Sara Lee's CEO Discusses Q3 2011 Results - Earnings Call Transcript

May. 5.11 | About: Hillshire Brands (HSH)

Sara Lee (SLE) Q3 2011 Earnings Call May 5, 2011 10:00 AM ET

Executives

Mark Garvey - Chief Financial Officer and Senior Vice President

Melissa Napier -

Marcel Smits - Chief Executive Officer

Jan Bennink - Executive Chairman

Analysts

Andrew Lazar - Barclays Capital

Alexia Howard - Sanford C. Bernstein & Co., Inc.

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

Jason English - Goldman Sachs Group Inc.

Vincent Andrews - Morgan Stanley

Terry Bivens - JP Morgan Chase & Co

Eric Katzman - Deutsche Bank AG

Kenneth Zaslow - BMO Capital Markets U.S.

Timothy Ramey - D.A. Davidson & Co.

Bryan Spillane - BofA Merrill Lynch

Akshay Jagdale - KeyBanc Capital Markets Inc.

Operator

Good morning, and welcome to Sara Lee's Third Quarter Earnings Conference Call for Fiscal 2011. [Operator Instructions] This call is being recorded. [Operator Instructions] I would now like to turn the call over to Melissa Napier, Senior Vice President of Investor Relations for Sara Lee Corp. Thank you, Melissa, you may begin.

Melissa Napier

Thank you, Candy, and good morning, everyone. Thank you for joining us for our third quarter fiscal '11 earnings call. With me today are Jan Bennink, Sara Lee's Executive Chairman; Marcel Smits, our CEO; and Mark Garvey, the company's CFO. Our third quarter 2011 results were released at 6:30 a.m. Central Time this morning via press release that you can find on our website. You may have noted the new format of our press release. We strive to shorten the release while also ensuring the key messages are clear, and we'd love to hear your feedback. If you have any trouble accessing the release or the slides to go along with this presentation, please call Bonnie Cruz [ph] at (630) 598-8100. Our 10-Q is expected to be filed on or before May 12.

To begin, I'll caution you that our remarks this morning contain forward-looking statements about Sara Lee's future operations, financial performance and business conditions. Such forward-looking statements are inherently uncertain and actual results may differ from those expressed or implied in these statements. Consequently, we caution you not to place undue reliance on the forward-looking statements. We've provided additional information in our press release and our fiscal 2010 10-K that I encourage you to review concerning factors that could cause actual results to differ materially from the forward-looking statements.

We're also providing slides that contain additional information that will be discussed during the webcast. The slides can also be accessed via our website in the Investor Relations section.

As a reminder, all adjusted numbers we discuss on today's call exclude the impact of significant items, contingent sales proceeds, acquisitions, divestitures and the effects of currency changes. Our updated guidance table contains a reconciliation of reported to adjusted EPS and explanations on non-GAAP financial measures that are included in our release. And now, I'm happy to turn the call over to Jan.

Jan Bennink

Thank you, Melissa. Ladies and gentlemen, good morning. Let me first say that it is a great pleasure to be with you today. After almost 3 months in the business, I can say that I am very glad that I joined and to be part of this exciting project.

Now many investors and friends and anybody have asked me, "Why did I give up my freedom and took this job?" To be very honest with you, I mean I had been looking at Sara Lee for a while because I found it is an undervalued company with great assets in coffee and tea and in meats. So when the opportunity came up last year, I grabbed it. And so far, I can assure you that I have not been disappointed on the contrary. As you can imagine, we are and have been very busy looking at all parts of the business, and I can assure you that we will leave no stone unturned in our quest to maximize shareholder value. We are very pleased to announce some parts of the program today.

Clearly, not all news is good today, but we're facing extraordinary headwinds in commodity costs. However, we feel confident that we can weather the storm with additional price increases, supply chain savings and even harder look at our fixed costs which we have been doing for the last couple of years. All the lessons I have personally learned from being in the dairy business, and especially in the milk powder business in my last 7 years as a tenure of CEO, will be applied and even more.

Let me now move on to Slide #1. The first slide of creating 2 successful pure-play companies. I think we basically, here, to make sure that we will create 2 very good successful stand-alone companies, and what we're doing for that is basically 4 points: The first of all is we're looking at our portfolio of the company. So we're looking at the portfolio in a sense can these businesses deliver a high-growth, high margin in the future? And I think that's what we put against the loop, all those businesses. It's not only in the portfolio of the company but we're also looking at that within the 2 divisions. So every part of the division has to deliver towards our goal of delivering high-growth top line and margin. As part of that and when we're coming out of a business, which is a $20 billion conglomerate of many businesses, and as a result of that, there are many fixed costs related to that. What we're doing now is we want to create 2 lean and mean companies, which were entrepreneurial in terms of spirit, and we're going for looking at the fixed costs which fit that profile of the 2 companies.

Now for those who know me a little bit from the past, reducing working capital has always been one of my key things to look at. Now when I look at the working capital, clearly Marcel and his team have done a great job in the past. But if I still look at the numbers, and I like to look at it from a percentage of net sales rather than to say kind of number of days, I see that we're about 11%, 12% of total sales. Is it good? Is it bad? I think I won't give any guidance. I won't give any numbers here. But definitely if you look at my past, I mean those numbers do not fit in the things what I like to achieve.

The organizational structure is quite similar to creating 2 entrepreneurial companies. Being a division is one, being a stand-alone company is very, very different. Very different in terms of management needs, in terms of structure of the company, where you go for. So we will -- we are looking at that, and we continue to look at that very closely. How do we maximize the management, how we maximize our structures as such that we will have 2 very clear companies going out of the gates at the moment of the spin, which will be in the early next year fiscal '12.

Now talking about the future is all nice and easy, but I think meanwhile we have to run the business and that is critical. And I think we have to be rest assured that we will not forget to run our current business. There's a couple of things which make it sure, and we'll make sure that we will deliver our results as far as we can promise. Accelerate fixed costs reductions. I mean we will put extra gas on looking at our fixed costs. I mean doing it now rather than doing it tomorrow. So that's one thing and one promise you have from the whole management team.

Variable costs reduction. The supply chain I think also there, as I said already in the beginning. It is absolutely critical that we look at those things faster, more efficient and leave no stone unturned. Things which were sacred cows before will be looked at, and we'll look at how we can reduce our variable costs.

Energizing and accelerating our innovation pipeline. I think coming to the company, I think, I was surprised by the amount of innovations in the pipeline. Very nice, I mean our R&D center in coffee as well as in meats in the U.S. are doing a lot on innovation. So what we're doing and what we're looking at how can we accelerate the innovations, how can we make sure that we don't wait for them but do actually more and create a new pipeline. Actually next week, we're starting a company-wide project with very young and energetic teams all over the companies, both in Europe and the U.S. We call it "Energy in Motion" to accelerate and to kind of make people think about the future and how to make sure that innovations becomes part of our DNA.

Part of that is boost our marketing spending. You've seen in the results, and Marcel will come back to that later, that we will have -- we have decided not to give up our marketing spend in order to cover our bottom line. We will say we have things to defend, we have great brands and it will be a great pity to stop our marketing spend.

