency and significant items and if there were any acquisitions divestiture impact.

Chris Growe - Stifel Nicholas

Okay. And then the last question I had for you just that you hedged your MAP spending down this quarter and I am just curious you mentioned that some of the spending could be shifting around to other buckets if you will. So, are you seeing an acceleration in trade promotion spending? I don't recall you addressing this earlier. If you did I'm sorry. But is that a factor that's kind of offsetting some of the decline in actual MAP spending?

Brenda Barnes

It is. Our field is starting to look at the things they are calling mapped fee, which is MAP with coupons and more trade spending and looking at that as a total number in trends over time because it really is a support to the consumer at point of sale that really is what impact are you having.

So yes, there has been money shifting, and quite honestly on the traits of the customers side, people are saying, don't give me complex promotions. Some retailers are saying this, don't give me complex promotions, give me a very simple to execute no separate (inaudible) and let's just get the product to the consumer at a reasonable price point so that we keep our unit volume going. So we've been doing some of that, shifting from complex promotions to pretty simple ones at retail.

Chris Growe - Stifel Nicholas

I presume that ratio is not one to one, but it's the decline in MAP, is that fully going to trade or is there still some 'savings' in there?

Brenda Barnes

There is still an overlap issue. So it's timing of it and in some of our business segments, it's really just the shifting between quarters or first half to the second half. To date, I would say, it would be pretty close up on every segment if you included the increased supports of the trade.

Chris Growe - Stifel Nicholas

Okay, okay thank you.

Brenda Barnes

You're welcome.

Operator

Thank you. Our next question comes from Alexia Howard with Stanford Bernstein. Please go ahead.

Alexia Howard - Stanford Bernstein

Good morning.

Brenda Barnes

Hello, Alexia

Aaron Hoffman

Hi, Alexia.

L.M. (Theo) de Kool

Hello, Alexia.

Alexia Howard - Stanford Bernstein

Hi. I wanted to ask about the pricing outlook for the second half, especially given that it seems as though the commodity cost inflation is going to flow significantly from this point onwards. How do you see the price curves shaping out going forward and maybe the volume mix profile as well?

Brenda Barnes

In principle, we priced to offset commodity increases and that's still the trend that we plan to follow. So in my comments I made a note of, we're adjusting our prices down to reflect commodity cost going down, that's why our revenue number is slightly down. So we don't have as much pricing coming through as we first planned down $25 million, the number.

But that is still intended to offset any commodity inflation that we would experience. It's not so simple that you say 'Oh! We offset', that we dollar to dollar, penny for penny, when you offset that because we have to look at the marketplace, you have to look at trends, you have to look at market share. And we're always trying to take it in the right places at the right time while keeping an eye on the strength of our growth and our unit volume.

But going forward for the second half, we do plan to offset commodity increases.

Alexia Howard - Stanford Bernstein

And then on the volume and mix side, given that price wasn't likely to moderate, then is the expectation that volume and mix will probably pick up a bit particularly with new product introductions?

Brenda Barnes

Yes, throughout the year, we do have a mix shift that we're expecting from new products and innovations. This volume question is something that we have to really keep an eye on, because the consumer is changing their behavior all the time right now. That's an unprecedented territory. I mean unemployment rates we haven't seen in, I don't know how long and how that affects consumer behavior and spending patterns. We have to be careful on the borrowing side. What we don't want to do is have a hard and fast rule on pricing and then experience market share overtime, because that'll be more expensive to gain back. So I'm telling you what our outlook is, and in this volatile time, we just will moderate as we see how it works in the marketplace.

Alexia Howard - Stanford Bernstein

Okay, great. Thank you very much. I'll pass it on.

Operator

Thank you. Our next question comes from Karen LaMark with Federated Investors. Please go ahead.

Karen LaMark – Federated Investors

Hi. I've got a couple of questions about Household internationally. Can you talk about what actions you might take in light of the economic pressures, and I think what you imply by tightened competitive pressures? What are you going to do differently to drive sales, whether it's pricing or distribution or market segmentation? And maybe talk about how you think about the trade off between pricing and volume in that business. Thanks.

