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Executives

Mark Garvey - Senior Vice President of Internal Audit and Senior Vice President

Melissa Napier - Senior Vice President of Investor Relations

Marcel Smits - Chief Executive Officer

Jan Bennink - Executive Chairman

Analysts

Andrew Lazar - Barclays Capital, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

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

Robert Moskow - Crédit Suisse AG, Research Division

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

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

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

Robert Dickerson - Consumer Edge Research, LLC

Eric R. Katzman - Deutsche Bank AG, Research Division

Sara Lee (SLE) Q1 2012 Earnings Call November 3, 2011 11:00 AM ET

Operator

Good morning, and welcome to Sara Lee's First Quarter Earnings Conference Call for Fiscal 2012. [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 Corporation. Thank you. Melissa, you may begin.

Melissa Napier

Thanks, Candy. Good morning to everyone on the call. I'm joined today by Jan Bennink, our Executive Chairman; Marcel Smits, our CEO; Mark Garvey, our CFO.

Our first quarter results were released at 6:30 a.m. Central Time this morning via press release you can find on our website. We've also posted the slides that we'll be discussing during today's call. Our first quarter Form 10-Q will be filed on or before Thursday, November 10.

Before I turn the call over to Jan, I'd like to refer you to the forward-looking statement currently displayed. During today's call, we may make forward-looking statements about future operations, financial performance and business conditions. These forward-looking statements are inherently uncertain, and actual results may differ from those expressed or implied in these statements. I ask that you refer to our press release and our fiscal 2011 Form 10-K for more details on factors that could cause our actual results to differ materially from our forward-looking statements.

All adjusted numbers we discuss on today's call exclude the impact of significant items, acquisitions, divestitures and the effects of currency changes. Explanations of these non-GAAP financial measures are included in our release.

We'll take your questions at the end of Marcel's prepared remarks. [Operator Instructions] Jan?

Jan Bennink

Okay. Thank you, Melissa. Good morning, ladies and gentlemen. Welcome to Sara Lee's First Quarter Earnings Release.

Let me start with sharing the agenda with you. I will start with giving you an update on our pure play progress, the spin. Mark will follow with the financial overview and Marcel will close with the business update. The Q&A session, of course, will be after Marcel's discussion.

Let me start with our promise #1, an update of our portfolio divestitures. As you have noticed, I mean, we had a very busy quarter, and if you look at the page, I mean you'll see that H&BC divestitures, that's done and the North American Fresh Bakery, it was the DOJ approval at 10/21, and I'm very sorry, I apologize for the fact that it has been a little bit slower than we had anticipated, but it's difficult to manage a process if you're not completely in control, but we were very happy that it is now approved and you can expect the closing in the next couple of days. And this is very good news.

The North American Refrigerated Dough, the deal is closed 10/3. Spanish Bakery was announced 10/10 and also that you can expect closure before the end of the year.

I think the North American Beverage, which we announced last week, also I think was a very good deal where we're very happy that our coffee business in North America, which was basically unbranded, has now a very good home with Smucker and its Folgers brand, and I think the deal completed with an association on our liquid technology is a very good promise for the future.

That remains with one last one to close the box and take the box is the French Refrigerated Dough, which we expect also to be announced in this quarter.

Okay, let me give you then our #2. I mean, we had a second promise and that was about the organization. The organizational structure, and I think what we said before that the organization will be finalized by December. As you can notice in the first line, we say here December, January. I gave myself a little bit of leeway, although I still think and hope that we will be able to do everything in December.

There's 2 open searches, the one is the CEO for Meat Co. and the other is the General Counsel in the Meat Co. company.

In terms of the board, I think we'll be ready to announce our Chairman of the Meat Co. in December of this year, and I'm talking this calendar year, of course. Then in terms of our existing board members, we currently go to the process which board member wants to share and wants to be in which board and that will be announced, at the latest, by mid-February. And then, we'll have, of course, the nomination of our new board members. We've started the process of looking for additional board members to fill the places in either Coffee Co. or Meat Co. in the coming half year, and we expect some new members to be announced in the next 6 to 8 months. Okay?

Now going through detail of the organization, which I'm, first of all, talking to Meat Co. I mean if you just change the page, you'll see their the org chart of our meat organization and what you see is basically, in the new organization, we'll have 3 new hires, 3 internal promotions and 2 people who are remaining in their position. The 3 new hires will be the CEO; the CFO, Maria Henry, who has been announced in July; and the General Counsel, as I just mentioned before.

If you look at the business part, I think there's 2 new -- I mean, 2 positions which is the President and CMO, Monty Pooley, who is taking care of our Marketing, our R&D and our Foodservice business; and our Custom Officer, Andy Callahan, who is taking care of the Retail kind of, i.e. sales business, sales of our organization. So that is the new organization as it will be in Meat Co. and I think, as I said before, we'll expect that this will be closed between December and January of this year.

Going then to the org chart of Coffee. I mean, here, you see in total 5 new hires, out of which CEO, Michiel Herkemij, has been announced, and he will start actually in December. We've recently announced our CFO, this is last week, Michel Cup, who will join also in the 1st of December, but I'm glad to announce that he has already started on a part-time basis, going into the details of the financial, so I think that's a very good news. And you will see a new name, which we haven't announced so far which is the CMO, Ingrid Baron. Ingrid, I'm very pleased to have her in the organization. Ingrid started up the Energy in Motion process in Coffee Co. as well as Meat Co. in April of this year. She is from an outside agency called IDEO. And from origin, she is an industrial designer, so a very different background, very innovative thinker and I expect great things of her going forward.

In terms of the business, how do we split up the business, there is 3 parts. We've split up the business in one side, Western Europe, then the rest of the world and our out-of-home business or our Foodservice business, respectively, managed by Harm-Jan van Pelt, which is an internal promotion; Marlene Vaessen, internal promotion; and Nick Snow who has been handling Foodservice for the last 3 to 4 years. So I think a very solid way of looking forward in our business and people who know our business and going forward in a very positive way.

The third promise which we made is innovations. We've said that we would push our innovations. And I think if you look at promise #3, I think great progress has made. I mean, as you know, with innovations, they don't come from one day to the other if they're a bit bigger. So what we see on coffee is we will make significant, significant changes in the next 12 to 24 months. In 24 months, you could expect that none of our packaging, none of our products will probably look the same as they currently look. You can expect the first relaunches in March, April of this year and that's what we'll roll out, then the big second wave of innovations will happen in the summer and then major innovations, which is the bigger ones can be expected in the first half calendar '13 and hopefully even something already in the last half of calendar '12.

