Executives
Aaron Hoffman - Vice President, Investor Relations
Brenda C. Barnes - Chief Executive Officer
Mark A. Garvey – Interim Chief Financial Officer
Analysts
Judy Hong - Goldman Sachs
Andrew Lazar - Barclays Capital
Vincent Andrews - Morgan Stanley
Eric Serotta - Consumer Edge Research
Peter Jacobs - Ragen MacKenzie Wells Fargo
Eric Katzman - Deutsche Bank
Bryan Spillane – BAS-ML
Ben Fader Rattner - Canyon Capital Advisors
Terry Bivens - J.P. Morgan
Robert Moscow - Credit Suisse
Alexia Howard - Stanford Bernstein
Timothy Ramey - D.A. Davidson & Co.
Ken Zaslow - BMO Capital Markets
Sara Lee Corp. (SLE) F4Q09 Earnings Call August 12, 2009 10:00 AM ET
Operator
Good morning and welcome to Sara Lee's fourth quarter earnings conference call for fiscal 2009. (Operator Instructions) I would now like to turn the call over to Mr. Aaron Hoffman, Vice President of Investor Relations for Sara Lee Corporation.
Aaron Hoffman
Good morning and welcome to Sara Lee's year end 2009 earnings conference call. As always, we very much appreciate your time and your interest in the company. Joining me for today's call are Brenda Barnes, our Chairman and CEO, and Mark Garvey, our Interim Chief Financial Officer.
Our year end 2009 results were released at 6:30 a.m. Central Time this morning via press release that you will find on our Web site at saralee.com. If you have any problems accessing the release, please call Jeannie Williams at 630-598-8100. Our 10-K will be available in a few weeks. In the meantime, we have included additional financial schedules with the release for your benefit.
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 have 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.
This morning we are providing slides to go along with our remarks. You can find the slides on the Web cast portion of our Web site in the Investor Relations section.
And as a reminder, all adjusted numbers we discuss on today's call exclude the impact of significant items, contingent sale proceeds, acquisitions, divestitures, and the effects of currency change. The release contains a reconciliation of reported to adjusted numbers.
Now let me turn the time over to Brenda.
Brenda C. Barnes
Good morning everyone and thanks for joining us today.
With fiscal 2009 behind us, I am pleased to report that we delivered against our guidance for the second year in a row, demonstrating real progress in our business. Our commitment to innovation, marketing, and talent development are translating into bottom-line results, despite some macroeconomic challenges. Looking forward, we are confident that we are well positioned to benefit as the global economy begins to recover.
We are committed to delivering shareholder value by driving consistent results as we build on our capabilities. We do this by investing in future growth in developing countries, adding capacity as seen in our plant sliced meat facility in Kansas City, and expanding our new products. And we're taking efficiencies to new levels through our Project Accelerate.
As a result of our standardized processes and integrated IT infrastructure, we can now outsource the work and improve performance. With more efficient processes and simplifications, like SKU rationalization, we more fully utilize our capacity. In fact, all of our efforts have led to a 50 basis point drop in SG&A as a percentage of sales. This excluded significant items, currency, and MAP.
And with creative thinking, more savings become available. Even more opportunities are surfacing, leading to higher benefits and as a result, higher one-time costs. We can now tell you that charges associated with Project Accelerate are likely to exceed $300.0 million, with nearly half that amount already booked in fiscal 2009.
We also now expect that the annualized benefits will fall in a range of $350.0 million to $400.0 million and will hit that full run rate by the end of fiscal 2012.
We are exploring portfolio changes, also, to improve shareholder value. As you know, we've exited such areas as commodity meats and DSD route coffee, and we're exploring strategic options for our household and body care segment, which I hope to update you on in the near future.
Before going into specific results, let me remind you that this year's fourth quarter lapped a very strong year growth period in which we reported adjusted operating income up over $100.0 million. Consequently, I think it's important not to look solely at the fourth quarter numbers, but rather consider the results for the company and our segments over the entire fiscal year.
Our top line is improving behind pricing actions and improved mix, growing 2.7% on an adjusted basis this year. Our brands continue to strengthen, with market share growth in the majority of our key categories and geographies.
Yes, our MAP spending did decline 15% on a reported basis, with about half of that related to currency changes. We continue to be comfortable with our approach to marketing and look forward to discussing this further with you at our analyst day next month.
Adjusted operating income rose by about 2% on the strength of all three North American segments, offsetting challenges in our international health and body care and bakery businesses.
Our adjusted earnings per share reflected this improvement as well. Adjusted EPS rose by $0.02 to $0.84 per share.
A final, but very important, item affecting operating income during fiscal 2009 were mark to market commodity losses of $18.0 million, or a negative $40.0 million swing compared with fiscal 2008. Without this negative variance, obviously our adjusted results would have been quite different.
On the subject of commodities, we again offset significant input cost increases with pricing actions during the year. In fiscal 2010 we currently expect year-over-year commodity costs to drop. While this is one factor in our pricing plans, there are numerous considerations, including innovation, product mix, competitive activity, and discussions with retailers. In short, we don't anticipate pricing to fall in line with commodities this fiscal year.
Let's spend a minute on cash, where we substantially exceeded our guidance. We'll publish the final audited number on August 26 in our 10-K, but I can tell you that we generated $900.0 million of cash from operations. This supports the fact that very strong cash flow can be delivered in our business through tight controls over our working capital. We also continue to manage capital expenditures.