On top of that, which is not on the chart, and I think we put in place some very simple reporting mechanisms, which will allow us to monitor the business very, very closely. I mean it's getting also the people in divisions used to having monitor it very simply with one page where are we go and how are we doing things.

So that is in terms of the work stream of current today. We have our work stream of tomorrow, and we have a work stream, which is a work stream of making sure that all of the things which are with the spin related with the spin which are not necessarily business-building but which are absolutely necessary, there is a complete dedicated works into making sure that from a financial point of view, from a carve out point of view, these things work perfectly. As you see the preparations for our accountings are on track completely. The revenues for IRS ruling, we are completely on track. Making the portfolio divisions, we'll come back to that later in my speech. Organizational structure, I think I've talked enough about it. We'll make it very, very clear that our new organization will be ready to have the challenges of being an independent company. And the balance sheet optimization, we're looking at how to make sure that we'll have 2 healthy companies coming out of the gates next year okay.

Having talked about that, I would like to take a step back and look at our North American Meats business and I'd like to look at our International business. First of all, I think I am very pleased to announce an acquisition of Aidells. This is, I think, the first acquisition. And we went back to history in a long, long, long time to make an acquisition in meats. I think I'm very happy with it, and I am happy with it for a couple of reasons.

First of all, Aidells premium sausage is getting us into a segment of the market where we are not playing. Normally, I would say we're the more industrial middle-of-the-road good but middle-of-the-road company in terms of the meats. This will get us into premium segment. We've seen a lot of movements toward the premium segment in all food segments, definitely also in the sausages and in the Meats business. And this will give us a great entry, great entry in terms of consumers and the consumers, the premium consumers, the people are more organic and more natural related, which are growing. And on top, we will have now presence in Whole foods and a much better presence in Costco, where these businesses are more related, and we were, traditionally we are weaker in this kind of area. So very good from a consumer point of view and very good from a trade point of view.

We tend to do this business in a separation. I mean we'll separate it as a separate business unit. And so it also will teach our organization to make sure that how as an entrepreneurial company works. So it will be a learning element. We'll put our Gallo Salame in the business, and we'll have it run as a separate one giving us an example of how an entrepreneurial company can run. The price we paid, an $87 million for the revenue was approximately $100 million and is EPS accretive after year 2 -- in year 2, actually that is because we're putting extra marketing spending behind that. Otherwise, I could tell you the best news that it will be accretive as of moment one.

Moving from Meats to kind of another part what does evaluating our strategic options for a part of the Meats business, and that is we call it inside our private label retail business, a refrigerated dough. We are looking at the business whether that really fits with our strategy. It doesn't deliver the high growth, high margin we're looking for and that we'll go have a very, very key look at that. It's kind of be $326 million. We prefer it as, we call the store brands. It's separate unit within the Meats business. So I think you will hear more from us in the later stage.

We've talked about meats. And from meats, we'll move on to the International side. The International Bakery, as I'd like to call it the coffee and tea business rather than International Beverage. But I can't change names, I've been told so that I keep it the coffee and tea business. So here, in International Bakery, for those of you know our business very well, they probably know it. But many people refer to it as International Bakery. Actually International Bakery consists of 3 various segment, different segments. First of all, it's our Bimbo business, and people know that business. One thing is for sure it's a fresh bread business in Spain. We have a refrigerated dough business called Euro Dough based in France, and that is very similar actually to the business we have for North America. It is the croissants, the cinnamon buns like the dough we have here in the U.S. And then we have an Australia [indiscernible]. And actually Australia, is probably one of our best performing coffee and tea companies, and we just wonder whether that makes sense to have a very successful coffee and tea business, a frozen desserts business. And we wonder what it would do if the focus will be completely on coffee.

So here, we are talking about, again, you'll see the numbers in terms of sales, looking we want to do with the business in the future. So very clear focus on the meat and the acquisition there. And on the other side, looking at business as whether they fit our long-term, I would say mid-term goal of achieving good profits and high turnover.

We have announced previously 2 dispositions, and I think it's good to keep you on track and to keep you informed about that. The International -- the North American Fresh Bakery is completely on track, as we have stated before. We expect to close by the end of fiscal '11, and I think that is, as much as I can and want to say about it.

In terms of Household & Body Care, I mean, that has been a long process. But on the other hand, very positive now that I can say that 90% -- 97% of the proceeds have been received, cash in the bank. Australian, New Zealand bleach closed, global shoe care and insecticide is expected to close in the second half of the calendar.

So I think this gives you kind of an overview of where we are in terms of our total strategic review, and I feel very pleased about it. And I think you haven't heard the last from us. And I'd like now to pass the word on to Marcel who will go and make a deep dive into our businesses. Marcel, up to you.

Marcel Smits

Good. thank you, Jan. Good morning to everybody on the call.

Ladies and gentlemen, Jan has given you a good overview of the progress that we're marking in terms of setting up both pure-play companies for success. And part of that effort is to ensure that we weather the commodity storm that is currently raising around us. We're working our way through some 900 basis points of commodity costs increases in coffee and tea, some 700 basis points in North American Retail and Foodservice, and both of those, of course, are expressed as a percentage of sales.

If you'll allow me, let's state a step back. We're dealing with the proverbial rock and a hard place. We either take price and then risk some short-term volume or we don't take enough price and then we risk our long-term margin structure. And as you know and what we've been communicating before, we have made our pick. Having to make a tough choice, you might as well pick the option you think is going to least harm you in the long haul. And the priority, therefore is to protect our margin structure and hence, our ability to invest behind our brands. To some extent, we can and have offset increased commodity costs with productivity improvements, but it is inevitable that we have to take price. We've been very resolute about doing just that, and we've been willing to accept the short-term volume risk.

Protecting our margins is part 1 of setting both companies up for success and investing in MAP is part 2. In every quarter of this year, we increased our marketing spend. And in the fourth quarter, we'll spend less than last year's unusually high-level, but we will be spending at what I would call business-as-usual levels, and we've have made a determination not to cut to the bone. Fortunately, we've been able to take a significant amount of cost out of our business, in particular in the corporate expenses, and that has provided a fair amount of tailwind.

So here are the key messages. Adjusted net sales were up 6%, thanks to pricing and a positive contribution from mix, and that's real progress. Zooming in on pricing then, I'd say we are on strategy. North American Retail, we saw a 6% coming through. And for the first time in 4 quarters, we've been able to offset our commodity cost increases with savings in pricing, and that's a major piece of good news. As a result, we did take a volume decline. Our volume gain -- oh sorry, our mix gain was insufficient to make up for that volume decline, and that's disappointing but it is on strategy.

North American Foodservice, meanwhile, we really turned the corner. Commodities versus pricing and productivity were not a drag in the quarter. But more importantly, sales and profit in the quarter are both up, and that's a break with the trend of the recent quarters. As you know, we have been working through the loss of 2 large contracts in fiscal 2010.

In International Beverage then. During the quarter, we've broken through our many barriers of retailers resisting price increases. These increases will flow through the sales line in the third and the fourth quarter. The third quarter, we reported a 6% increase coming from pricing. And that is as yet not enough to offset our commodity costs increase, and we're working hard to get ahead of the curve. Meanwhile, the good news is that despite the price hikes, our volume was actually a small positive as was our mix.