Most of which and, of course, I can't announce everything and we can't announce everything in our Investor Day because I can't reveal all the new things for competitive reasons, but most of the things we will be able to announce we will show and announce in our Investor Day on February 29.

Also I'm very glad to say that we've started intensified cooperation with Phillips to improve our appliance offering, which I think will be absolutely critical to move our Senseo business in a turbocharge.

Going to the innovations for meats, new innovations also in the Meat business will start in spring. The first relaunch is expected in Q4, so more or less at the same time as you will see the first part of the coffee on the shelves. Second wave, as with coffee, you will see it in the summer and the significant changes in product portfolio, as well as channel offerings, to be expected from summer onwards.

Also here, in the first week of March, when we'll have our Investor Day, you will see a lot of innovations, which you will see on shelf. Again you won't see everything, but you will have a very, very good flavor of that we've not been sitting still in the last 4 to 5 months.

Now I'd like to then move onto my personal to-do list for the next 7 months, and which I update all the time, but there's a couple of recurring elements. And I think the look for fixed cost will never stop, and I think we are still looking at that very, very aggressively to see whether we're going to do some fixed costs to even further everything than the things we've promised in our last quarter earnings results.

The optimizing of our portfolio, I mean, we're continuing to look at it. There's always elements and parts, which I think are not fitting the strategy of profitable growth. There might be smaller things, not necessarily big things, but I mean we're looking at every portfolio, every brand and in geographies to see what we can do to make sure that when we start after our spin, we really have our optimum portfolio.

The working capital, as you might have noticed, it's still not perfect. I mean it's far from perfect, I would say, but we can't push the organization all the elements at the same time, so we're starting our project on working capital as of Q3, and taking for coffee or meat where we have respectively at kind of 18% to 9% of total sales.

Our midterm goal would be to arrive at 5% working capital for the total Sara Lee company, and I think there's a lot of work to be done, but we are full confident that we can make that.

Gross margins, absolute focus of the company. We'll look at how to make sure that our gross margins improve faster than we currently have planned, and we're looking for ways to, first of all, procurement. We look at projects squeeze with reduction of our variable cost and we look a lot of our mix and part of the portfolio changes I talked about before fit into the total strategy of making sure that we have the right mix, we push the right products and we push the right countries to making sure that our growth margins will see an uptick in the coming years.

And Mark and his team and, of course, all of us are working on an ideal capital structure for both companies, which is work on in progress in Q2, Q3, and we'll reveal the capital structure in our earnings, in our Investor Days in February and March, respectively.

Then coming for the key milestones for the spin, before I pass it onto Mark for the financials. Important date will be the IRS private letter ruling, end of calendar year 2011. Again here, we took a little bit of leeway. It's not complete and out of our control. I mean, we'll have to wait for the IRS to come back. Things happen not to go faster than expected most of the time, but most of the time they take a little bit more time. So I hope the IRS is on the call and make sure that they will help us a little bit to get the date as we would like it.

Finalize the organization, as I said before, December, January, 2011, 2012. That we'll hope to do in December, but don't be too upset if it becomes January.

The full presentation of the strategy names, financial guidance, capital structure, basically what are these 2 pure play companies going to do, what can you expect from them, will be announced on our Investor day on February 29 for Coffee Co. Date -- I mean the exact place to be will be communicated and it will, in Meat, be the 1st week of March. We're aiming for the 8th of March, but we haven't gotten any -- we're looking for a specific location. So the 8th of March, pencil it into your diary that's what we're aiming for.

And then the launch of the 2 new Co.'s [ph]. As said before, no changes whatsoever of what we've communicated before in our earnings release, is the first half of calendar '12.

That is as far as our to-do list and our update, and I would like to now pass it onto Mark to take us through the financials.

Mark Garvey

Thanks, Jan, and good morning to everyone on the call. I'd like to start by reviewing some of the key financial highlights for the quarter. First, we are reaffirming the adjusted earnings per share guidance that we provided in August of $0.89 to $0.95 a share. That range remains unchanged despite the headwinds from a weakening euro and the divestiture of our North American Foodservice Beverage business. As you may recall, our guidance in August had assumed an exchange rate of $1.44 to the euro. The average rate for the first quarter was actually just above $1.41, so we are now going to assume a rate of $1.38 for the remainder of the year. Basically, an average of $1.39 for the full year.

As we've discussed with you before, a $0.03 change in the dollar-euro rate has an approximate impact of $0.01 to our earnings per share.

We also announced the sale of the majority of our North American Foodservice Beverage business to Smucker recently. As such, we have moved this business into discontinued operations in the quarter and restated prior year results so that our earnings per share guidance no longer includes results from this business.

Now I'll talk you through the other key highlights as we show you the numbers for the quarter. Adjusted net sales for the quarter rose 6% with strong pricing in all segments, as well as good mix results in Coffee and Tea.

Overall, volumes were down in both major segments, but we did see improving volume trends in Coffee and Tea compared to the fourth quarter of fiscal '11.

Also be aware that our adjusted net sales of $1.9 billion now excludes $137 million in sales for North American Foodservice Beverage, which has been moved to discontinued operations.

We continue to invest behind our brands and our MAP spending was up 27%, with significant increases both in North American Retail and Coffee and Tea.

Adjusted operating income was up 4% with strong results in Coffee and Tea and the benefit of lower corporate expenses coming through at corporate and in our North American segments.

Adjusted earnings per share for the quarter was $0.18, an increase of $0.06 or $0.50 -- 50% from the prior year quarter. The increase in earnings per share resulted from improved adjusted operating income, slightly lower interest expenses, as well as a reduced share count.

Now Marcel will provide an overview of the activity in the North American Meats and Coffee and Tea segments and will provide some commentary around business segment performance. The schedules at the back of the earnings release also provide information on the net sales and adjusted operating segment income for both Meats and Coffee and Tea.

We are pleased to see corporate expenses continue to come down as we move towards the spin. Here you can see that general corporate expenses for the first quarter were 50% lower -- over 50% lower than the same period in fiscal '11. The reduction is due to reduced corporate department cost as we managed costs down prior to the spin and also lower pension costs.

In reducing corporate department costs, we are comfortable that our corporate departments remain adequately staffed to enable us to complete the spin.

On the other hand, there were commodity mark-to-market losses of $11 million in the quarter compared to a gain of $12 million in the prior year quarter.

On this slide, you can see the primary drivers of operating income for the first quarter. Overall pricing was ahead of commodities for the quarter. This was the case in the combined North American segments where pricing has exceeded our commodity costs now for 3 quarters.