Brenda Barnes

You're welcome. The price points the consumers willing to pay need to be met by product offerings. And we have a range of product offerings that go from premium to every day usage. So we have to make sure that we are getting all those price points covered for the consumers that are willing to pay the premium and go up scale and those are looking for lower cost.

So in Air Care, for evolution we still have in the market, we still have it at a right, a reasonable price point but some consumers may be trading down to what was the singular violin and an electric outlet or even through a candle or a spray. So actions to make sure we have got product offerings covering the wide range of what the consumer might need and want for that particular product.

Another thing we are doing that's on the sale side so, there might be a bit of a trade down but we still have product offerings so we can get there. The other things that we are doing are radically looking at our supply chain, our overhead structure and our entire cost position via these projects, accelerate. And Household as much as anybody, has really taken that to a higher end aggressively, have moved against the ideas that we know will in fact reduce our cost, cost to get the product manufactured to the consumer, cost of our people overhead, now all that sort of thing.

So just to make sure that we can continue to offer the right value to consumer and at the same time deliver the profitability that we need from the business. And I mentioned earlier the trade shift from maybe broad advertisings support to very targeted promotional activity, where the retailer cooperates to get the right display activity and right visibility in the store.

Karen LaMark – Federated Investors

Other channels, distribution channels, retail channels that you can address that you are not now?

Brenda Barnes

We have nothing different than what we have done before. I mean, we have been working on discounters, hard discounters, soft discounters and making sure we can get as many of our products in there as we can. So that's not a shift, but we lever there especially during this economic time period.

Unidentified Analyst

Okay. Thank you.

Brenda Barnes

Okay.

Operator

Thank you. Our next question comes from Andrew Lazar with Barclays Capital. Please go ahead.

Andrew Lazar - Barclays Capital

Good morning.

Brenda Barnes

Good morning, Andrew.

L.M. (Theo) de Kool

Good morning, Andrew.

Aaron Hoffman

Good morning.

Andrew Lazar - Barclays Capital

You may, Brenda talk more about this at CAGNY but in terms of projects accelerate, is there a way to get a sense of how much of that if any flows through in the back half of this fiscal year? Or is it really start to flow through in terms of the savings in fiscal '10?

Brenda Barnes

We have some coming through this year but not a big percentage of it. So, the actions -- we started on this quite a while ago but as you can imagine by the time you get the project designed, implemented and the benefit start to flow it takes a little bit of time. So the bulk of it is going to come in '10 and then into '11.

Andrew Lazar - Barclays Capital

Okay. And when you talk about projects accelerate, you have kind of discreet activities and projects that are part of that, how do we get a better idea of perhaps what may be more of an ongoing type of productivity rate might be for Sara Lee? Just a thing as you are doing kind of -- as a part of ongoing that you are not taking discreet restructuring charges for, is there a certain base-line rate of productivity that you try and get incrementally each year? Is it, as a percent of cost of goods or I'm trying to get a sense of magnitude on that.

Brenda Barnes

Well, again as a guiding principle, we need to get our cost reductions to offset any inflation. Inflation wage rates, inflation of materials, things that add to the cost of running the operation. Any of that's quite significant and so some of these one-time events ratchet you down in the big set, but then for the last several years, we've used our ongoing continuous improvement efforts which lean, we've talked about lean before where everyday, every week, every person is trying to find ways more efficiently do their jobs and run our processes.

So these one-time charges, just to ratchet it down in the kind of levels that we want to, to again get a lower ongoing rate that we've in build off or going to improve from, you have to do things that you can't do without a one-time charge. I mean that's the unfortunate thing. If you want to have a significant improvement, and you have people affected like we do in business process outsourcing, 700 people, you can't do that without a onetime charge.

So on one hand I understand that this is an element that you have to track our numbers, taking this into account. On the other hand, it is setting up for ongoing run rate of a much lower cost structure. So, I hope that answers your question.

We hope to offset inflation on an ongoing basis. Periodically, we'll have these one time rest downs coupled with onetime charge.