On a cumulative basis then, our adjusted operating income from continuing operations is down $82 million. Of that, $61 million is mark-to-market impact of currency, and let me just briefly explain that. Last year, the dollar strengthened against the euro, and we recorded a gain on our long dollar positions in Europe relating to our business buy in coffee forward in dollars. So we buy coffee forward in dollars and we hedge those positions against euros.

This year, the dollar has weakened against the euro, and we had to take a mark-to-market loss. Between the gain from last year and hit from this year is a $61 million variance, and we've also spent additional $24 million in MAP spending. Excluding these 2 items, we're flat. It's obviously not where we want to be, but if it's the net outcome of dealing with a $650 million commodity storm, not bad either.

The last key message then is adjustment of guidance. We missed by $0.06 and hence, we missed our numbers. Over half of it relates to volume risks in both North American Retail and Foodservice and our coffee and tea business. Since our last guidance in January, we've been confronted with an additional $100 million of commodity cost increases. We're going to get most of this back in pricing and additional productivity gains, but we are now reaching price levels where we are incurring additional volume risk.

The remainder of the call down relates to International Bakery business. I will talk about that in a minute when we get to the discussion of the International Bakery segment.

While we're not pleased to miss the numbers, we're confident that we're doing the right thing for the long-term health of the business. Going forward, the imperatives are the following: First of all, we've going at ahead of the curve in pricing coffee and tea business. We're confident that we'll get there. Secondly, it's imperative that we keep up our MAP investments and that we keep innovating. Thirdly, it's imperative that we further reduce costs, and we're very confident that we can do, aided among others by the conclusion that the split of the company presents additional opportunities for cost reductions. So what you can expect from us essentially is more of the same, protect the margin structure, invest behind the brands and cut expenses as aggressively as we can. And with that said, let's go into some further detail.

This slide shows our sequential estimates of commodity cost increases and the comparison of fiscal '11 to fiscal '10. Back in August, when we started the year, we expected some $200 million of headwind. Every quarter, the estimate has moved up and our current estimate is $650 million. Roughly half of that is in North American Retail and Foodservice and the other half is in coffee and tea. And the text below summarizes the strategy, protect the margin, accept short-term volume risk, cut costs.

Here, you see the progression in terms of pricing. In the fourth quarter, the price component will again increase based on pricing actions taken during the third quarter but not yet fully reflected in Q3 and based on actions taken in the last quarter. International Bakery stands out and has gone in the wrong direction. In France, we're confronted with price competition we didn't have before, but really the key issue is Spain. We were confronted in the third quarter with a competitor dropping its branded pricings to levels below private label and effectively entering into a price war. We decided to vigorously defend and took our pricing down, and that's why we missed the guidance in this part of the business.

Now, in every crisis, there's an opportunity. Firstly, we have accelerated the discussion with the Spanish unions on wanting to move our sales force to an independent operator model. We expect to reach a conclusion on that soon, and that will help to recover most of what we're now losing in price. The second opportunity that we do see is a large volume uptick, and in particular, private label in the Spanish market is taking a heavy toll.

As said, we've brought our guidance down by $0.06. On this slide, we're showing you the breakdown of the results by quarter, split by segment income at the upper part of the slide and corporate in the middle. There are 2 important conclusions to be drawn from this slide. Firstly, our last quarter projection for segment income is not unhealthy. It's going to be a satisfactory in quarter, in line with the last 2. And in the comparison with last year, it will actually be a strong quarter. Below the line of segment income, as you can see here, our corporate expenses are going to be higher in the fourth quarter than they have been in the second and the third. We've made great progress in reducing our corporate expenses, and we see a lot of room to bring it down again next year. That said, in the fourth quarter, we have to deal with some stranded expenses and some commodity mark-to-market losses.

The second important conclusion from this slide is that we are targeting what I would call a normal MAP level. We're not going to be cutting off our nose in order to hit our guidance.

Now here, we compare our updated guidance with the figures we gave you the 28th of January. Of the approximately $70 million miss, more than half relates to our core North American Retail and Foodservice and coffee and tea business and less than half relates to International Bakery. It translates into $0.06, and that's a bit less than one would expect from the adjustment in operating income and we've had a little bit of tailwind from share count, interest expenses and of course currency.

Now let's go into the business segments, starting with North American Retail. As we have previously called out, pricing actions coupled with productivity gains, enabled the business to offset commodity increases in the quarter and a major breakthrough. We benefited from our mix gain. But as I've discussed, volume took a hit. Let me just highlight that Jimmy Dean and Hillshire Farm, 2 of our core retail brand, posted sales growth in the quarter in volume and market share gains in the key categories of lunchmeat and breakfast sandwiches. We had volume setbacks, fresh breakfast sausage, smoke sausage and hot dogs mainly as a result of pricing ahead of the market.

Here we have the key figures, showing the development of this business quarter-by-quarter. Now let me start with the bottom line of the slide. Now the third quarter margin came in at 12.8%, and that's definitively the good news. At the top end, you see net sales, we've grown sales in all 3 quarters. The growth in the second and the third quarter was lower than in the first quarter, and the reason for that is shown a couple of lines below. We're making progress in pricing quarter-by-quarter. Our mix is positive in each quarter but our volume was down in the second and the third quarter. We're increasingly seeing signs that price increases are being replicated, and that makes us cautiously optimistic that the worst may behind us.

Now I've made a strong point on wanting to maintain MAP spending, and in North American Retail, in the third quarter, we've dialed back a little bit. In the fourth quarter, we will spend at normal levels appropriate for the innovations that we have coming through. Last year, we spent considerably more behind innovations and a number of consumer acceptance tests. This drove our MAP spending to unusually high levels. From last year's tests, we know that these investments actually do pay off. And later in the year, the management team of new Sara Lee will present themselves to you. And I'm not here to steal that thunder, but you can assume that cost reductions in order to finance MAP increases are going to be part of their strategy.

Turning to the North American Foodservice business. We've got good news across the segment. The segment is really our poster child of cost reductions, driving growth in the areas where you can make real money and leaving less profitable sales behind. We did well in meats, frozen bakery and liquid coffee. And those are exactly the areas where we have sustainable advantage.

And here are the financials quarter-by-quarter. In the third quarter, sales were up, operating income was up and that's actually very encouraging, considering that we're still working through the loss of 2 large contracts in the prior year as you know that remember.

Our coffee and tea business then. The bad news is that we're still lagging commodity cost increases as I have explained. In addition in the Benelux, we're fighting a tough battle with private label on Senseo. And to brew it really very simple, our price premiums are insufficiently supported by brand equity in differentiation. That has led to market share loss in that region and the solution is to redouble our efforts to strengthen the equity of Senseo, and we're working on that. But just to manage expectations, we're not going to be fixing that in the next quarter.

Now the good news, and we've got lots of it. Firstly, in the third quarter, we broke through nearly all of the glass ceilings of strong pushback from our customers on the need to take price. The inevitability of price increases is now accepted. Private label is taking price as well.