In Coffee and Tea, excluding favorable mark-to-market currency benefits, pricing still trails commodity costs, but as we have discussed before, this is expected to turn around in the second quarter.

There were also some commodity mark-to-market impacts in the quarter that I just discussed. The change was a negative $23 million. MAP investment increased by $14 million on a constant currency basis. And the other drivers of operating income improvements came from improved mix results in Coffee and Tea, as well as lower selling, general and administrative expenses in the North American businesses and at corporate.

Now I would like to turn to commodities in a little more detail. As you have seen, commodity cost increased by $153 million in the first quarter compared to the same period last year. For the full year, we now expect commodity costs to increase by $425 million. This number is lower than our August update of $500 million, primarily as we are not including costs related to North American Beverage, which is now being moved to discontinued operations.

As we look out to the remainder of fiscal '12 for the Meats business, we see commodities quite historically high are tracking with our internal projections, and we are currently not anticipating any significant swings in our outlook.

In Coffee and Tea, the costs we incurred in the first quarter, excluding currency mark-to-market benefits, are expected to be the highest for the year coming off the recent peak in coffee prices. We have mostly covered our coffee purchases for the remainder of the year and so we feel reasonably comfortable about our cost metrics for the fiscal year in coffee.

Now our strategies to mitigate commodity cost increases remain the same, mainly to protect our margins through pricing and productivity gains, continue to invest behind new innovations and to continue to look for opportunities to further reduce costs.

The next slide shows our earnings per share as reported and as adjusted for continuing operations and for the total company. For continuing operations, we reported a net loss of $0.06 per share. This number was impacted by some one-time items to our tax reserves, as well as costs associated with the spin and other restructuring charges. Backing these costs out, our adjusted earnings per share was $0.18, as I've just discussed.

For the total company, including discontinued operations, there was a net loss of $0.37 reported. This number, of course, is impacted by gains on the sale of discontinued operations, in particular the North American Refrigerated Dough business sale in the quarter and an impairment charge of approximately $370 million related to the movement of bakery Spain and France to discontinued operations.

As we discussed in our last quarterly call in August, we are looking closely at both Meat Company and Coffee Company to determine additional cost-savings opportunities as we prepare for the spin. And as we previously reported, we continue to expect cost-reduction opportunities of between $180 million and $200 million achievable in fiscal 2012 and '13.

These savings will help offset stranded overhead, which we estimate to be between $50 million to $60 million resulting from the disposition of businesses.

We now expect to incur $450 million to $475 million of significant items, not including impairments or gains or losses in sales of businesses in fiscal '12.

These amounts include additional costs to rising from anticipated actions, which will be taken as a result of selling the majority of the North American Beverage business to Smuckers. We estimate that the after-tax cash impact from these items will be approximately between $300 million and $350 million.

Now let me turn to cash flow and update you on anticipated year-end cash and debt balances. Net cash from operating activities was an outflow of $220 million for the quarter compared to an inflow of $28 million in the prior year quarter. This is primarily due to a one-time payment to the Dutch pension plan of EUR 60 million, which was made in July.

In addition, we have significantly reduced cash flow from discontinued operations this quarter compared to last year. And finally, our working capital balances are higher, primarily due to significantly higher commodity costs.

At the end of fiscal '12, we now expect a cash balance of $300 million and gross debt of $2.1 billion. This represents an improvement of approximately $200 million from our August guidance, which is primarily due to the additional proceeds we will receive resulting from the North American Beverage disposition, offset by the reduced proceeds from the North American French Bakery business.

Again for simplicity, the year-end cash of debt balances assumes that the spin-off occurs on the last day of this fiscal year. This also assumes the completion of sales related to all announced dispositions, the payment of the $3 special dividend and the payment of the repatriation taxes for which we have already provided.

We will provide you with regular updates on our expected year-end cash gross debt positions as we progress through fiscal '12, and as Jan said, at our Investor Day we will give you an update on the capital structures for both companies.

Now for your own tax planning purposes, many of you have asked us in which calendar year the $3 special dividend will be paid. If we can confirm that we intend to pay the dividend in the first half of calendar year 2012 before completion of the spin-off.

Finally, I would like to update you on our guidance. As I mentioned earlier, we are affirming our fiscal 2012 earnings per share guidance of $0.89 to $0.95, and we are also affirming our adjusted operating income guidance of $875 million to $930 million. We are updating that sales guidance to $7.9 billion to $8.15 billion to take account of the impact of moving the North American Beverage net sales into discontinued operations and also a weaker euro.

Consequently, net sales are now expected to increase by 4.5% to 8% over last year. Net interest expense is now expected to be approximately $80 million for the year, an improvement of $5 million since our last guidance. And we continue to expect the tax rate for continuing operations of 33.4%. As I mentioned earlier, our guidance now assumes an average euro rate for the year of $1.39.

So with that, I will hand it over to Marcel who will discuss the performance of our businesses.

Marcel Smits

Thank you, Mark. Good morning, everybody, on the call. I'll be providing some color on the operating results from our 2 businesses, and let me begin on this side of the pond with a review of our first quarter performance in Meats. We've provided an overview of the financial street segment in the quarter and it's really part for reference -- in part, it's for reference purposes, so I won't dwell on it too long. Let me just call out a couple of things though.

Sales declined by 2% in the quarter as pricing actions were offset by volume decreases. For the third straight quarter, pricing actions coupled with proactivity gains enabled the business to offset commodity increases.

It's important to point out that we're lapping a strong volume quarter in the prior year period in which the company invested heavily in promotions. Volume was also impacted by early pricing actions and the rationalization of low-margin promotions.

During the first quarter, we launched several new products under the Hillshire Farm brand, including Grilled Essentials, Gourmet Creations and Deli Carvers, that will strengthen the Hillshire Farm franchise. These innovations resulted in start-up costs and MAP in the first quarter and will positively impact results in the remainder of the year.

We committed to higher MAP spending and we showed it in the first quarter with MAP up 30% behind new product launches and a focus on building the core brands. For Ball Park, we have meaningful innovation coming through later in the year, and Jimmy Dean is doing well. In all, the first quarter adjusted operating segment income was down 9% as volume weakness and higher MAP investment offsets SG&A savings and manufacturing efficiencies.

The newly named North American Foodservice and Specialty Meats segment comprises of the North American Foodservice Meat and Bakery businesses and the company's newly formed Specialty Meats business, currently comprised of Aidells and Gallo.