Operator

Thank you. Our next question comes from Ken Zaslow with BMO Capital Markets. Please go ahead.

Ken Zaslow - BMO Capital Markets

Thanks. Good morning, everyone.

Aaron Hoffman

Hi, Ken.

Brenda Barnes

Good morning.

Ken Zaslow - BMO Capital Markets

Brenda, can you just discuss a little bit about and my sense of it may not be but the channel migration, how that's affecting your business at all in different regions? Is there anything that we should be aware of in terms of either sales momentum from one channel to another? And how that will affect our profit margins?

Brenda Barnes

Nothing in terms of going into new channels that we weren't in before. You would not see a radical change in that, but you all see the difference in how retailers are doing, you know which ones are doing very well, and which ones maybe not quite as well. So certainly, Wal-Mart's a big customer of ours and they've had very strong sales results.

So that's great, and we benefit from that. But there is no huge mix shift or new channel emerging that's significantly altering our mix.

Ken Zaslow - BMO Capital Markets

Would that shift to Wal-Mart or other companies like that, would that have an impact on your margin structure at all? That's what I was trying to get at, I don't even want to ... Wal-Mart per se, because I am not looking to target any company. What I've been really just trying to figure out is, as the consumer trades into different shopping venues, is that a negative margin shift to you, is that a positive margin shift, does that have any bearing on how we look at your company?

Brenda Barnes

No, I would say, it doesn't.

Ken Zaslow - BMO Capital Markets

Okay. The next thing I just wanted to ask; is new product innovation, because of the changing economy and changing global outlook, have you shifted how you are coming to market with your products? Are there different types of products that you're coming to the market with? So, maybe you are more value oriented and can you discuss that?

Brenda Barnes

Well, what we're finding is, our core products, take North America, the retail side, a really right spot on in terms of what the consumer is doing today. You know the shift from eating out to eating at home, and within eating at home; we have four products in our brands hotdogs, sausages, Hillshire Farm, Ball Park, Deli Meats, sandwiches are a huge meal. I mean in spite of the number one meal that consumers eat, and even more so now.

So we're pretty much in the sweet spot, given the economic condition. So our innovation is tending to bring variety to those core categories and those core product segments. Probably moreso than maybe we would have thought six to eight months ago. So, that's where you'll see more of our innovations closed in, more variety, more bolt flavors, reducing cost of packaging, again trying to take any non value-added cost that's possible to get the price points to the consumer.

And then yeah, another major avenue of new product innovation has been and will continue to be health and wellness. That's a trend that's certainly alive and well.

Ken Zaslow - BMO Capital Markets

And then my last question is; in terms of market shares, have you been able to maintain and grow your market share? A lot of companies are saying what you're saying, well we're in the sweet spot, but you are also saying on the other side, guidance keep on coming down. So what I'm trying to get at, is there ... if you guys are already in the sweet spot, are you seeing market share gains or are you're seeing ... how is that playing out as well?

Brenda Barnes

Yes, we are. And I encourage you to look at things that we have across our core category and our lines. Our market shares are quite strong ... and I just have to keep pointing back to our trends in North America retail, all three segments. I mean, I don't want to overplay it, but those growth rates sure are making us happy, in terms of top-line and bottom line. And I think it's the combination of so many things that we've done.

Integrating the supply chain, we took cost out of SG&A, early there and it's paying dividend, our innovations pipeline. Our interactions with our customers, you have to see it to understand what I'm saying, but they are extraordinarily better than they were a couple of years ago. I mean we've got great relationships with many of the key customers.

So all that's coming together, and making us a stronger competitor in the categories in which we compete and the market shares show it and our profit level shows it.

Ken Zaslow - BMO Capital Markets

Okay, great. Thank you.

Aaron Hoffman

And Ken just as a follow-up, if you want to follow-up with some additional market share, to get some specifics, I'm happy to do that. I'm just kind of...