Secondly, the price increases would appear to have a muted impact on volumes. We do, of course, see some consumer trending more towards private label simply because absolute prices are starting to give a reason to pause when they stand in front of the shelf, but it's not dramatic. In fact, overall, for the segment as a whole, we're actually showing a small volume increase in the third quarter.

Thirdly then, our innovation is giving us real lift, and that is showing up in the mix. Senseo keeps growing driven by Germany, France, Spain and, of course, of late Brazil. Our LO'R capsules keep going strong. We've launched new variants and we've launched into new countries. We're now present in France, the Netherlands and since a couple of days, we're in Spain. Recently, we launched our Napolitana capsules in Spain and, of course, we're putting our money behind all of these innovations.

Fourthly then, it turns out that we did a nice acquisition in Brazil with Damasco. We got this right. We came out of the gate with good volumes. We believe the brand has legs better than anticipated, and we're ahead of the business case.

Here are the financials. A couple of notes, I've explained the impact of currency mark-to-market on our operating income and the footnote of this slide is actually really important. This year we took a $31 million hit from currency mark-to-market, and that's in the footnote. Last year, we had a $30 million benefit. Now we tend to filter the $61 million delta out in order to make our own comparisons. And if you correct for it, you'll see that our profit decline in the third quarter roughly equals our MAP increase. And that means that the negative commodity to pricing impact is absorbed by gains from organic growth and innovation as well as costs improvement.

And lastly, just a quick clarification, you'll see that in particular in the third quarter, our 13.2% sales increase is more than the addition of price volume and mix. The difference is Brazilian export business. We export beans from Brazil to Europe and that volume is sharply up. The low-margin revenue that allows us to capture nice tax benefits.

Now moving to our final business segment, international Beverage. I've already explained the issue, and let me just summarize. The business underperforms. We face serious price competition, in particular in Spain. We've had to react and see volumes rebound. We're working on taking out the next layer of costs but it will come too late to avoid taking a hit in profitability this year, and that contributed to the margin -- or to the guidance adjustments. The financials then come as no surprise. You see the pricing impact and the resulting operating income decline. And with that, let me just turn it over to Mark Garvey for a review of our financials.

Mark Garvey

Thank you, Marcel, and welcome everyone. I would now like to walk you through the third quarter results in some more detail.

On this slide, you can see adjusted operating segment income for the third quarter and year-to-date for fiscal '11 with comparisons to the same periods in fiscal '10. Total adjusted operating income was $230 million for the third quarter compared to $257 million last year, and year-to-date adjusted operating income was $658 million compared to $740 million in fiscal '10. Now as an adjusted operating segment income level, the results were primarily impacted by commodity costs net of pricing, particularly in the International Beverage segment, volume softness in North America retail and weakness in International Bakery due to price competition in Spain. In addition, as Marcel has said, MAP was 12% higher in the third quarter and is 11% higher year-to-date.

On the other hand, we are pleased to see corporate costs lower than last year for the third quarter in a row. In this quarter, corporate and other costs were $25 million favorable to last year, $13 million of which was accounted for by positive commodity mark-to-market variances. Year-to-date corporate and other comps were $83 million lower than fiscal '10, of which $23 million related to positive mark-to-market. Core corporate costs are lower primarily due to Accelerate savings and pension cost reductions coming through.

Now as I mentioned, rising commodity costs were a significant factor impacting the performance of the International Beverage segment during the quarter and year-to-date. As Marcel has discussed, our coffee commodity costs do include adjustments for currency mark-to-market each quarter. On this slide, you can see some more detail at the impact by quarter to date for fiscal '11 and the comparison to last year. In the third quarter, we had a currency mark-to-market loss of $15 million compared to a gain of $13 million in the third quarter of last year, therefore a negative delta of $28 million. And year-to-date, this delta is a negative $61 million for International Beverage.

This slide quantifies in more detail the primary drivers of the year-over-year changes and adjusted operating income from fiscal '10. Pricing net of commodities were a negative $61 million in the third quarter, $28 million of which can be attributed to currency mark-to-market as just discussed. Project Accelerate contributed $10 million in savings and MAP investment was $8 million higher. The lean savings, commodity mark-to-market gains as well as lower pension costs drove additional operating income and were somewhat offset by lower volume mix result and costs for Kansas City and our SAP implementation in North America, which we've discussed with you before.

A similar theme is evident for the year-to-date results with pricing net of commodities is a negative $154 million, Accelerate savings of $59 million and an additional MAP investment of $29 million.

Now let me turn to earnings per share. For the third quarter, we reported earnings per share of $0.25. There were a number of events during the quarter as we continued to work on closing the Household & Body Care sales and started ramping up the activity in preparation for creating 2 pure-play companies. Firstly, the completion of the sale of the Asian-Pacific detergents business in the quarter resulted in a gain of $0.05, which is included in our reported earnings under discontinued operations. We also incurred termination charges related to certain Household & Body Care licensing agreements amounting to $0.04, which are also recorded in discontinued operations. In addition, there were significant items incurred related to Project Accelerate, spinoff related costs and exit and severance actions in our International businesses as we continue to work down stranded overhead. This then brings us to adjusted earnings per share of $0.30 for the third quarter, $0.24 of which relates to continuing operations and compares to adjusted EPS of $0.22 for continuing operations in the third quarter of fiscal '10.

During the third quarter, we completed our share repurchase commitment for fiscal '11. In total, 80 million shares were repurchased this fiscal year at an average price of $16.21 per share. Since the program was initiated in fiscal '10, we have bought back 117 million shares or $1.8 billion at an average price of $15.55. As we have communicated previously, we plan to pay a special dividend of $3 in fiscal '12, which when paid will bring the total amount of return to shareholders to approximately $3.5 billion.

We are updating our guidance for cash from operations to a range of $400 million to $450 million primarily due to the update in operating income guidance. As I have previously explained, the overall reduction in cash flow from operations from $952 million in fiscal '10 is primarily due to reduced cash flow from discontinued operations this year as well as negative working capital impacts arising from the commodity costs environment. In addition, we are reducing our capital expenditure guidance by $25 million to a range of $375 million to $400 million.

Now let me quickly update you on Project Accelerate, which remains on track and has contributed significant cost savings. We expect cumulative savings of between $300 million and $350 million through fiscal '12. We have reached cumulative savings of approximately $204 million through the third quarter of fiscal '11, and this will grow to between $225 million and $235 million by the end of the year. Overall costs for the project are expected to be around $280 million, the majority of which have already been incurred.

Before I conclude, I would like to update you on some of the impacts to fiscal '12 earnings per share, which I discussed last quarter. There are some tailwinds that would benefit our earnings per share in fiscal '12, which we currently estimate to be approximately $0.17 per share, of which $0.02 relates to the International Bakery business and the North American refrigerated dough business, both of which are up for strategic review. Now these tailwinds include the annualization of the reduced share count, following the completion of the $1.3 billion of repurchases this fiscal year. Pension expense is now expected to decline by approximately $25 million next year based on current assumptions and amortization costs will decline by around $30 million, of which $20 million relates to the businesses under strategic review. And we continue to expect to make good progress in eliminating the stranded costs for Household & Body Care and Fresh Bakery.

In addition, based on current exchange rates, we should have currency favorability next year. We will provide more complete guidance for fiscal '12 in August. Now let me turn back to Marcel for some concluding remarks.