The North American Foodservice Beverage business is now reported as a discontinued operation and Gallo was formerly reported in the Retail segment. The reason for the formation of the new Specialty Meats Group is to accelerate growth in the premium meat segment. This new group is being led by the Aidells' management team. The Gallo business was successfully transitioned into the Aidells management model and the management team is taking it over and is expected to benefit from Aidells' proven business model.

The Foodservice segment then reported its third straight quarter of adjusted net sales growth, increasing 2% on pricing actions across the portfolio. Volumes increased 2%, including the contribution from the Aidells acquisition. Excluding Aidells, volumes declined 2% versus a strong prior year quarter, driven by soft restaurant traffic and declines in Foodservice bakery.

Adjusted operating segment income increased 7%, driven largely by manufacturing and SG&A savings. Adjusted operating margin expanded 40 basis points to 9.6%. The Aidells brand outperformed expectations with 17% volume growth and 22% sales growth. The company expects growth in Aidells to accelerate due to the expansion of distribution across new geographies and customers.

Now that I've recapped the performance in Q1, let me just give you some color on the remainder of fiscal '12. First on the volume price and commodity cost equation. We've weathered some volume softness in key categories over the past few quarters as we focused on pricing. To combat this volume softness, we will be taking precise pricing actions to improve volumes and firm up shares in key strategic categories. We have numerous large platforms innovations that will benefit our results for the remainder of the year.

We launched a few of these innovations under the Hillshire Farm brand already in the first quarter. In addition, we're taking steps to accelerate the innovation that was developed by the Energy in Motion teams.

And finally, we continue to benefit from cost reductions taken over the past 6 months. We've now reduced headcount by over 400 in the North American business versus last year. The combination of these variables leave me very confident that we will continue to perform in the coming months as we set this company up for outperformance post-spin.

Now let me move on to our Coffee and Tea segment then, formerly called International Beverage. This segment encompasses our new Coffee and Tea company. These are the financials. The Coffee and Tea segment reported strong adjusted top line performance of plus 14%, driven by pricing of 14% and positive sales mix of 4%. We continue to expect that pricing will fully offset commodity inflation by the second quarter.

Improvement in volume trends from the previous quarter as declines abated to 3%. MAP increased 32% behind innovation and a renewed commitment to build the core brands.

Adjusted operating segment income was up 19% on pricing, positive mix and the benefit of new innovation, as well as currency mark-to-market variances.

Adjusted operating margin of 13.3% was up 60 basis points versus last year and 90 basis points versus the fourth quarter of fiscal '11.

Although the Western European business continued to operate in challenging environments, these operations showed a great improvement compared to the fourth quarter of fiscal 2011. Spain, the Netherlands and Denmark improved volume trends compared to the preceding quarter.

L’OR EspressO, meanwhile, continues to perform well in France, the Netherlands, Belgium and most notably in Spain, where it commands a 10.6% value share of the total retail coffee market, only 20 weeks post-launch.

Now let's now look forward, and I'll start by addressing the volume price and commodity cost equation. Current price level should be sufficient to cover commodity inflation by the second quarter. As is true in North America, we have a healthy pipeline of new product launches that will benefit results in the remainder of the year. A few examples of innovations are L’OR EspressO and new machines coming through in the Foodservice. And as we begin to see in the first quarter, the volume in R&G, in Roast and Ground, is rebounding. As you saw in our first quarter numbers, we will continue to increase our investment in MAP to drive growth.

We now have our new organization structure in place, and we're confident that our new management team will be successful in driving further growth in the near term. With the organizational change, comes a cultural change that will allow us to move quickly in the market and accelerate the time frame for new growth opportunities. So we feel good about the prospects for making a decent step-up in 2012.

With that, thank you. And with that said, let's move over to Q&As. Jan, Mark, Melissa and I will be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Alexia Howard.

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

It's Sanford Bernstein. We've just had a conversation with Kellogg's this morning, and on that call, they said that the heavy cost cutting that they concluded or they conducted back in 2009 cut a little bit too deep and led to supply chain and employee morale issues. Now you're going through an awful lot of productivity improvement here as well and have been for some time, what measure did you got in place to make sure that your own cost reduction initiatives don't go too far?

Marcel Smits

Well, let me briefly speak to that. Our supply chain group, that's the biggest group in our overall company, is doing very well. So they are to be commended for continuing to deliver good results. We have a very strong track record of bringing in lean savings, and everything we're seeing so far in the year is that we're actually doing better than what we anticipated in our plan, so that's supply chain. And that group is highly motivated and they're doing very well. On the sale side, we've taken some cost reductions because we've moved some of the smaller accounts over to a brokerage model. That has meant a lot of change. Obviously, the sales team is keen to make sure that we win in the marketplace. They're excited about the fact that with surgical precision, we're dialing back some of the price points that we're promoting a bit heavy and that will help to win in the marketplace, so I don't think that we have major motivational issues there. And then, of course, people in the office are saying, well, we're going to move downtown, at least that's what the management preference is, so that means quite a bit of change. So we're spending a lot of time sharing with people a vision for the future. We've had a big meeting on the 5th of October with something like 300 people in the room, showing them what the innovation was going to be, what we were going to do in terms of changing the channel strategy, manufacturing strategy and so on and so forth. We've are going to have another big meeting on the 18th of October. This afternoon, we're going to have a big meeting. So for the people inside, there's a lot of change going on, but I think we are becoming quite specific in terms of the plans that we're executing in order to make the 2 companies successful. And the plan and the specificity around the plans give confidence and actually drive the motivation. So we're obviously going through quite a bit of change, but we are thoughtful about how we do that and we're trying to keep everybody aligned and everybody on board by communicating extensively, and we're giving people the means to be successful in the market. The last point that I would make is the fact that we're investing in new innovations, slotting, MAP. That doesn't go unnoticed inside our organization. And people are saying, well, that's good. So overall, I think we'll be fine.

Jan Bennink

Marcel, I have something. I mean, it's not necessarily cutting to deep, it's more the change management we have to go through because if you look at it, I mean, the last 2 to 3 years, Sara Lee has been through enormous amount of change. So it's not the cutting too deep, making sure that the people get the vision. And I think what you've seen in the last, I would say 8 months, yes, has there been some destructions overall? Yes, for sure. I mean more in North America probably than in the international Tea and Coffee business. And I think now, as Marcel has said, they get clear what the future is going to look like more and more and you see the morale actually ticking up and also with the internal monitors we're doing rather than having the -- we had -- in the summer, we had a pretty deep point. And I think we're ticking up -- ticking the box in terms of getting more positive in the last minute. I think it's all about the strategy. I would say that Coffee and Tea is currently ahead of Meats because they've been through less. And you'll see a very positive spirit over there. And I'm sure that in Meats, you will get exactly the same thing and you will see that in the results, but it's not [indiscernible].