You'll notice that our guidance for fiscal 2010 shows lower cash from operations. This is a result of making critical investments in Project Acceleration, which will result in cash restructuring costs. This project is an investment in our future and we expect to see a meaningful payback from these actions.
Moving on to our segments, in North America our adjusted results demonstrate the impact of the changes we've implemented over the past several years. We have reduced costs while strengthening marketing, sales, and supply chain capabilities.
In our retail segment, adjusted sales were up 5.9%. Declines decreased by 2%, which combines a 1% decline for retail with 6.6% lower units for non-retail commodity meats, which we've been aggressively exiting.
The decline in retail also reflects our kosher meat business in the second quarter of 2009. Ballpark hotdogs, Jimmy Dean breakfast sausage, State Fair corndogs, and Hillshire Farms Smoked Sausage, all delivered strong volumes in the year behind these products' success.
In fresh bakery, adjusted sales grew 8.5% and volumes were up 3.2% for the year, primarily driven by strong non-branded sales. We have seen moderate consumer trade down to private label, as expected.
Also of note, we are seeing a number of players attempting to gain share at the expense of margins. We believe that this hurts the category for manufacturers and retailers alike. While commodity costs have come down slightly, they do not come close to justifying the price reductions we've seen.
In our food service segment, adjusted sales rose almost one point, while volumes declined 4.2%, as we exited several unattractive businesses and continue to prune our SKUs. We are pleased with this performance, given the difficulties in the out-of-home dining industry.
I would like to comment on market share for a minute as I think it helps demonstrate the success we've had in North America with on-trend innovation, strong marketing campaigns, and effective sales efforts.
For North American retail, share grew in 8 out of 10 core categories. You will notice a slight dip in total fresh bakery, but keep in mind this figure does not account for unmeasured channels where we are doing very well in gaining ground.
Looking at the bottom line, our North American segment showed real progress in fiscal 2009. Adjusted operating segment income rose by almost 38% in our retail business, over 21% in food service, and almost 11% in fresh bakery.
To put this further into perspective, during fiscal 2009 these businesses collectively generated over $100.0 million of incremental adjusted operating segment income, and each saw its adjusted operating margins improve.
I am confident that we are well positioned to continue to deliver strong growth over the long term.
Turning to our international business, we saw international beverage increase adjusted sales by 2.5% on the strength of continued mix improvements behind sales of single-serve coffee, Cafitesse coffee concentrates, and pricing actions.
However, as a result of severe economic headwinds, both household and body care and international bakery both saw adjusted sales decline.
Looking at international beverage, we have invested for the future and still held the bottom line flat in fiscal 2009. In Brazil, the overall business generated improved results and we added to our position through the acquisition of Café Mocha. We rolled out new, high-quality instant coffee products in the U.K. and Russian and saw our shares increase. We successfully launched Senseo in Spain and in addition to these efforts, with our global partner, Phillips, we introduced a next-generation Senseo machine, Latte Select, in several markets, and we literally could not keep the product on the shelves.
At the same time, we adjusted our marketing approach to adapt to the changing consumer environment and largely maintained our strong share positions.
On the other hand, international bakery saw sharp declines in adjusted operating income, as it had very large exposure to extremely difficult Spanish markets, which accounts for about two-thirds of all sales for the segment. As a result, we were required to take a $207.0 million non-cash write-down of these assets.
Nonetheless, we are rationalizing the business to achieve better performance, including the recent announcement that we will sell three facilities to another fresh-bakery company. We will continue to source product from these bakeries, which should start to operate at significantly better utilization rates and thus allow us to reduce production costs.
And a further positive note, as you would expect in a tough economy our private label refrigerated dough business in France has performed very well this year.
Household and body care has a substantial amount of business in Spain, France, and the U.K. and is dealing with pricing pressures in these countries as competitors fight for market share. In spite of the tough conditions, we've achieved successful deodorants and other body care rollouts and overall our shares in Europe are holding fairly steady.
While we are experiencing buying declines as a number of categories are reacting to current economic pressure, outside of Europe we continue to see strong results, particularly from our Indian joint venture, and the balance of Asia, where we see profitable growth.
Our press release includes a revision of our fiscal 2009 and 2008 results by quarters and for each segment. In the past, we showed transformation-related software amortization as a significant item, which we're no longer doing in fiscal 2010. We have revised our historical results so you can compare them to our guidance and future results on an apples-to-apples basis.
Turning to our fiscal 2010 guidance, we anticipate sales to be between $12.9 billion and $13.2 billion for the full year. Keep in mind, fiscal 2010 has 53 weeks.
On a reported basis, we're forecasting diluted EPS in the range of $1.03 to $1.09, which includes a $0.19 gain from the sale of our tobacco business in fiscal 1999.
Our guidance does not include any other significant items that may occur during the year.
Our adjusted EPS guidance, which excludes the tobacco payment, is $0.84 to $0.90. This is an increase of between $0.02 and $0.08 per share compared to the revised fiscal 2009 results, mainly due to better operating performance.
I would like you to know that these results include the negative impact of a projected $65.0 million increase in pension expense.
Looking at our segments, we currently expect five out of six businesses to show an increase in adjusted operating segment income in fiscal 2010. The single exception to this is North American food service, as a result of continuing industry-wide pressure affecting most food service manufacturers and operators.