Marcel Smits

Thank you, Mark. I'd like to conclude this section of today's call with a few points. In late January, we told you of our plan to spin the company into 2 pure-play, vibrant stand-alone businesses. And we've told you that the definition of success was not to just do the accounting work or the fact, actually I can give you 2 pieces of paper. But the definition of success is that we deliver to you 2 companies, which have excellent margin and growth profiles. And I'm pleased to say that we're making great progress towards that goal.

We've made some important strategic decisions, which includes daily enhancement of the intent to acquire Aidells sources company in North America. In addition, we discussed the plan to evaluate our strategic options regarding the North American refrigerated dough business and our International Bakery segment, and that will all help to enhance the margin and growth profile of both businesses.

On the operational side then, the strategy is very clear. We have to cover our commodity cost inflation through price increases and cost savings in order to enable us to continue to build our brands, superior marketing and innovation. We're committed to that strategy, and we have great confidence that it will lead to an enhanced margin and growth profile for both businesses.

Going forward, we'll continue to invest in our brands, optimize operations and processes and manage commodity cost inflation. And I think that I speak for the entire senior management of Sara Lee when I say that we're excited about the successful future and prospects of these 2 new companies. With that said, let's turn it over to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Terry Bivens [JPMorgan Chase & Co].

Terry Bivens - JP Morgan Chase & Co

I'm from JPMorgan. Jan, one thing I wanted to ask you about I found intriguing in your remarks, the comment on Senseo's brand equity. I think there are a lot of us out here that think perhaps that particular product could have been better managed. And I'd like to get just briefly your ideas on what exactly can be done, particularly with all the competition in single serve. Where do you think that goes in terms of rebuilding or building again the brand equity?

Jan Bennink

Okay, very good question, Terry, because I think that's what I have been focusing all along to come into the new type of business. I think if you put just as I mean, we have the #1 single-serve sale in terms of machines, far above a very well-known competitor. And if you compare what our well-known competitor is doing, and if you compare what Senseo is doing, I think if you put them in a kitchen, in a room, you can see the difference. And I think that basically would be -- we would like to be, much, much better, much more innovative in terms of machines, in terms of what you can deliver in terms of product. So much more innovation, much more innovative, much more pleasant to have in your kitchen. Now having said that, within your single-serves, I think you have to identify that one type of machine, an espresso machine, is very much focused on espresso drinkers. Now luckily, there are a couple of people, I mean about 30% of the population likes espresso and there are 70% of people who like more the filter and drip coffee. So we are going towards the filter drip coffee people while the espresso machines are going for the espresso drinkers. So we have a very clear segment of our consumers, and we want to make our brand as exciting, if not more exciting than our key competitor. So that is a clear mandate we've given to our Senseo team, and they have start to work very hard on that.

Operator

Next question comes from Vincent Andrews [Morgan Stanley].

Vincent Andrews - Morgan Stanley

It's Morgan Stanley. I just wanted to bridge the commentary about the volume risk in the core business because from results in the quarter, it looked like the problems you are having relative to price are more in the International Beverage business versus the North American Retail business. So I guess my 2 questions are, one, when you say volume risk in the core business on a go-forward basis I assume you're talking about both businesses, and it looks like maybe from that retail slide that you're starting to see great elasticities and price is going higher and you're worried about what's happening going forward. And then just the second part of that, which is you speak broadly about short-term volume losses versus long-term margin protection. And I guess I just want to understand why you feel like the volume loss would be short term in nature but we've seen in most other consumer businesses that the volume loss from pricing doesn't necessarily come back.

Marcel Smits

All right. Thank you, Vince, and that's very helpful. I'm sure that Jan will have observations to that. Let me just give you a couple of observations from my side. First of all, where is the volume risk. As you said, it's indeed in both businesses. We're in uncharted waters now. We're taking, in some countries, we're taking the full price increase on the coffee and tea side. In the North American meat side, we're taking pretty big hikes. And it's just difficult to predict. 2 things, what is it our consumers will do? Will people trend down to private label, won't they? And secondly, it's also very difficult to predict where the competitors are going to come out. And I've said, look, we are cautiously optimistic that everybody seems to be recognizing the realities on the ground. I think we've made some noise about the fact that in European retailing scene, private labels are actually coming up quite nicely. So in that particular part of our universe, people do seem to recognize the realities and actually reflect that in pricing. But at these price levels, we've never been here. Consumers in the Netherlands stand in front of the shelf and they look at a 500 gram filtered coffee pack and they have to pay close to EUR 5. That's something they haven't seen before. So we have some uncertainty on the volume component. Then with respect of the long-term volume loss, we feel pretty good about strength of our brands. I think we have a convincing track record of actually growing share. If you look at the last 4 years, what's happened with the core brands behind which we've been investing, we've actually outperformed I think the market very, very significantly. You remember that we had a slide on at the CAGNY presentation and the 4 core brands have grown with top line growth or something like double digits over the last 4 years on a CAGR basis. So that's pretty healthy growth, good brands. We've got good innovation coming through, very confident about the innovation coming through next year. So we're taking a short-term hit, but we feel pretty good about our track record. And we also feel, driven by all of the innovation that are coming down in the pipeline, we feel pretty good about our long-term prospect. The last thing that I would say is I think we are all becoming increasingly convinced that the MAP levels in this business need to go up both on the coffee side and on the meat side. That's something that you can't do overnight, but that's just another impetus to having a really good look at your costs. And we've had Jan come in here, and he's basically turning every page. And everything that doesn't make any money is immediately questioned, and everything that is on the cost page is immediately questioned. And we're going to be chucking as much as we can overboard. And a big chunk of that, we'll put back into the market in terms of MAP investments.

Jan Bennink

Just a slight addition to the short-term versus the mid-term volume loss and pickup. I think if you look at the volume losses, if you look at coffee and tea specifically, you would look at roast and ground and you will at Senseo more than in the Benelux countries. I think, on the Senseo, I think I've given an answer before to Terry in terms of that we're focusing on the business a lot, and we've been convinced that we'll get volume back in that area. The other part, which is a big one is roast and ground. Roast and ground, to give you an example, I think the main brand of the Benelux. I think when I was a kid, it looked exactly the same as it looks now. And it's a long time ago, I can assure you. And I think that doesn't work. I mean such things don't work. And I think roast and ground, all people think it's dead. I think it is one of the most exciting areas where we can develop things. It's nobody -- it is people like roast and ground, and the beans comes back. Everything comes back. And I think we just, we have a lot of work to do and making sure that we reinvent that category and make it exciting. Like Starbucks has shown us that roast and ground can be very, very interesting.

Operator

Next question, Ken Zaslow [BMO Capital Markets].

Kenneth Zaslow - BMO Capital Markets U.S.

Bank of Montréal. I have just 2 quick points of clarification, making sure I understand the clarification and I wanted to ask bigger picture question. First is on the $0.17 for 2012, did it always includes a $0.40 -- a $40 million from FX?

Mark Garvey

No, it did not, Ken. So we're adding that in now because as we get closer to the end of the year, we're getting more visibility on currencies. So we had not done that before. So that's new.