Operator

Next question, Jason English.

Jason English - Goldman Sachs Group Inc., Research Division

Jason English here. A couple of quick questions. First, the Australian baking business, I think you said it was under strategic review last quarter. Can you update us on the progress made there?

Marcel Smits

It continues to be under strategic review, Jason. Yes, we have really nothing to add to that at this point.

Jan Bennink

We're kind of indecisive.

Jason English - Goldman Sachs Group Inc., Research Division

All right. Fair enough. Moving onto coffee, your Coffee business. Brazil looks like it was the source of strength this quarter. I think it was the source of weakness last quarter. We don't have very good visibility into that market. Can you tell us what's happening and some of the dynamics down in Brazil?

Jan Bennink

I think overall in Brazil, we think we raised the prices in Brazil. And that we've been through in the summer. We've put our last price increase through in September. What you see there is, overall, our market share is picking up despite the price increases. Everybody is following us. And I think very positively speaking, if you look at our key brands, which is Pilão, which is about 65%, is Damasco and Pilão which is the more premium part and the higher-margin part is they're actually growing almost double digit. I mean, we pulled a little bit back by the lower cost volumes, I mean the lower margin volumes, which is exactly what we would like to do because we're not pushing at all on the Caboclos and the low-margin businesses. So you see a healthy trend, pick up of market share and the competition following price increases, which is a very positive signal.

Operator

Next question, Tim Ramey.

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

Trying to get my hands around the shift of the Specialty Meats business and what that does to the results we've known in the past. That appears to have been a high-margin segment that you moved over. First of all, give me the rationale again on that. I mean, why doesn't that belong in the Meat business? And second, what should we be thinking about in terms of margin performance for what is the new Meats, Retail Meats business?

Marcel Smits

Okay, just a couple of questions here. What we've done, Tim, is we've moved Gallo over to the Aidells business. The Aidells business is -- it's more of a premium business. We have always considered Gallo to be a hold brand in which we didn't invest all that much. Fairly profitable for us, but sales have not been increasing on a bound basis over the last few years. And when we brought Aidells in, we actually brought in a company that was excited about Gallo as a business, so lots of opportunities. So we gave them that business, integrated the 2 and then are applying the Aidells model to the Gallo business. So we're turning Gallo into a growth engine. We're going through a number of reformulations. We're gaining some distribution and we're going to apply the same Aidells demonstration model that has served us very well. So that's where we are. The Aidells business, meanwhile, under the Aidell brands, keeps performing very well. Gallo had a decent quarter. In the first year, it's very small. It's really a rounding, but we have high hopes that, that could be real successful under this new leadership team. Leadership team, we've put it together. We've looked at how we should define the segments and felt that it was better to keep its efforts. So we're keeping it separate from our retail organization and we're looking at its top-down level on an integrated basis between our Foodservice business and the Aidells, Gallo business. It's too small to cut it out as a separate segment, so that's where we put it. Does that give you an answer to your question?

Jan Bennink

It's a [indiscernible] of a different business model and an agent for a change. I mean, people see how we can do business differently. And I think that's another very good signal to the organization. I mean, kind of keep it different, the one who is running -- the person who is running it did it perfectly, and so you give a great example. It's on a roll.

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

It answers part of the question. The other part of the question was how should we think about margins in what is the new Retail Meats business? And just to follow up on your answer there, I mean, Aidells, as I recall, is a Costco model essentially. Does that mean Gallo will become a Costco model? And why is a Costco model sort of not a Retail business?

Marcel Smits

Aidells is, I wouldn't say it's a Costco model. It's a business that actually has a very strong franchise in Costco. It's built quite a bit of equity in Costco. It's now increasingly rolling out outside Costco. That's why we, as a company, are making contributions there because we're opening doors for the management teams or for the Aidells management team that were difficult to penetrate in the past. Yes, I think you can have an argument then, obviously, as to whether or not it should be part of Retail Meats or it should sit somewhere else. We, in the end, decided that we'd put it -- it's a separate business. We don't want to disclose it separately because it's too small, so it doesn't meet the hurdles to disclose it separately. We put it into Specialty Meats. We tend to look at the Meat Company as a whole, which is what we've done in the release while we've added the figures up, because that's the way we're starting to look at what's the Meats business and what's the Coffee business. Then in terms of your margin objectives, yes, we're clearly trying to drive the margins in our Meat business up. And that's a function of a whole range of things. It's a function of innovation coming through, mix management, further saves on the, what is it, on the COGS side. So it's a whole range of initiatives. We clearly have an objective to drive margins further up. I don't think we should go into specifics of what those margin objectives are, there'll be another moment, but up is the direction where we're going. It's surely a higher margin business.

Operator

Our next question, Akshay Jagdale.

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

It's KeyBanc. My first question is for Jan. Just wanted to ask you about your exit from the single-serve market in the U.S. I mean is that -- would you call that a regional issue, category, meaning single serve, or brand? Or is it something else?

Jan Bennink

It is completely a regional issue. I mean, we were fly on a window screen here in the U.S. I think it's a very small business. We would have had to invest a hell lot of money in order to get in here. It's a very competitive market. And I think the money is better spent in areas where we can have a bigger bang for our buck. I think we have completely, but completely, committed to the single serve as you will notice in the next 12 to 18 months. And as I also said about looking at ways of expanding our cooperation with Phillips. There is a full commitment to our single serve, completely a regional issue. And I think the market is currently too full for us.

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

Perfect. And just a follow-up on that. You mentioned intensified cooperation with Phillips. If you can, could you expand on that? I mean, if you don't want to be too specific, at least help us understand strategically how important you think the machines are in the whole scheme of your business?

Jan Bennink

We will update it, kind of we're in negotiations to see how we're going cooperate more together. We will update, give you an update in the next, hopefully, month, where we want to go, what we want to do. Having a very cooperated innovative partner next to you to make the single serve a success, I mean as I said before, our Senseo machine looks the same as 10 years ago. I mean, that is result of both partners, and I think that we want to do is making sure that we have a wide array of machines and we're talking about single serve and perhaps also other types of machines and single serve ways. So is it important in our strategy going forward? Absolutely. And we just want to make sure that both partners are completely in the same boat, and we will give you an update on that one, hopefully, very soon.