As I look back, we've driven real progress over the last two years. We have built our capabilities and are now delivering strong financial performance. There is no doubt that we've reached a critical inflection point in our journey. We have significantly improved North American performance. We have a strong international beverage business and continue to invest in it appropriately. We are wisely exploring our options for household and body care and believe that we will arrive at a decision that truly benefits our shareholders. And across the company, we continue to identify and achieve efficiencies and cost savings.
As a result of all these factors, we are now positioned better than ever to consistently deliver strong results over the long term.
And now Mark, Aaron, and I are happy to take your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Judy Hong - Goldman Sachs.
Judy Hong - Goldman Sachs
I want to first better understand the shift in MAP spending to trade spending. You said MAP was down 15%, if you adjust for currency, it's down 7% or 8%. If I do my math, it sound like MAP spending is down about $50.0 million in fiscal 2009. I'm wondering, is all of that shifting to trade spending or is trade spending just going up even more than that $50.0 million shift, because it sounds like pricing is moderating. And in that context, as you look at your volume trend, I'm wondering if you really think you're getting the DAD response to this trade spending if you look at your [inaudible]?
Brenda C. Barnes
I would start by looking at our market share trends. I think that is the most important indicator because it incorporates what's going on in the category, what's going on in the total industry, how the consumer is responding to the depths of the recession that we've been through.
So starting with that, I would say we feel really good about our volume trends relative to the categories we compete, showing market share gains quite significantly in North America and really holding pretty good condition in all of international.
The growth to net number on trade spending, there are a lot of things that go into that. It incorporates pricing moves, it incorporates all kinds of promotional activity with the trade, it incorporates doing some in-store merchandising and advertising that we do through the customer, as opposed to do it directly on our own. So it captures a combination of the shift from some MAP spending there and it also incorporates the competitiveness of the marketplace on the pricing line. So it's not as simple and clear to pull exactly what's where.
We really want to go deep on this subject at our Meet The Management meeting next month, because I think you will see in all the factors that reach the consumer, I think you will feel very good about how we reach them and what we're investing to reach them, and it does not get reflected well in just looking at the math line.
Judy Hong - Goldman Sachs
And in terms of your cost outlook next year, can you quantify how much you expect commodities to be down?
And can you quantify the phase of the Project Accelerate savings and how much you think you got this year and what you will get next year?
Brenda C. Barnes
In terms of commodities, and then I will turn it over to Mark on Accelerate, but the commodities are down slightly. And we don't give an exact number but I would say across all the baskets of things that we buy, it's down slightly. So that's not an enormous move as we look out to next year.
Mark A. Garvey
On Project Accelerate, we just talked about the revised numbers in Project Accelerate. We expect that to be ramping up over the next number of years so we will have the full run rate by fiscal 2012.
Judy Hong - Goldman Sachs
Can you tell us how much you would get of that $350.0 million or $400.0 million in fiscal 2010?
Mark A. Garvey
We're not giving guidance on that right now but clearly we will be seeing some of that come through in fiscal 2010 because it's a ramp-up process in terms of the number of projects that we have.
Operator
Your next question comes from Andrew Lazar - Barclays Capital.
Andrew Lazar - Barclays Capital
A quick question about gross margins, and I guess trying to make some comparisons here. Some in the industry have shown some pretty big gross margin improvements year-over-year, [inaudible] costs being a little more favorable and pricing kind of holding in there. I don't think, best of my ability to adjust it, that we saw that in your quarter this time around. It seems the correlation is pretty high with volume and that maybe in 2009 when you see volumes starting to weaken, so did those margins. I'm trying to get a sense whether that explains it or if there is something else to it.
Brenda C. Barnes
Yes, if you look at the quarter, which is what you're asking about, we have some ups and a couple of downs on that line, in and of itself. So retail and food service are up, as is international bakery and then the down numbers would be domestic bakery, international beverage, and also body care. So it's a little bit of a mix by business, looking at it that way.
That's the line we keep trying to improve over time and that end is what a lot of our actions are geared to, to try to do, is reduce the cost of goods going in, get the pricing at the right level relative to the commodity mix, and so that's where we keep pushing.
Andrew Lazar - Barclays Capital
And with your comment around input costs for next year, and then you opened your comments with wouldn't expect pricing to be down as much as input costs. If you combine that with Project Accelerate ramping up, is gross margin something we would likely see in your forecasting getting meaningfully better in fiscal 2010?
Brenda C. Barnes
We are doing all that we can to make it be better, but I want to give you one example that defies that right now, and that's the U.S. fresh bakery business. If you look what's happened to wheat, wheat costs, how it's dropped. And roughly maybe that's $0.03 a loaf of bread. And if you look at pricing across fresh baker over the last quarter, you'll see 2, 3, 4 times that drop in pricing.
So we can't control this whole thing. We're competing in a marketplace that you hope everybody is being as rational as possible and we're going to do our best to do it but I can't sit here and promise that. We have competitive competitors and we have new products and we have pricing plans, we have all that, that we're always balancing in each category.
Andrew Lazar - Barclays Capital
If we look at the segment EBIT growth guidance, that I think you had updated in a chart last quarter, it seems the key unit that did not get where you wanted it to be within that EBIT growth range for the year was international beverage, even though we associate household and body care and bakery overseas as having some macro challenges right now. And given that's such a key business, international beverage, and one that is kind of a much bigger part of the portfolio, if and when something happens with household and body care, perhaps you can go into a little bit more there on why that didn't get where you needed it to be.