Marcel Smits

Yes, and the currency effect, of course, has moved very, very considerably over the last 3 months.

Mark Garvey

That's right.

Kenneth Zaslow - BMO Capital Markets U.S.

I thought previously, it was $0.15 to $0.20, so did something change negatively to offset the...

Mark Garvey

Yes, so just to give you a bit of color that, we had $0.15 before plus it changes our pension assumption. We had $40 million of savings. Now we're saying $25 million. We will measure pensions finally at the end of June, but there's been changes in mortality table assumptions and inflation assumptions and elements in the U.K. So that's what changed since we spoke to you last time.

Kenneth Zaslow - BMO Capital Markets U.S.

Okay, and then a second point of the clarification. In terms of the full year guidance, I know you took that by $0.06. The benefit from the currency as well, is that another $0.04, so operationally it was down a little more than like about close to $0.10? Is that a fair where to start just from a modeling standpoint?

Mark Garvey

No. For the fiscal year, the currency effect actually is very small, which I think we went from $1.34 to $1.36 I think in terms of our average for the year. So it's not significant at all for the fiscal year, Ken.

Marcel Smits

We've had a major upstream or downstream in the dollar because depreciating very sharply over the last few weeks, but that has very limited impact on the fourth quarter.

Kenneth Zaslow - BMO Capital Markets U.S.

Okay, so the bigger picture question to me, which is 100 times more important is, if you take out the $0.17 benefit, to what extent can Sara Lee grow operationally? And where will the positioning -- where will you be able to grow more aggressively on the meat side or the coffee side? Because $0.17 doesn't seem as operational, but it seems like there is some way that you believe that you're going to be able to grow in 2012 beyond that $0.17. Is that a fair assessment?

Marcel Smits

Yes, that's a fair assumption. And that's why we're calling out the components of $0.17. $0.17 doesn't include any benefit from Accelerate savings. It doesn't include any benefits from dissolving the current corporate overhead structure. It doesn't include any of the swing from currency. And this year, we're taking a $30 million negative mark-to-market which, all things being equal, should normally be 0. It doesn't include any of the benefits of innovation. So the rollouts of LO'r or the rollouts of Senseo, and doesn't include some of the stuff that Jan has been talking about in terms of putting more emphasis on innovation, in particular in roast and ground and Senseo. So what we're doing here is we're giving you a figure for this year. We're giving some stuff that is pretty mechanic. And then the race is on to try and get as much operational improvements over and above that, and those are the 3 buckets. And the operational improvements, we're really not in a position to do that yet. So that's going to come in August.

Kenneth Zaslow - BMO Capital Markets U.S.

And is it also fair as the primal value is keep on falling, the price stickiness or your price increases stick so will that create potential margin expansion in the retail meat division in 2012?

Jan Bennink

Yes, we're aiming for price increases, obviously, to stick. But basically what we're trying to do is we're trying to make sure that both in North America and in coffee, based on current price levels of commodities, whatever price increases we need, which we're going to try to get them in, in the fourth quarter. And that's not going to be entirely done in coffee and tea, that's the objective in North America, we may have some overflow, but we're going to try and get as much done as we can in the fourth quarter.

Operator

Next question, Jason English [Goldman Sachs Group].

Jason English - Goldman Sachs Group Inc.

And thanks for the color to the last question. I think that was good information. Let me build off the last point there on pricing and the price inflation delta. I think absent of currency mark-to-market, you've got roughly a $90 million negative deficit between price and inflation year-to-date. At what point do you think that you're able to close that gap? I know you have been originally targeting hopefully end of year for International Beverage, does that still hold or has that changed? And then building on that further, and kind of to Ken's question I guess, do you see any opportunity to actually recover that deficit to generate a surplus at any time over the next 12, 18 months?

Jan Bennink

Yes, I'd be real cautious on generating any expectations on the surplus. So let me just give you -- because we have anticipated somebody to ask this question. So thank you for that. In North America, we are now at the point where commodity cost increases have been recovered through productivity gains and pricing. So we've got that behind us all of that, of course, is contingent on not getting another huge hike of commodity prices over and above what we now have because then obviously the dynamic shift again. Coffee and tea were lagging. You've just done a calculation and have a little about, if that's accurate. In coffee and tea, we reckon that we're not going to be able to make everything out in the fourth quarter. We reckon that we'll have a little bit of overflow in terms of negative commodity pricing variability in the first quarter. We're aiming to hit the milestone that we've hit in North America in the third quarter. We're aiming for that to be hit in the second quarter of next year. Is that clear?

Jason English - Goldman Sachs Group Inc.

Yes, that's helpful. And then another question, this is a bit of a flyer. Marcel, I've always been impressed with your knowledge of taxes. There has been a lot of chatter lately. I think that was your initial coming out of CAGNY, you dropped a lot of knowledge on us on that topic. So let me come back at you and tap into that knowledge base. There's been a lot of chatter recently about potentially a repatriation tax holiday. Hypothetically speaking, if that were to happen, what would the implications be for Sara Lee?

Marcel Smits

It's a subject that we're following very, very closely. There is some chatter this morning. The last time, there was a repatriation provision was in 2005. And there was some very strict conditions imposed and restrained. There's a couple of fences put around that in order for it not to be too big. We recommend you should not put that into our equation. And so we're not sitting here saying, "Okay, fine. That's going to be a real plus for us." We think it's likely to be too late for us. If the 2005 rules of the game are anything to go by, it's really questionable whether or not it will be applicable to us. So we're not counting on that. We're working on, as we have said earlier, we're working on ways to optimize our balance sheet. And we have nothing to say about that today other than saying that we've made a lot of progress in terms of our thinking over the last 2 or 3 months. But don't pin your hopes on another home run on repatriation. Sorry, if I may one more, I should have said one thing. And that is if it actually comes combined with a lowering of the corporate tax rate, that, in any scenario, is of course very good news for Sara Lee. Because for the reasons that we've explained to you in the past, our meats profits are fully taxed here in the U.S. and our coffee profits, in any scenario, I'm not going to go into the teaching that we've done in the last time. Our coffee profits will also be impacted in any scenario by the patriate here in the U.S. So if there is really thinking that the patriate should go to 25%, that would be really welcome.

Operator

Next question, Alexia Howard [Sanford C. Bernstein & Co.].

Alexia Howard - Sanford C. Bernstein & Co., Inc.

Yes, it's Sanford Bernstein. Can I pick up on Terry's question from the beginning, talking about the private label situation with Senseo in Europe. To what extent -- you've talked a lot about the benefits of having Senseo with an open system. As you move into new generations of product, how carefully are you thinking about maybe changing that?

Jan Bennink

I mean, as always -- I mean will it be as open as it is now, we're looking at can we close it a little bit more? Definitely that's part of our thinking, but don't expect it to be completely closed. I mean there's definitely ways of how can we make it more ours rather than becoming part of a double system.

Operator

And next, Eric Katzman [Deutsche Bank AG].

Eric Katzman - Deutsche Bank AG

It's Deutsche Bank. There's no way I'm limiting it to one question, sorry. Okay, the first one, why do you -- given that most companies are excluding the mark-to-market commodity changes and I think you've done that in the past, why wouldn't you do the same thing for currency? And how does -- does the mark-to-market currency have any impact on the $40 million that you're pointing to as a fiscal 2012 positive swing factor?