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

Perfect. And one last one for Marcel, I think this will go to you. On the North American Retail Meat volumes, one is, did they disappoint -- I mean, they seem pretty weak in terms of the trends. And can you just comment on category dynamics there? I mean, where is that weakness coming from? Is it Deli or anything, any color you can give on that, that would be great.

Marcel Smits

Let me just give you a couple of perspectives. First of all, I think it's an important point to note that last year in the first quarter, we actually had a fairly heavily promoted quarter. So from a pricing point of view in a number of categories, we were quite competitive at the time. And then as we saw commodity prices coming up and got visibility on those commodity prices sticking, we then said, look, we have to protect our margin structure. So we've been taking pricing up quite aggressively. In some areas, we've gradually been followed, in other areas, we haven't. And that's one piece of the dynamic. The other piece of the dynamic is that we need to bring more innovation to the market, which is exactly what we've done in the first quarter. So the Deli Carvers, the Gourmet Creations and the new products that we just mentioned, so that will help to drive and improve the volume trend. And that's -- innovation that's coming through apart from the Energy in Motion innovation, which will start hitting us -- or which will start coming through in the fourth quarter of this year and then accelerate in 2013. So it's a function of pricing and innovation, and we're correcting on both sides. We're pushing quite a bit of innovation through already in the first quarter and we're making sure that will accelerate as we go through the year, that's one. And secondly, from a pricing point of view, to the extent that we see competitors not reflecting the same commodity realities that we see, with surgical precision we'll defend our share.

Operator

Next question, we have Priya Ohri-Gupta.

Priya Ohri-Gupta

I'm calling from Barclays Capital. Wanted to know when you expect to file the Form 10? And secondly, as you sort of look to put your capital structures in place for the 2 entities, have you given some thought to how you could potentially address sort of putting your respective debt at each of the entities, i.e. through sort of a tender, a refinancing or potential and exchange?

Mark Garvey

It's Mark Garvey here. We're working very hard right now to get ready for filing this Form 10. As you know, it's quite a bit of work. Our expectation currently is probably early February is our current time line to get that filed. So all going to plan, that's where we should be. And yes, we've been giving a lot of thought to capital structure in terms of where we will end up with the 2 companies. We will certainly be giving you a full update on that at the Investor Day. But based on where we currently are, you would expect that we will raise some debt in the Coffee Company and we will do potentially some tenders here in the North American area as well. So we haven't fully determined all of that yet, but you will be getting more updates on that fairly shortly.

Operator

And the next question, Eric Katzman.

Eric R. Katzman - Deutsche Bank AG, Research Division

It's Deutsche Bank. Okay, I guess the first question has to do with your comment about how your coffee pricing looking forward is now kind of covering the cost. And so I would have thought that, that would have been pretty positive because that's been something that you've been like kind of playing catch-up on for a couple of quarters. Is it that currency has gone the other way and that's why the consolidated forecast for fiscal EPS is just kind of staying where it is?

Mark Garvey

Eric, no. We've been predicting, I think, for a number of quarters that we thought we would catch up by the second quarter in terms of our pricing versus coffee commodity costs. And yes, we took some decisions over the last 2 or 3 months as well to make sure we were pretty well covered for the year. So, we have reasonable confidence where we are right now from a pricing perspective that we should be ahead of commodities and we should have a good metric on that for the year, but it's not a currency factor. This is something that we have been really trying to get through to the retail environment. As Jan said, this quarter, we got all of our pricing basically through in the different countries as well, so that's what gives us the confidence.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. Second, it looks like you lifted advertising or MAP spend, a very big amount, but you didn't get a lot of bang for your buck in terms of volume. I guess, do you think that, that starts to have a tail with an ROI and volume starts to rebound? Or is that kind of what's necessary versus kind of it sounds like a pretty aggressive new product launch, and that's what gets the volumes back over the next couple of quarters?

Jan Bennink

Right. I mean, if you look at the MAP spend -- and I am taking Coffee and then Marcel will take the Meats part because there are definitely different ounces to that. If you look at the Coffee, I think the MAP spend was up 31%. I mean very interestingly enough, I mean, you see the mix. I think one of the results of the MAP spend is that we pushed a lot of the products with higher margins. So the mix part is a very positive signal. Also you recall probably better than anybody else that our minus 9 in Q4 versus a minus 3 and if I even take the private labels out in Q1, we're ending up with minus 1.5 in terms of volume on branded goods. So that is overall the trend in the volume is actually a very positive one and that's the trend we expect to continue to be positive going forward. That's in concerning so we're pushing on higher mix, higher margin products. We are turning the corner on the volumes. We see that the private labels and other ones are following us in terms of pricing, and we feel more confident that currently the market is playing out pretty well for us. Meats?

Marcel Smits

Yes, on the Meat side, Eric, basically what we've done is we've pushed the number of new products into the market, so we've incurred quite a bit of slotting expenses, which sits in our gross profit, and we've incurred a MAP expenses, which should show as visible on the MAP line. And as we have launched these products in the course of the quarter, we were anticipating that we'd have a major contribution of those products in this particular quarter. Those contribution of those products will come through as the year progresses.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. And if I could just follow up with Mark on the cash flow in the balance sheet for the fiscal year end assumptions. It seems generally that what you've been selling has come through at least less than what I expected and obviously there was a DOJ required adjustment for the bread disposition in the U.S. So how do we -- is it that cash flow from operations are coming through better than expected, that there isn't much change in the net debt assumptions by year end? I mean, kind of, how do we bridge the lower proceeds versus kind of whatever operating cash is being generated?

Mark Garvey

Well, Eric, when we give -- and I'm sure you know this. But you know in the last quarter, we did not include the North American Foodservice Beverage proceeds, right, in what we had given you from a gross debt prospective, so that obviously is additional proceeds that we have clearly the offset of North American Fresh bakery, to some extent reduces that. There are also some favorabilities coming through in cash flow from ops, which are helping the numbers there as well. So overall, I'm not trying to bridge every single number because that's not what I think we should do, but we're coming in a little bit better than what we expected. It's mostly though the North American Beverage proceeds that helped us there.

Marcel Smits

Yes. And I think it's fair to say that we were a little careful in what we assumed as the proceeds for the Bakery business.

Operator

And next question, Robert Moskow.

Robert Moskow - Crédit Suisse AG, Research Division

Credit Suisse. I just wanted to maybe dive a little bit more into the Coffee margins. They're still low at 13.2% and it's clear that you're pointing in an upward direction, but how long do you think it takes to get back to like that normalized level of 18%? And do you think that there's a risk that with coffee prices kind of rolling over a little bit that some of your competition starts to lower price, causing you to take some more pricing actions in the other direction?