Brenda C. Barnes
I will start by saying we have really strong confidence in the health and future of our coffee business. As you know, it's a high margin, it stays a high margin, and we have innovation that we've launched, but in our pipeline, that we're very excited about. So the outlook is quite good from our standpoint.
Part of what we did in 2009 was we made significant investments in various areas and a couple of those didn't pan out how we hoped. So I'll just take Russian as an example. We went in with a new instant product there, had a very aggressive marketing plan, and probably don't have to tell any of you what happened in Russia with the economic situation. So we didn't pick up the benefit that we were planning on that.
So there were a couple of items like that that went against our total outlook that we had planned. It incorporated the base business, our base countries, innovation, plus new investments that didn't quite come through as we had hoped.
Looking forward to fiscal 2010, we will continue to shoot for holding our margin and driving the top line through the investment plans that we've got laid out.
Operator
Your next question comes from Vincent Andrews - Morgan Stanley.
Vincent Andrews - Morgan Stanley
On cash flow, can you just remind me, that $900.0 million cash flow from operations, does that include the cash in the tobacco gain or is that not in the operations portion?
Mark A. Garvey
That is not in the operations portion.
Vincent Andrews - Morgan Stanley
I noticed you didn't buy any shares back in the quarter. Can you give us some thoughts on where you are in that regard?
Mark A. Garvey
You're correct. We didn't buy any shares back in the quarter. We will continue to look at share purchases opportunistically as we go through the next fiscal year and we do that in conjunction with our cash availability, our capital structure reviews, etc. But we're not giving guidance specifically in terms of what we will do over the year.
Vincent Andrews - Morgan Stanley
On volume, what would your expectation be for volume for next fiscal year?
Brenda C. Barnes
I don't have a volume guidance, but I do want to tear apart that volume number a little bit because I really don't think you should put a lot of emphasis on that number, and I'll tell you why. In the North American retail business, you see the total number going down. A large part of that was due to the commodity business, 6.6% it went down, and that's a big piece of the volume number.
In addition, baked into the retail number, we exited the kosher hotdog business and so that's also in there because it's not a discontinued op so it shows up.
So if you pull those two out, our core brands and our core business, for the most part, the volumes were up. So that's a very important piece for our company and it's not a bad sign.
Fresh bakery, the volumes were up, if you look at our units on that.
The place where it's really showing up is on household and body care. We have talked so much about the economy there and the whole industry is facing volume pressure.
And food service, we also had a lot of exits in our business, as we've told you our strategy over time is to prune back areas that either commodity-driven, not likely long-term margin plays, and so we've cut back and purposely discontinued.
So I don't personally get worried looking at the volumes in our business based on the results we've had, because we're doing kind of what we planned to do. I go back to market share, which is to me, the ultimate barometer.
Vincent Andrews - Morgan Stanley
So your expectation, exing out all these one-time things that are going on in the different segments, you would expect volume to be at least flat to up next year, is that fair?
Brenda C. Barnes
I can't give the guidance, but I will tell you volumes will be up, in our priority areas of focus, and volumes will be down where we exit and prune and purposely walk away from business.
Operator
Your next question comes from Eric Serotta - Consumer Edge Research.
Eric Serotta - Consumer Edge Research
First, housekeeping item. Fiscal 2010 will have an extra week. Could you talk about plans for whether you're going to let the benefit from that flow to the bottom line or whether you're going to be reinvesting that in the business.
Brenda C. Barnes
Certainly another week gives us more sales and more profits. But we also have a major headwind in our pension expense. So if you think of the two of those things, that kind of offsets each other. Actually, pension will account for even more of it.
Mark A. Garvey
Significantly. Pension $0.06 to $0.07 a share. And whatever the 53rd week turns out to be, it's a little difficult to forecast exactly this far out, but obviously it's not going to be $0.06 or $0.07 a share.
Eric Serotta - Consumer Edge Research
And then you've laid out some long-term EBIT growth targets which in aggregate fairly overall came to about 10% to 12%. When I look at the midpoint of your range for next year, excluding both tobacco and one-time charges, you're looking at about 5%. I realize that you have issues like pension depressing things in fiscal 2010 but I thought that one of the reasons why you were justifying such high targets was that you were coming off a low base of above-trend investment. I'm wondering whether you could talk about how you see the trajectory for EBIT growth unfolding over the next few years.
Brenda C. Barnes
I made a mistake one time by giving a number a few years out and I've been regretting that ever since I joined this company. So I can't give a precise number multiple years out, nor can I give you that by year.
We certainly have it. We build our plans around it and we build our actions around it. And long-term guidance was never intended to say this is the number for every single year between now and then.
So I hope over the last couple of years we have gained credibility with all of you that actions we take we do, we report on them, we tell you what it costs, what the benefit was. We're tracking key metrics to show you our progress. And when we are giving guidance for fiscal 2010, we are operating in a world like every other company that you talk to, in a lot of uncertainty.
So we're just trying to balance all those things to give you confidence in the future and hopefully our track record gives you some confidence that what we're saying we have the ability to deliver.
Eric Serotta - Consumer Edge Research
Could I ask you to comment at least, do you expect an acceleration in EBIT growth within the next two to three year period or do you think that the continued investments that you need to make are going to offset that? Is the company still in investment mode or should we start to see that acceleration over the next few years?