Mark Garvey

No, Eric, it's Mark. It has no impact on the 2012 guidance that I gave you. We did start to call out our currency mark-to-market last year. It's traditionally included in our International Beverage results as opposed to called out separately like commodity mark-to-market, and we may end up at doing it differently in the future when we set up the companies. But because of the scale of it, it's important that you understand the deltas.

Marcel Smits

It would seem disingenuous if we take it out now, so that's why we just called it about. And we're not going to be presenting a slide with adjusted, adjusted operating income.

Eric Katzman - Deutsche Bank AG

Somewhere within those 26 pages of press release, I think there are enough adjustments, but okay. The $3 special cash dividend, the net debt, I think was expected to move up as that's paid sometime in fiscal '12. But with the cash proceeds, assuming that the strategic review leads to the sale of the refrigerated dough or the International Bakery business, I mean do you think that, that would be material enough that the net debt would not go up much in terms of that funding? Or if it was more significant, could that be additive to the cash dividend?

Mark Garvey

Okay, it's hypothetical, and we're obviously doing the strategic review right now in terms of these businesses to the extent that we make any decision in terms of selling them, clearly it will impact what debt would be in a positive way.

Eric Katzman - Deutsche Bank AG

Okay, alright. And then last question, Jan, I guess if you exclude the Foodservice business, your MAP spending is probably running, I don't know 4% to 5% of sales, which is pretty competitive with most consumer food package goods companies. Do you think that that's -- it sounds like you want that to be higher even though it seems relatively competitive. Am I thinking about that reasonably?

Jan Bennink

I don't think it's very competitive actually. I think first of all, you have of course to look at the absolute amounts because it's nice talking percentages. The other thing is you want to add to your clout in terms of your marketing spend. So as a result of that, your percentage of marketing will go up and it will be a significantly higher part of the new goals or once coming slowly, slowly. I mean it depends completely how much money can they squeeze out of the fixed costs, supply chain and everything to make sure that again we reinvest part of it. There is a clear mandate. You can go and invest more in marketing if you give me half and you can get the other half. There will be more marketing spend coming up, and the P&L is looking, in three years from now, will look significantly different than what they look now.

Operator

Next question, Bryan Spillane [Bank of America Merrill Lynch].

Bryan Spillane - BofA Merrill Lynch

It's Bank of America Merrill Lynch. Just a question with regards to how you're approaching planning for 2012 and more specifically just I guess goal-setting. You've done a very good job of maintaining the focus of your organization through a lot of turmoil, right, both the operating conditions being tough and there being a lot of changes coming up structurally for Sara Lee. Could you just -- are you doing anything differently in terms of the way you're going to set, I guess, goals, objectives, payouts for 2012 in order to ensure that you keep people properly focused sort of in front of the split off?

Marcel Smits

Those are really 2 questions. So one what's your planning for how are you going to go about the process of actually putting the 2 plans together, and the second question is how are you going to incentivize people to do the right things leading up to the spin. First of all, on how we're going about the planning, both businesses are now making plans under the old structure. And that's mechanically the best way to do it because otherwise, we're going to create confusion from a systems point of view. We're close to making determinations of what goes where and we will then, in the course of May and June, overlay the structure designs for both companies. And from that, we will derive a view of both companies right in the middle of that exercise. So that's the way we're going to go about it. Currently, stick to the way you've done it in the past because we're creating too much confusion and then secondly, we'll overlay the structure decisions that we are in the process of taking. And then we'll incorporate that into the planning process, one. Two, what are you going to do in terms of making sure that everybody is properly incentivized? That's something that we're thinking about. Obviously come August, we're not going to be able to do a normal LTI because the normal LTI, a normal incentives around Sara Lee stock with restricted Sara Lee units and performance share units. So we're thinking about how we can make sure that everybody focuses on let's make sure that we're gonna come out of the gates flying.

Jan Bennink

Basically, as Marcel said, it's all focused on as if we're already 2 separate companies. And we have a third bucket, which is corporate. I think that's how we're trying to push it and make that -- maximize it to the as far as we can go.

Bryan Spillane - BofA Merrill Lynch

Okay, so are you setting goals? I guess I'm just, you know, so is -- if like profitability is a target, if I'm working in your North American Retail business and I've got a profit objective for fiscal '12?

Jan Bennink

It would be as a stand-alone company.

Operator

Next question, Chris Growe [Stifel, Nicolaus & Co.].

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

It's Stifel, Nicolaus. I just had a couple of quick ones for you. The first one is, Mark, you've given us -- I didn't hear it or perhaps I missed it but sort of the market rate of inflation and then the sort of inflation you have coming through I know the dollar amount, is there a percentages? And I guess what I'm trying to understand is it seems that some of the prices hold because we're going to spill over into fiscal '12, so is that going to require another round of pricing?

Mark Garvey

Well, yes, we've been giving that each quarter. It's obviously gone up since the last quarter. So we're above 30% in terms of the basket. That is not our cost push, as I've said before, because we have obviously hedging policies that mitigate that but we're quite a bit above 30% now because of what's happening in coffee, primarily. And there will be some -- clearly, when we look at the comparisons of fiscal '12 versus fiscal '11, we continue to have costs push into '12. But I think the key message here is in terms of how our pricing is coming through, we have turned the corner in terms of North America. And we would expect by the end of calendar year to be pretty much there in International Beverage as well given current commodity price.

Marcel Smits

Given current commodity prices, that's a very important addition. We now look, on a weekly basis, as to what our total cost increases going to be as the prices that we're now seeing annualized. So we know that. And from there, the way we tend to look at it is do we make our commodity increases with price? That's the way we plan for it. So when is the drag on profitability going to end? And that's why I think with some justification, we have made a point that, in North American Retail and Foodservice, we've turned that corner. And we're pretty confident that we'll do the same in coffee somewhere in the first half of next year, all of that be predicated on assuming that current prices are it. Obviously if prices go up again, then we're going to have to work hard to get ahead of the curve. In coffee and tea, we've been behind the curve. So we're now trying to make sure that we get ahead of the curve.

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

Thanks, Marcel. And then a follow-up question I have was for in North American Retail, particularly in meats, you've had a bit of a drag from IT expenses and from the Kansas City facility. And my modeling or my recollection was that those get better in the fourth quarter of this year and then really throughout 2012. So are you expecting a nice little bump in margins in the fourth quarter for North American Retail along the lines of that benefit?

Mark Garvey

It's really going to do -- you'll see that into fiscal '12 more than fourth quarter. It's a little bit less in the fourth quarter. I think for the third quarter, we had an incremental $7 million spend because of the ERP and the Kansas City implementation. And for the full year, surrounding year-to-date, it's $28 million. You'll see that begin to go down in fiscal fourth quarter. But for next year, you really start seeing the costs go away and the savings come through from an Accelerate perspective.

Marcel Smits

I should have mentioned that in my list of stuff that will help the operational for next year. It's, by the way, it's part of our Accelerate savings.

Operator

Our next question, Andrew Lazar [Barclays Capital].