Jan Bennink

First of all, let me correct you. We've never used 18% in any of our previous -- no, we've said to historical levels, you put them at 18%, I mean that's your call. But definitely, there's an upward trend in terms of the margins and I think we feel comfortable in getting back. How long does it take us to go -- to get back? I mean, I won't give a precise number, but I think we're looking at, as I always said, this is the year of transition. Next year will be a building year and the growth here will be 2000-and-whatever. 2013, I think it is. 2 years, 2 fiscals from now. So it's about -- that is probably the moment where you will see both top line as well as the bottom line in line with the expectations, so it's more of a midterm guidance. How fast can we go back? I think the prices as you currently see and as I reported also in our 6 months, kind of 6 to 9 months coverage, which we have with Coffee, we feel pretty comfortable that we can get to better levels than we have now in this particular quarter because the prices in coffee were a record high. These are really on a free fall [ph] basis which we take. I mean this is the coffee prices at $2.85, which is the highest level we had. So they will get better. I mean we expect margins to grow. Will there be price pressure coming in from the competition? So far, we haven't seen it. I mean, prices have been going up and down. There might be some coming up. We've anticipated for that. I mean we do not want to decrease our margins. I think we are far away from the margins where we were in our historical level. So margins and percentage margins, I'm talking not about absolute margins, is the name of the game in the company. So we'll push the percentage margins and that will happen via, perhaps on a short term, we might do some promotional activity if there's some activity in private labels. But the way going forward is innovating our way out. And I think the route to market where we have starting April, May next year gives me a lot of confidence that we can tackle additional margin enhancement on our Roast and Ground business, as well as on our single serve business. So I don't feel particularly stressed by it.

Robert Moskow - Crédit Suisse AG, Research Division

Can I ask a question about the internal goal on percentage margins rather than dollar margins? It seems like your competition really focuses more on dollar margins. What do you think that the -- how do you think that will affect the competitive dynamic in the categories if one is focusing on one thing and the other is focusing on the other or it doesn't matter?

Jan Bennink

I mean, luckily, we don't have one competitor. I mean if you look at our competitive markets, in Brazil, our competitor is Strauss. In the Benelux, our competitors are -- and in Spain, our competitor is private label. In France, our competitor is Kraft. In the Eastern European market, our competitor is Kraft and to a certain extent, Nestlé. So it is a very different marketplace with different place -- different kind of competitors in different market. So overall, private labels will focus more on penny profit. Interestingly enough, because of all the price increases, what you see is we, as a coffee brand, since we're the leaders, most of the places where we play, we will use as a loss leader. And the trade didn't make any money on us. With the higher prices, all of a sudden, we've become a very interesting category for the trade and our brand specifically has become more interesting. So the trade, all of a sudden, starts pushing us more rather than their own private label because they're start making more money on us. So it's not one dynamic. And in the end, by the innovations, by looking at it, I mean we've done it in the past with margins which are high. Will we get to the similar margins as we were in the long time past? I mean that will probably be difficult. But actually, I mean, I feel and I feel more and more confident definitely with the raw material prices and the innovation pipeline that we can get to where we've stated we can be. I mean more than ever.

Operator

Next question, Rob Dickerson.

Robert Dickerson - Consumer Edge Research, LLC

Consumer Edge Research. Just, I have a few questions. I guess to start, on North American Coffee Foodservice, what was new there? I mean what was the rationale of not telling us that may be coming when you reported last quarter?

Jan Bennink

I think the reason for not telling you is because we were looking for the best strategic option to go forward. And I think just selling a business, I mean was it selling, was it not selling. There's a lot of people involved here in North America and also for the internal organization, I think it would have been a pretty heavy burden on top of all the changes we have. So they were more internal reasons than external reasons not to announce it.

Marcel Smits

Yes. I think there's no point in announcing things if you're not 100% sure that you can take them across to finish line.

Robert Dickerson - Consumer Edge Research, LLC

Yes, okay. That makes sense. And then just off of there, I know you didn't change guidance today for the year, but I'm assuming, obviously, just due to the low profitability of the Foodservice Coffee business at the $0.75 base doesn't change from last year?

Mark Garvey

That's correct. The $0.75 base doesn't change. It was a low profitability last year. We had plans for it to be, frankly, more profitable this year. So it did impact on how I did my guidance calculation. But you're right, last year's base did not change.

Robert Dickerson - Consumer Edge Research, LLC

Okay, perfect. And then I think in back-to-school, you threw out some kind of rough growth targets for Coffee Co. Now you're selling Foodservices. Any of that change or were still standard plan?

Marcel Smits

We're staying on track.

Robert Dickerson - Consumer Edge Research, LLC

Okay, perfect. And then next question. This is more, I guess, on cost savings. I know you've laid out before product accelerate should be about $60 million incremental this year, corporate savings were about $35 million incremental. Your strand overhead seems to be staying the same. But a few of the moving parts for at least fiscal '12 was, I know originally you'd called out pension savings. I thought it was a $46 million. Is that stay the same or is that now go down some?

Mark Garvey

Yes. Pension versus last year was about $40 million plus favorable. I think it was about $44 million is the last number I saw. We did some adjustments because of the dispositions. On the other hand, of course, we had anticipated we were going to get some amortization savings, which we will get must less of those now because we have those in discontinued operations.

Robert Dickerson - Consumer Edge Research, LLC

Okay. Got it. And then...

Jan Bennink

Sorry to interrupt. In a way, what we've been saying also on the road show, I think there's a lot of moving parts and the moving parts are getting less and less, but I think in the way you look at this business is very simple. We've given, kind of, how the Meat business will look in the future and how the Coffee Co. will look in the future. And what's in the middle will be taken care of. I think that's how you should look at it. Very simply, 2 great straightforward pure play companies. And the rest in the middle is basically the people, the 3 people [indiscernible]their task to make sure it disappears.

Robert Dickerson - Consumer Edge Research, LLC

Yes, I know. I completely understood. I'm just trying to -- also important for us to get our hands around the actual numbers. And then back to the actual cost savings, I thought you said about $10 million to $15 million-ish for this fiscal year, but I mean it looked like in Q1 you already had about $10 million benefit in corporate expense, in general corporate. So I mean, is there a potential for cost savings to even be higher in the corporate than you originally expected?