Brenda C. Barnes
We've given very specific guidance on fiscal 2010, as you have, and you need to know that we are committed over the long term continuing improvement and shareholder value for Sara Lee Corporation. That's the best I can tell you right now and I think you can look at all the actions we've been taking, these are investments now that will pay dividends in the long run. And we have been very bold in taking these moves.
I'll just point out the thing we did with the bakery plants in Spain. That's a big deal. And that's not an easy thing to execute. Just like business process outsourcing isn't. And maybe Mark can comment on where we are with that but it's a massive undertaking. And these are all building for future trends.
Mark A. Garvey
The business process outsourcing, which is a key platform in our Project Accelerate program, we are right in the middle of that right now, partnering with IBM, looking at our finance and accounting transaction processes, as well as our application development and maintenance infrastructure, and our global procurements of indirect goods. And that is certainly ramping up on track currently.
We expect to see some real results coming through over the next year which will help us in terms of our overall processes in the corporation and will help us as well, we think, from a cash flow perspective.
Eric Serotta - Consumer Edge Research
You mentioned the intense competition. I don't think you used the word "irrational" but maybe I'll use the word for now, in North American bakery. Could you talk about what Sara Lee's strategy is in that context? Are you going to be trying to maintain share? What actions have you taken in light of the spiking competitive environment that a lot of people have been looking for over the past year or so with IBC's re-emergence and the like?
Brenda C. Barnes
I think as we laid out the strategies for you in the past, we are excited about the bakery business because we have a really great brand. We have really good innovation with marketing to support it. We have category management approach with our retail trade. And we are really working on the operation engineering by local markets to make sure the cost structure supports the environment.
That has to work no matter what the competitive pricing environment is and that's what we continue to put the pressure on. So we absolutely stay focused on doing those things. Our outlook, as I said, is still to be in fiscal 2010, in terms of our profitability. So we just have to, like in any business, you have to deal with the circumstances of the marketplace at the time, but not go off course.
I will say we will not just drive volume by doing ridiculously low pricing in any of our categories. It's just such a short-term tactic. I could drive up the volume numbers for you all the time if you wanted, but it makes no sense for us. So we will just be flexible but keeping to our disciplines on things in the competitive marketplace.
Operator
Your next question comes from Peter Jacobs - Ragen MacKenzie Wells Fargo.
Peter Jacobs - Ragen MacKenzie Wells Fargo
This will be the last year of the contingent sale proceeds, is that correct?
Brenda C. Barnes
That's correct.
Peter Jacobs - Ragen MacKenzie Wells Fargo
When do perform your goodwill impairment tests? Would it be now that you've completed your fiscal year? And if so, are there any businesses that you can think of that we should kind of be thinking about in terms of goodwill write-downs?
Mark A. Garvey
We normally look at our goodwill situation across the segments of the second quarter, every fiscal year, so we'll do that again in fiscal 2010 second quarter. Currently we do not have any businesses in what we would refer to as the watch list from a goodwill perspective.
As you know, we did take the bakery Spain impairment at the end of fiscal 2009, primarily because of the situation in Spain, which was a very specific situation.
Peter Jacobs - Ragen MacKenzie Wells Fargo
Can you give us a rough number for fiscal year end cash debt and also capex that you ramped last year?
Mark A. Garvey
From a capex perspective it was $378.0 million or $379.0 million, approximately, for the fiscal year 2009.
From a cash perspective, we ended up approximately $900.0 million and from a debt perspective, $2.8 billion at the end of the fiscal year.
Now, these numbers, of course, would be coming out in our 10-K, so I just make a point we're still going through that final process.
Operator
Your next question comes from Eric Katzman - Deutsche Bank.
Eric Katzman - Deutsche Bank
Did you give a tax rate guidance for fiscal 2010?
Mark A. Garvey
No, we didn't give guidance for fiscal 2010 but if you're thinking through this in terms of how you're looking at your model, I would think 29% to 31% for fiscal 2010. That's excluding significant items but including the contingent proceeds from tobacco.
Eric Katzman - Deutsche Bank
On the kind of EBIT targets versus the Project Accelerate savings, I know you're not going to go into a lot of detail, but to the extent that the corporate expense line at Sara Lee has always been a very significant chunk of expense, should Project Accelerate as the savings come through, kind of hit both the segments and corporate expense kind of evenly, or is it mostly going to be seen through lower corporate expense because that number was down quite a bit versus our expectations in the fourth quarter. Maybe that's just a variety of things, but maybe just some view on that.
Mark A. Garvey
Project Accelerate affects the entire corporation. We're looking at it from the segment perspective as well as corporate perspective, and we have a number of initiatives there, including the outsourcing one that I referred to earlier. Brenda mentioned the capacity utilization, the SKU rationalization, as well as looking at having a leaner organization and how we manage going forward.
All of that has impact on the segments and on corporate. I can't give you a perspective as to what percentage corporate versus the segments, but you would expect to see the savings coming through across the board.
Eric Katzman - Deutsche Bank
Just kind of bigger picture, you were at Pepsico a while back, you've been through the wringer here with all the market volatility and what's happened in the world. Can you just kind of give a broader perspective of what you believe will be, how you think competition both here in the U.S. versus Europe kind of plays out? Because clearly the investors are kind of fearful that the cost savings that are coming through from lower input costs are going to be plowed back into irrational promotion and retailer pressure. Maybe you can give just a perspective on how you see this playing out and how you see Sara Lee within that based on the various businesses.