Ken Zaslow - BMO Capital Markets

I was hoping more for Europe though. That was kind of more I was looking for ... I was just looking for European trends. Because it seems ... again no offence to you guys in anyways. It seems like a lot of companies keep on saying they are in the wheel house of how everything should be going and everybody keeps on reducing guidance. So that's kind of what I was getting at.

Aaron Hoffman

Sure. I'm just kind of standing down real quick and we can talk about it offline and I'm just going to some coffee shares here just kind of steadied up in the Netherlands, basically flat in Belgium, down just slightly and staying pretty with the up in France and it has been a pretty steadied up picture even in some of those tough markets, and we can go through a lot of it if you want it offline. We got a lot of data if anyone is interested.

Ken Zaslow - BMO Capital Markets

Thank you.

Operator

Thank you. (Operators Instruction). One moment, our next question comes from Tim Ramey with D.A. Davidson. Please go ahead.

Tim Ramey - D.A. Davidson

Good morning, Brenda you mentioned, since sales innovation and I'd love to know how that's translating into growth for that brand and should we then infer that there is some decline in roast and ground offsetting that?

Brenda Barnes

Yes, I'd say roast and ground is not the growing segment of the coffee industry, and for us that would also be the case. So it's a premiumization of coffee. The single serve, move to single serve, and in some countries its instant and premium instant. So yes, that is fair to conclude.

Tim Ramey - D.A. Davidson

Any metrics you can give us on?

Brenda Barnes

I don't have the right number.

Tim Ramey - D.A. Davidson

We'll circle back.

Brenda Barnes

Yes, I'll get it.

Aaron Hoffman

Tim, we can talk offline. I'll get you that data.

Tim Ramey - D.A. Davidson

And also, on the U.S. Fresh Bakery category I think you reduced your exposure to private label over the course of the last couple of years, is there a way to remind us or quantify what percentage of your mix would be private label now?

Brenda Barnes

That's another number I don't have of the top of my head so we produce, you're asking.

Tim Ramey - D.A. Davidson

Okay

Brenda Barnes

Is that what you are asking?

Tim Ramey - D.A. Davidson

Yes, what percentage of your sales would be, would fall in that regional brand or private label?

Aaron Hoffman

Private label?

Tim Ramey - D.A. Davidson

Yes.

Aaron Hoffman

Wasn't it 20?

Brenda Barnes

20, yes. But I can't give you an exact number but we can get that for you.

Tim Ramey - D.A. Davidson

So about half of the category average or a little less than half.

Aaron Hoffman

We will get you the exact number.

Tim Ramey - D.A. Davidson

Okay. Brenda, in your prepared comments, you mentioned that private label was stronger. What are you seeing there? Are retailers asking for more private label in their mix? Is it just the consumer trade down, how do you read it?

Brenda Barnes

Yes.

Tim Ramey - D.A. Davidson

How do you read it?

Brenda Barnes

Yes. Every retailer has private label bread. Every one of them, there is no big shift in who is in and who is not. It is a consumer driven phenomenon and as time gets up it is just looking for a lower price point. I don't know of any situations that somebody new has come into private label.

Tim Ramey - D.A. Davidson

And then Theo, did you ever comment on the tax rate from an operating perspective being so low?

L.M. (Theo) de Kool

It has to do, Tim with the non-deductible impairment charge that we took in U.S. GAAP will lead you then to a lower charge in the quarter. Actually if you look at the guidance table you will see they are sort of adjusted EPS, our tax rate spend change for the year with four points up for the quarter basis and everything they do with non-deductibility of that $107 million impairment charge.

Tim Ramey - D.A. Davidson

Great, thank you.

L.M. (Theo) de Kool

You're welcome.

Operator

Thank you. Our next question comes from Ed Roesch with Soleil Securities. Please go ahead.

Edgar Roesch - Soleil Securities Group

Hello, and also my congratulations on the North American trends, nice to see that progress coming through. I had a couple of questions, first on pricing, would you think it's fair to characterize your stance as desiring of holding on to it as much of the pricing that you have taken. It's possible kind of excluding Fresh bread which tracks the underlying commodities more. But the hold on to as much as your branding and other efforts will bear in the marketplaces. Is that a fair characterization?