Andrew Lazar - Barclays Capital

Barclays Capital. So just a quick one, a clarification in the way -- I know that we've been discussing input costs and pricing. We're looking at obviously the dollar amounts, which makes sense and the gap that we've got. And then the way you sort of discuss trying to protect the long-term margin structure of these businesses, I assume that means through more percentage margin structure, but I could be wrong. So I'm just trying to get a sense of how you link your [indiscernible] and then as your competitor -- and also you're thinking in percentages, okay. And then so thinking there is when you're talking about turning the corner in North America and ultimately in beverages, is that on a percentage basis? And if so, is that what you sense that your competitors are sort of after as well?.

Marcel Smits

I don't know how our competitors think, but I would assume they're a decent companies. But I think if you're thinking of the percentages, that definitely is something where we're looking at. How fast do you turn that corner? That is the question. How fast can you come back to those margins where you were about a year, 2 years ago? That is the question. But definitely the percentages is the only thing we're looking at.

Mark Garvey

Yes, just to clarify, Andrew. When I talked about turning the corner, it was an absolute amounts in terms of covering the actual. But clearly, like Jan says, we're focused on the percentage in terms of long term.

Marcel Smits

The -- it's gross margins, it is everything, product P&Ls. Everything has to -- will go to percentages, and that is a shift for the company because we've been looking at penny profit

rather than percentages. So there is a little bit of a shock, but I think it is a healthy shock, and people will at some point will understand what it means. This is a Jan Bennink challenge layered onto the profit objectives. I think it's actually very healthy principle. So it's going with some shock waves through the company. It's a very healthy addition.

Operator

Our next question, Tim Ramey [D.A. Davidson].

Timothy Ramey - D.A. Davidson & Co.

D. A. Davidson. The fourth quarter -- I was just wondering if you could give us a little clarity on 2 things. What will the impact on employee compensation accruals be, without pointing fingers, I'm going to assume that bonus accruals might be down some as a result of the earnings reduction. And also wondering if you can give us any thoughts on what the volume impact actually might look like that's contained in your guidance reduction?

Mark Garvey

On the bonus accrual, yes, there is certainly some benefit coming through because of bonus accrual has dropped. We haven't given out the magnitude, Tim, specifically. But you're right, there is a small impact there coming through from that. On the volume, I don't have that in front of me. So we have to get back to you on the volume impact because I don't have it right now.

Timothy Ramey - D.A. Davidson & Co.

And just if I could sneak one more in, is there any comment on what happened in bakery in the quarter? I know you're carrying it as a discontinued op, but...

Marcel Smits

Yes, as I said, in France, our year-ago business...

Timothy Ramey - D.A. Davidson & Co.

Thinking about North America and I'm sorry, Marcel.

Marcel Smits

Bakery, oh I'm sorry. I misunderstood you. Yes, that market continues to be a very tough market. Everybody is battling it out. I think competition is just a very, very fierce market. I don't know whether you've seen the results enhancement from Grupo Bimbo. They were making some noise about North American market and we recognized that as well. So that's -- we're not having an easy time there.

Operator

Next question, Akshay Jagdale [KeyBanc Capital Markets Inc.].

Akshay Jagdale - KeyBanc Capital Markets Inc.

KeyBanc Capital Markets. Jan, this question is for you. As a newcomer to Sara Lee, I'm really interested in your perspective of the coffee business, and specifically, single-serve and Senseo. I'd be interested in knowing when you look at this business since it was launched in 2000, what do you think of it? I mean what did they do right? What did they do wrong? And what is the competitive advantage even today that you plan to leverage? You alluded to the 26 million machines sold or your install base. But at this point, do you think you can leverage that? Because to me, that would be a competitive advantage if you could leverage it. But I'm interested in knowing how you think of those things?

Jan Bennink

That's right. I'll keep this answer very short. And I think it is probably more appropriate to give you my view on Senseo as far as I want to give it. What I think want to do with it and how we can leverage the number of machines. I think first of all, I think the Senseo name has much more value than you currently have. Yes, we've sold a lot of machines, but I think it is solely focused on the pad. So is that the right thing to do, yes or no? You look at the whole -- of the machine. Look at how the machines are made? How the filters are made? So I think do I think it is a success? Not really. I think it is good. It is a great number of machines. I think if you look what Nespresso has done to name the competitor by name. They've got a great sales, they got great profitability and they're growing. We're growing by 5%, 6% over the years. So it's good. We're doing well in France. We're doing well in Spain. We're doing well in Brazil. In those countries where we've been longer, like the Benelux, we're not doing so well, and I think there is -- they're crying out for newness, new way of reinventing it. It's like reinventing the Senseo machine, and that's what we're working on. So a couple of things you will see faster, but there's a couple of things you'll have to wait for a little bit in order to see how we look at it. But to give you a short answer, do I think it is a great success? No. I think it's good, but that's it.

Akshay Jagdale - KeyBanc Capital Markets Inc.

Perfect. And one last one for Marcel, if I may. You talked a lot about normal levels of MAP spending and they're up year-over-year, which is great to see. What is, in your opinion, the company as a whole, what is a normal MAP spending level?

Marcel Smits

What I have described as normal, I think it's relative to what we have been doing in the first 3 or 4 quarters. That is for that purpose, the definition of normal. I think I've also made it clear that long term, we'd like to drive the company to meaningfully higher MAP levels because we think that we actually have a much better growth profile if that's what we can achieve. And that's why we are very creative in looking at our cost structures in order to try and do that. Does that help?

Akshay Jagdale - KeyBanc Capital Markets Inc.

That does. I was -- I mean if you look at it on a trailing 9-month basis, I think it's about 3.7%. So that would, I guess, be normal, but you're saying you want to be higher. Can you be specific about how much higher?

Marcel Smits

We have it on the slide. We have for the fourth quarter we're approximately $75 million, and I'm not in a position to tell you whether or not I think it should be $100 million, $125 million or $150 million. We're not to that point. I think we're very clear that strategically we all believe that the company over time should migrate to higher levels of MAP spending.

Operator

Our last question comes from Andy Feinman. [Ladenburg Thalmann & Co. Inc.]

Andrew Feinman

Iridian Asset Management. I know in the press release you give the average number of shares for the fourth quarter, 605 and 609 primary or basic and diluted. But I was wondering if could give the number of shares at the end of the quarter since you bought a lot of stock during the quarter?

Mark Garvey

Andy, so it's approximately 585. Think 584, 585s.

Andrew Feinman

Is that basic?

Mark Garvey

Yes, I believe so.

Marcel Smits

I've been going around the world to saying that it would be 584 or 585.

Mark Garvey

That's consistent, yes.

Andrew Feinman

And the dilution was about 4 million. So if I want to get estimate diluted myself, I'd probably use 588. That sounds reasonable?

Mark Garvey

That sounds reasonable, but let's get back and make sure we're absolutely right. But I think that's right.

Marcel Smits

You're not going to be far off then.

Mark Garvey

You're not going to be far off, yes.

Melissa Napier

Okay, that concludes the call today. And again, we are here for the day and into next week. And if you have any questions, you know how to reach us.

Marcel Smits

Thank you very much for your attention.

Melissa Napier

Thank you.

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