Brenda C. Barnes
Being in this industry for many years, there are lots of ups and downs that happen on commodities and I think we all need to think beyond pricing to commodities. I just think that's a very blunt instrument and doesn't really get at the nuances. So in the long run, though, the retailer has to make money and manufacturers have to make money, so irrational pricing and go up and down wild swings, I don't think make sense for anybody.
So I'll go back to the days when private label soft drinks came up on the scene. I'm talking a long time ago. And everybody was oh, my gosh, the world is crumbling and everything is going to fall apart. Well, it doesn't. And I'm finding there is a balancing out of both the economic conditions will not always be the same. And the pendulum shouldn't and won't swing radically one way or the other. It's a brand and it's a private label. The marketplace is going to be more balanced, I would say, over time.
I think each of us have to be really good at what we do. I think for our product, getting the cost structure to the lowest possible point that we can actually get the right price to the consumer, and the retailer charges the right price, the economic model is good for everybody. If any of us, us included, act irrationally or lower than is justified, everybody loses.
So to me, there should be a calibration between retailer, manufacturer, to get a marketplace that is healthy, stable, some ups and downs.
I'm probably not answering your question directly, but I do think we shouldn't overreact to just a commodity swing. We have to deal with it, we have to deal with competitive pressures, we have to deal with gas prices. We have to deal with all of that and always have and always will. So to me it's those companies that balance it and plan for it and get prepared for it. Like I think we're doing with step functioning change our cost structure, and retailers who don't overreact to try to draw traffic, that in the end maybe it doesn't help. It may drive traffic but it's not a sustainable long-term profit play.
Eric Katzman - Deutsche Bank
Do you see a big difference between the U.S. versus EU?
Brenda C. Barnes
I'm thinking about that a little bit. I see a big difference between certain retailers' approach and certain manufacturers' approach, less so by geography. It's not a universal approach by U.S. versus EU and it's not the same from one retailer and one manufacturer to the next.
Operator
Your next question comes from Bryan Spillane – BAS-ML.
Bryan Spillane – BAS-ML
On the pension expense increase for 2010, did you make changes to your pension assumptions and if you could just give a sense, how much of the increase in the expense is maybe a catch-up from prior year and how much of it is kind of an ongoing step up in the pension expense?
Mark A. Garvey
No significant changes in our pension assumptions. Obviously we look at our pension fundedness at the end of every specific period, or end of the year in this case, and determine where the asset valuations are, what discounts are appropriate to use based on the market at the time, and that leads us to determine what the actual expense should be for the following fiscal year. And so no fundamental changes in assumptions there.
Bryan Spillane – BAS-ML
So in thinking about going forward, better returns over the next 12 months would have a favorable impact on the way we would model pension expense for next year?
Mark A. Garvey
Generally that's true although that's not the only factor. It obviously depends on interest rates, also, but clearly better returns in our pension fund is something we would be very happy with.
Bryan Spillane – BAS-ML
Hypothetically, if you happened to have a windfall in cash, it would be some benefit to putting cash into the pension plan?
Mark A. Garvey
I won't answer a hypothetical question but I will tell you that from a funding perspective we are meeting the requirements we need to meet in the U.S., Netherlands, and the U.K., which are primary pension funds right now.
Bryan Spillane – BAS-ML
If you go back nine months ago or so, I think there was a lot of concern in the market about retailers making more money, especially making more money selling private labels. There was a lot of concern about retailers squeezing manufacturers on price promotions. And now you've seen the food industry, especially, put up reasonably good expansion and gross margins and I think maybe broadly, with the exception of maybe your fresh bakery business, pricing has held in reasonably well.
But retailers are now, grocery retailers especially, seemingly are seeing some margin pressure. So how does it square? Does it change the conversation you're having with retailers now? Is it going to be more difficult for food companies to hang on to pricing or funding levels while gross margins are expanding? Is there more pressure from retailers in terms of trying to claw back some of that margin?
Brenda C. Barnes
There is definitely pressure. Definitely there's pressure. There's pressure from everybody because everybody is trying to grab that consumer dollar that may be in total is shrinking in terms of how much is being spent, so everybody wants it. And everybody wants to have their store be the ones to attract the consumer. So yes, there's pressure.
I think over time the retailer has to make money, too. And you can buy short-term volume by really discounting but the question is how do you keep loyal shoppers in your store. And I'm not a retailer but I understand the pressures of that and if you go too wild one way or the other, it doesn't work.
So to me, the retailers that work with us, I'll use us as an example, to try to get money out of the supply chain to be able to have price points that matter, that's the way to do it because that's sustainable.
We can get beat up to go to a really low price. We'll walk away from business if we have to because it's not sustainable. So, it's that balancing act and different retailers approach it differently and if you really do category management appropriately, you find ways to make it easier for the consumer, take cost out of the supply chain, and hit the right price points that will keep them loyal to your store over time. That's what we want to do and that's what we want to do when we work with retailers.
Operator
Your next question comes from Ben Fader Rattner - Canyon Capital Advisors.
Ben Fader Rattner - Canyon Capital Advisors
I was wondering if you could refresh us on your view on capital structure and where you optimize that and if you could also address what you're planning to do with new term maturities.
Brenda C. Barnes
On the capital structure, we have, for quite some time now, said we really want to have a balanced capital structure. We are happy with where we are from a credit-rating standpoint and we have a very healthy dividend, relative to the peer group, that we feel good about. And we're balanced that we haven't taken too much risk to put us in any kind of difficulty from a liquidity standpoint. So where we are right now we think is a good job of balancing it. We haven't given any more guidance in the future of what we'll be doing.