Brenda Barnes

Sure, yes. I'd say it is.

Edgar Roesch - Soleil Securities Group

And is it pretty much true that Fresh bread I mean is the main category that would track with the commodities. I mean I guess someone on the meats as well, right?

Brenda Barnes

It certainly tracks with it. But it's all about what will the consumer pay, what value are they getting and so there is a combination of innovation, new needs being met and commodity cost that you are taking into account. So our job is to come up with excellent idea that's the consumer is willing to pay like whole grain white bread. And we either...

(Multiple Speakers)

Brenda Barnes

Yeah, and chocolate flavors and say or whatever. So, it's adding value through the consumers' eyes that they're willing to pay for.

Edgar Roesch - Soleil Securities Group

Okay. So, any kind of formulas or anything like that really don't exist, I've heard about some of that for baking and other categories but that's not really relevant there.

Brenda Barnes

Well, I'm sure you all know that you can always cheap in your products, you can always make it less quality. We are not taking that step. We will not take that step. And our brand stands for high quality and we'll look for efficiencies outside of that in our processes or manufacturing approach in our distribution network not on the formulations.

Edgar Roesch - Soleil Securities Group

Great. And then looking at the cost side, you touched on the hedging positions and could you just update us on what you'd expect in the second half commodity cost increases?

L.M. (Theo) de Kool

Yeah. I think that we are hedged in certain categories some of them even through the rest of year. We don't give the details by segments. But it means that our costs are coming down less so than the market is coming down, and the same thing happens when the price went up, if went up much slower. On the net to net basis we expect that we will compensate and I think the number for the next six months is about $100 million that we expect to increase our cost.

Edgar Roesch - Soleil Securities Group

Only $100 million? So, a significant improvement over the inflation rates even taking into account the hedging versus the first half?

L.M. (Theo) de Kool

Well, because we forecasted, what's the number?

Aaron Hoffman

395.

L.M. (Theo) de Kool

395 for the year and we have the majority already in our numbers in the first six months, so there is less to go.

Edgar Roesch - Soleil Securities Group

Right. Okay. That 395 is still a relevant number. Okay, thank you.

L.M. (Theo) de Kool

Yeah.

Operator

Thank you. Our next question comes from Eric Katzman with Deutsche Bank. Please go ahead.

Eric Katzman - Deutsche Bank

Hi, thanks for taking the follow-up. Theo, I think that at the Analyst Day you mentioned that corporate expense, I guess through project accelerate and maybe with lean, that that should be coming down over time. In the second quarter it was up a lot and I am kind of wondering ... I guess one, what was the reason for that and then two how should we think about that very volatile kind of number for fiscal '09?

L.M. (Theo) de Kool

Yeah. Actually the number is up as you can see in the press release, about $18 million for the quarter. It's a number of items, none of them significant enough to pull out but it is in relation to the sale of our direct store delivery coffee business where we met some expenses, we have some business consultancy cost coming in. We also have some other benefits costs that are up.

So although the corporate departments are all flat versus last year and that's the expectation for the remainder of the year, we have this one time cost and like an element like a reversal of accrual in last year it did not occur, this year. So yes, there is some volatility unfortunately and this is about the level that you may expect for the remainder of the year, but that can be incidental still.

Eric Katzman - Deutsche Bank

So when you are saying a level like 130 million for the second half?

L.M. (Theo) de Kool

I don't give the exact number, Eric. But it's not coming down quickly because we have some of these costs ongoing in the second half. But strictly the cost will come down for sure because we have taken strict measures and our headcount in corporate, and our other costs are stable at the moment.

Eric Katzman - Deutsche Bank

Okay. Thank you.

L.M. (Theo) de Kool

You're welcome.

Operator

Thank you. And I am showing no further questions at this time.

Aaron Hoffman

Great. Thank you all very much for your time today. And we look forward to see you all at CAGNY in I think 13 days.

Thanks very much.

Operator

Thank you. That does conclude today's conference call. You may disconnect at this time.

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