Mark Garvey

Yes, we're making good progress in corporate. The thing we focus on a corporate is I need to make sure we get to the finish line, obviously, to get there for the spin. But to the extent that there are additional savings, we will pass them on. But I think the 180 to 200 savings that we quote is what you should think through. My earlier comments, said we continue to look at both Coffee and Meat in terms of savings opportunity, some of which if we feel appropriate, we'll pass through, some we will invest in the businesses.

Operator

Next question, Chris Growe.

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

It's Stifel, Nicolaus. I'd love to get Marcel on the phone later too, if you don't mind. And I sure hope somebody within corporate is getting paid. Corporate expense was a little less than I expected this quarter. I guess, what I want to understand just from a bigger picture standpoint, you have a couple -- you had divestitures this quarter that came out of your guidance and -- discontinued ops, I should say, and you had foreign exchange less than you thought. And I quantify that around $50 million, 5-0, and I'm just curious within -- holding your guidance, what helps overcome that? Because I'm not clear on that. I saw like amortization was lower than I thought, corporate was a little lower than I thought. Was there anything else in the business units that gave you a little more comfort to keep that guidance in place?

Mark Garvey

Yes, I think as we're seeing the results come through, Coffee certainly, we're very happy with the results there. We feel we peaked on the commodity side. We've got our pricing through. We have a bit more confidence, I would say, standing here today than we did, let's say, 3 months ago. And there a lot of moving pieces as you can imagine, Chris, but when I put them all together, I feel that despite the headwinds we have on currency, taking out Foodservice Beverage, you're right, corporate is coming in less than expected, and I think Coffee is also doing fine. So that's giving me the comfort that we can hold the guidance.

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

Okay. And my final question is in relation to, I guess, the general question about pricing and I was struck by a comment that Marcel made about, I think, in Meats, where maybe you're going to get a little more promotional [indiscernible] to support some better volumes there as input costs allow. Is that something that we should expect, maybe your pricing, and more closely track less aggressive inflation in, say, the second half of the year? Is that a reasonable assumption for the business, especially in Meats?

Marcel Smits

I think, Chris, what you're seeing is in the Meats business, we're going through very significant cost saves. I've quoted that a number of STEs that we've reduced. We're' going through cost saves on the IT and infrastructural side. The company's been put on the mode of let's now get to the leanest, meanest cost plan that we can get to. So we're confident that we will actually do well on a cost side and that allows us to be tactical in those areas where it's required. We have consistently said we think that we need to reflect commodity prices in our consumer prices in order to protect the margin structure, both for us and for the trade. Long term, it's not a path that you can go down to let that erode. Most of our competitors seem to or a number of our competitors seem to reflect those same realities. And in some areas, we don't see that happening. And we're not going to sit on our hands and see people running away with our ball. So we can afford it and we'll spend back. Now, the real solution, of course, is to add innovate and the products that we've pushed into the market in the first quarter, that's the first step. The products that we're pushing into the market this year as a result of the ongoing innovation pipeline are bigger innovations than what we've pushed through last year. So that's helpful, and over and above that, the Energy in Motion innovations, we'll have to accelerate the top line. So we're going to be a bit tactical. We can afford to be a bit tactical because we've got cost favorability. And meanwhile, the strategic answer is let's make sure that we've got great innovation coming through because that will long term carry the day.

Operator

Our last question comes from Andrew Lazar.

Andrew Lazar - Barclays Capital, Research Division

Barclays Capital. Just 2 quick things. First, Jan, broadly speaking, if we look back on, I guess, the Coffee and Tea business maybe 2 years from now, how do you think the geographic split looks versus today because I think the high single-digit sales growth agenda that you're thinking about for this business over time, I would think almost necessitates a lot of change on that front, no?

Jan Bennink

No, not really. I mean, there will be change. I think the rest of the world will be a bigger part of the pie. I mean, how big exactly? I mean, well, we'll try and give you an answer on that one in February. But I do expect that Western Europe will accelerate significantly. I mean do not expect that because we think Western Europe is kind of the rust bin [ph] of the world, I mean -- that it can't grow. I think really the way we've been treating our businesses in Western Europe, it can grow. And Spain is currently our fastest growing business, followed by France. Holland is getting there, Belgium to follow. Germany had been good growth, so I think actually that, yes, there will be a higher part of the business in the rest of the world is currently 27%. But growth will come from both ends.

Andrew Lazar - Barclays Capital, Research Division

Okay, that's helpful. And then last thing, just -- it was intriguing, the sort of innovation R&D, sort of JV arrangement you have, I guess, with Smucker as part of this deal announced last week. And I'm trying to get a sense, whatever you can share around that, what brought you to that place? Is it broader than just Foodservice? Does it extend to the overall Coffee business branded for both players in each region? And is it a right of first refusal situation or a little bit more around that because it's a fairly unique arrangement.

Jan Bennink

Marcel?

Marcel Smits

Let me give you some insights on that. I've been -- over the summer, I've participated in a number of those discussions. What we did is we took the Smuckers people to whom we took a real liking by the way. We took them over to Europe, to [indiscernible], to our R&D center and said this is what we have in the pipeline. And they have a view that liquid coffee can play a really supplementary role to their overall presence. They have a view that they want to grow in Foodservice. And when they saw the pipeline, they said, oh, that's really exciting. And we said, well, we're keen to bring you on board because obviously that pipeline of us just becomes easier to sustain and bring to market if we have a larger business, which takes the fruit of that labor into the markets, the U.S. market is a big market. So we're very keen to see products coming through in the U.S. market. It means that we'll sell more machines, it means that we'll get access to lower machine prices. And basically what we've done is we have agreed with Smuckers that they will support us on an ongoing basis with the R&D expenditure that we're incurring. And to the extent that they become very successful in combining their innovation -- or our innovation with their brand, we get to share in that lift. So we're really sitting here, hoping that they're going to be phenomenally successful and the combination of our technology and their brand will prove to be a major hit because then we will have what is for us a relevant financial upside, apart from the fact that we'll have more mass. So we're excited about that.

Andrew Lazar - Barclays Capital, Research Division

Okay. Did it go beyond Foodservice, Marcel? That's the only one I wasn't sure.

Jan Bennink

It might be.

Marcel Smits

It maybe. We haven't -- we don't compete in geography, so we tend to look into each other's cards and say, hey, there's interesting stuff in there, what can we do together.

Jan Bennink

You can think of a lot of things, I mean, from technology, to R&D, to even go as far as procurement. So I mean, there might be ways to go. And I think we'll first have to see how well we get together, it seems all good. And it's an open door.

Okay. I think this was the last question, so thank you very much for your attention this morning. And hope to see you soon on the road or in our next call. Thank you very much.

Operator

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

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