Mark A. Garvey
We don't have any maturities of any significance coming through in the next fiscal year. I think the next major maturity is late calendar 2011.
Ben Fader Rattner - Canyon Capital Advisors
Can you at all comment on the expected proceeds from the sale of the international household business?
Brenda C. Barnes
Not at this time we can't.
Operator
Your next question comes from Terry Bivens - J.P. Morgan.
Terry Bivens - J.P. Morgan
Can you give us some idea of what kind of MAP spending is embedded in your 2010 guidance?
Brenda C. Barnes
It's up. It's roughly up and we won't give specific guidance on that but you can count on us investing more.
Terry Bivens - J.P. Morgan
Just as you look, I know you can't comment too much on the possible sale of household and body care, but if you look at the way the EBIT has behaved over the past five years, it's down pretty sharply and now we're seeing some fairly significant volume erosion, is there a chance that the expected proceeds from this become so diluted that you basically just have to scrap the idea? How would you assess the odds of that?
Brenda C. Barnes
I have said from the beginning that we will do the move that is in the best interest of our shareholders. And we haven't left any option open to answer that question the appropriate way.
Operator
Your next question comes from Robert Moscow - Credit Suisse.
Robert Moscow - Credit Suisse
I think the reason why people keep coming back to this long-term guidance of 8% to 10% EBIT growth, at least for me, I'm having trouble understanding how it's used to incentivize your management team. A lot of companies have two or three year management compensation plans, two or three year targets. I always thought that maybe this would be implemented in that.
You seem to be very focused on one-year targets. Do you have a two- or three-year plan and is that at all involved in executive comp and how are we doing versus that?
Brenda C. Barnes
We have a rolling three-year plan. We update it every year. The numbers are reviewed with the board, approved by the board, totally spelled out on all the metrics you would image, with the programs that are going to be used to drive it. So they are linked to our initiatives.
And I would say that's what we are quite good at, if I may say, that it's not just a number. We know what we're going to do to get that number. Some of the actions take place earlier, like accelerate one-time charges to deliver a number in the outlying years, but they're all linked to broad initiatives and products, investments, etc.
The long-term plan we have, any wealth that our senior team gets comes from the stock. Stock appreciation. So the long-term plan is linked to the delivery of shareholder value. We have made slight changes to it over time. And there's a grant of stock every year that vests three years out. And it's linked to that plan.
To date, I would argue that Sara Lee probably has the most pay-for-performance designed plan of anybody. And I could talk about it in a lot of detail, but basically it has to do with our stock performance relative to our peer group, for the most part. For the grants we've gotten in the last three years. And if we're in the bottom quartile in terms of total shareholder return, which includes stock prices plus dividends, we don't get anything. If we're in the top, the grant continues to grow. So that's how the linkage happens in terms of the numbers.
We are always these tweaking the design to make sure that it's as good as it can be, so we may have some changes coming forward, but for the last several grants that's what it's been. You can look in our proxy and see big zeros, in a lot of cases, in terms of how it paid.
Robert Moscow - Credit Suisse
And that rolling three-year plan, though, is it linked at all to an operating income number?
Brenda C. Barnes
Yes. There is a definite operating income number and that's for your plan, built up by segment and in total. So, yes, it's absolutely there. And those are the things we're thinking about, is the share price too distant of a vehicle to measure that? I think that's something you could ask. Right now, the long-range payout is not linked to that number, it's linked to the shareholder return.
Robert Moscow - Credit Suisse
On that subject, your opening remarks, you said that this was a year where you delivered on your plan again, but if you look at what the plan was initially, at 12 months ago, it was a higher EPS number. Are you saying that you delivered on your plan, maybe ex-currency, or can you help me with that remark?
Brenda C. Barnes
That's something we feel we don't control so when we look at it we do take those effects out.
Robert Moscow - Credit Suisse
So management delivered on its plan ex-currency?
Brenda C. Barnes
Right.
Operator
Your next question comes from Alexia Howard - Stanford Bernstein.
Alexia Howard - Stanford Bernstein
The commodity meats business, I think that contract has been dragging on and on for about two years at this point. Do you have visibility into how much longer that is likely to be a drag on sales growth in the North American retail business?
Brenda C. Barnes
We call it our Hog Hotel. Since we have hogs passing through a facility that we once had. It's a contract that if we can find ways to get out of it we will but for right now I think we've got another two years, roughly, on that contract.
Aaron Hoffman
Although it continues, elements of the contract I believe roll off in chunks. They have been and they will continue to sort of roll off in pieces, no pun intended. And so it gets smaller and smaller over time, going to ultimately nothing in two years.
Operator
Your next question comes from Timothy Ramey - D.A. Davidson & Co.
Timothy Ramey - D.A. Davidson & Co.
Kind of a follow-up on Robert's question there because a year ago guidance was $0.90 to $0.98 and we all understand the hit that you took on currency but then as we look forward, currency should be a slight positive, at least in your view in fiscal 2010 versus 2009. I guess I understand the $0.06 from pension, but this number kind of refuses to accelerate. What are we getting wrong here? Why can't we kind of get out of our own way at the low-$0.80 range in earnings?
Brenda C. Barnes
That's a very full question and we are—I'm trying to structure how to answer your question here. We look at our adjusted performance and there are always things that are in and out, whether it's currency rates, one-time charges for things like Accelerate, an economy that has taken a huge dive in the last year. There are just so many factors that affect these numbers.
So underlying, we feel we are making progress. Would it be better if we hadn't had a recession? Yes, I think it would have been.
Aaron Hoffman
I'm just looking at last year's guidance and our assumption in that number was for $1.50 Euro versus the $1.38 that we came in at. I will double check it but my recollection is that about every $0.02 of currency is $0.01 per share. So you're talking about $0.06+ just in currency switch. So if you add that into the $0.82 that we delivered, that's $0.88. Essentially that puts you very close to the adjusted range that we initially gave. So the currency is the absolute and major variable there.
Timothy Ramey - D.A. Davidson & Co.
It does seem like an awful lot of your peers have actually performed pretty well relative to gross margin and kind of the ability to get performance in a recession. What's the disconnect here? Is it the exposure to Spain? The exposure to Europe? I'm just trying to figure out why we're underperforming relative to peers.
Brenda C. Barnes
We're stalling here because we're trying to give you a reasonable response to our question.
Aaron Hoffman
We're trying to understand your question because we look at the year, it's an up year, most of the segments did quite well. Obviously we had some big headwinds in a couple of our international segments, but overall this is, we view, a good year. Cash flow was very strong.
Timothy Ramey - D.A. Davidson & Co.
No quarrel with the year. It's the guidance. It's essentially for another flat year. The way we view it, you reported $0.84. That's the low end of your range. Subsequent to the fact of adjusting down $0.02. So we're not accelerating and I don't get that because we are seeing certainly margin expansion from a lot of other companies in the peer group.
Aaron Hoffman
And again, as the guidance calls it, it's an increase of $0.02 to $0.08 per share, which is about 10%. And that includes, Mark makes a good point, the headwind of the pension, which is significant, offset slightly by the 53rd week.
Operator
Your final question comes from Ken Zaslow - BMO Capital Markets.
Ken Zaslow - BMO Capital Markets
The food service side, you have been making really good progress this year. I would have thought that the worst in the food service trends have kind of passed or at least stabilizing. Maybe not past. But yet that was the one division that you're saying operating profit next year will not be up. Why?
Aaron Hoffman
One of the key benefits in 2009 that helped us offset a lot of the industry-related decline was the fact that we exited the sauces and [inaudible] business which essentially had no profit for us, and that we exited the DSD route coffee business, which again had virtually no profits. We exited almost $300.0 million of sales with almost zero profit associated with it, which boosted the margin and was actually added to the operating results of the total segment.
Now we are not lapping that as we go into fiscal 2010 and while we're forecasting to be down today, we will be working hard to change that guidance over time.
Brenda C. Barnes
And I think we're trying to be a little cautious in terms of forecasting the economic recovery. We don't have the answer. If it's going to be a quicker recovery, hopefully we have some upside in terms of what we do.
Ken Zaslow - BMO Capital Markets
Again, I'm not trying to be prickly, I thought you were making some good progress internally and really overcoming the food service trends and I thought that was a real positive sign. And I just would have thought it would have continued to at least be flat for the year. So again, I'm not trying to pin you down, it just seems an odd commentary given how you've actually done this year.
Brenda C. Barnes
And you're right, we are making great progress and we have focused our portfolio and we have big positions in big categories with pies and baked goods, coffee, and our meat products. So we are as focused on it and hopefully we can prove that number wrong.
Ken Zaslow - BMO Capital Markets
In terms of your guidance, what would make you at the top end and what would make you at the low end? Is it all the economy?
Brenda C. Barnes
It's hard to say it's all economy. A more robust economy certainly would help. Faster execution on some of the things that we're doing. Competitive activity will make a big difference.
Aaron Hoffman
New product successes. We have a forecast on a lot of new product activity, if it goes better than expected, a lot of variables.
I would say the Western European economy, like Brenda said, is really a major factor and we're not going to pin our hopes and dreams on it right now.
Ken Zaslow - BMO Capital Markets
In terms of your dividend policy, you're at the high end of the package food group, can you talk about the philosophy of what you think about your dividend longer term? Is it something that you want to be here, I know, after the Hanes, you took it back down to the 2.5% range. Can you talk about your philosophy on dividends?
Mark A. Garvey
Yes, our philosophy has been consistent about a 40%, 50% payout ratio in terms of what we've been doing. Our board will meet at the end of October and talk about our dividend and improve what we need to do going forward but right now there is no guidance on that.
Ken Zaslow - BMO Capital Markets
So a 40% to 50% payout ratio, if your operating profit went down, you would have the same 40% to 50% payout ratio?
Mark A. Garvey
That's the range that we work in and that's what we talk to our board about prior to them approving any changes or amendments to our dividend.
Ken Zaslow - BMO Capital Markets
You started talking about the competitive pressures in the bakery and how you wouldn't want to get into a price war or anything like that, but at the same time you're increasing your promotional spending. Can you reconcile those two statements?
Brenda C. Barnes
I think the immediate jump is more goes into trade spending therefore it's lower price. That is not the case in terms of when we shift the money. It has to do with promotional activity like High School Musical and getting displays on it. It has to do with getting advertising through the vehicles that the retailer uses. It does not link directly to taking prices down further.
Operator
There are no further questions in the queue.
Aaron Hoffman
Thank you all very much for your time today and obviously we are available to continue to answer your questions.
Operator
This concludes today’s conference call.
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