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Executives

Melissa Napier - Senior Vice President of Investor Relations

Jan Bennink - Executive Chairman and Member of Finance Committee

Marcel H. M. Smits - Chief Executive Officer

Mark A. Garvey - Chief Financial Officer and Executive Vice President

Analysts

Eric Serotta - Wells Fargo Securities, LLC, Research Division

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

Eric R. Katzman - Deutsche Bank AG, Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Andrew Lazar - Barclays Capital, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

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

Robert Dickerson - Consumer Edge Research, LLC

Unknown Analyst

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

Erin Swanson Lash - Morningstar Inc., Research Division

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

Priya Ohri-Gupta - Barclays Capital, Research Division

Sara Lee (SLE) Q2 2012 Earnings Call February 2, 2012 11:00 AM ET

Operator

Good morning, and welcome to Sara Lee's Second 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

Thank you, Julie, and good morning to everyone. Welcome to our earnings call. I'm joined today by Jan Bennink, our, Executive Chairman; Marcel Smits, our CEO; and Mark Garvey, our CFO.

Our second quarter results were released at 6:30 a.m. this morning, and you can find that release along with the slides that we'll be reviewing today posted to our website. We're expecting to file our second quarter form 10-Q on or February 9. Before I turn the call over to Jan, I'd just like to refer you to the forward-looking statement currently displayed and remind you that during today's call, we may make forward-looking statements about future operations, financial performance and business conditions. Actual results may differ from those expressed or implied in those statements and all explanations of non-GAAP financial measures are included in our release.

We'll take your questions after management’s prepared remarks conclude. To ensure adequate time is available for all questions, we do request that you limit yourself to one and we’ll do our best answer to concisely. Jan?

Jan Bennink

Thank you, Melissa. Good morning, ladies and gentlemen. Welcome to the Sara Lee Q2 earnings call. And first before going to the presentation, I'd like to take you through the agenda of this morning. I'll start up with an update of the spin, so the pure play progress. Then we have a deep dive in the 2 companies, the Coffee and Tea Co., which will be done by myself and then Marcel will give you a deep dive into Meat Co., followed by the financial overview of Mark and, then as Melissa already said, the Q&As.

So starting with the food pure play progress. I mean streamlined portfolio. As you can see, all the divestitures are completed. The only surprise you’ll see on this page is the Bakery Australia, which we have decided to retain. We have decided to retain it and put it -- and not sell this before the spin and put it together with our U.S. business and make that a kind of a combined bakery business so it falls under the Meat Co. in the future. So Sara Lee sweet bakery is an entity within the Meat Co. business.

Going then to the next one, which is the acquisitions. I mean, we've made 4 acquisitions if you go from now on until today. First one is Aidells. I mean, it has been integrated into the business as of July from this year. Completed, doing very well; Marcel will come back to that later in more detail, but it's doing extremely well and everything is completed. Three acquisitions made in Coffee, small ones but important ones in order to enhance our growth profile. We made a out-of-home acquisition in Scandinavia to strengthen our business over up in the north. We made an acquisition of a Coffee Co., which is a retail chain in Coffee in Holland. Now don't expect that we're going to retail. I mean, this is just an acquisition to strengthen in our position in Holland where we have some cafés; Starbucks is not present and we'll see it more as a laboratory of growth to get more knowledge about our young consumers and making sure that we are very well set for the future in terms of what we don't want to do in terms of innovations.

Tea Forte, again a small acquisition in the premium tea segment. Our normal tea is more in the mainstream to lower priced. This will be a first entrance into the high-margin and high-growth premium tea segment. We will learn the very entrepreneurial spirit. We'll leave it separate completely in the beginning and we'll try and learn from them as much as possible. You can see them a lot in the more upscale hotels. So they're out-of-home-based and then perhaps there's possibilities to move them back into the retail. So that is in terms of acquisitions.

Then moving to a deal we announced last Thursday. Now a lot of people have asked what exactly is different now versus what you've had in the past. I think there is a significant difference as what we've had in the past than what we have now. The deal which we make with Philips is a mutual, exclusive deal on all machines, these we still produce. So we move from only the pods, which we've had and the Senseo machine will go into all segments, meaning beans, meaning cups, meaning liquid, meaning instants, so there is -- everything was goes to consumer market we will do together. There is an incredible possibility to do more in terms of geographical expansion and innovation within that segment of Coffee. And we're both very committed to that.

Now another big difference is that last -- before it was kind of 4-company deal, we have put a board in place, which is run by Michiel Herkemij on our side and Pieter Nota, which is the head of the consumer goods for Philips on the other side. So a board which will meet, make sure that the progress is done, that the innovations are happening and if there's any conflicts between the 2 companies that they're being resolved on the highest level; so speed, innovation, geographical expansion and new machines.

Now in order to do that, we need the Senseo which is owned -- was previously owned 50-50 by Philips and by us. We have decided to acquire that, because having full control over the brand equity, I think, we found it critical. Definitely, we have big plans with this brand, so we paid in total of $170 million for, one, making the acquisition of the trademark, as well as making sure that all old contractual parts were finished. So that's Philips. I think we expect a lot from this deal, and it will not happen that in the last, last we seen, in the last 9 years when there was only one innovation in the last 9 years. We'll have innovations coming up every year.

So next slide, next thing, organizational structure. Also there, importantly, I mean, both of the 2 -- the CEO and CFO have started as of the 1st of December last year. So Michiel and Michel; don't confuse the 2 because they look very similar in terms of names, but very different in terms of personality. So they have started since the 1st of December, made already significant progress in the business, very well accepted and they’re going with a high-speed in terms of the innovations and making sure that the company is completely ready by spin and hopefully in great place afterwards.

They've already made one change in the top structure. The manager for the rest of the world, which is everything outside Western Europe, they have changed that. We're currently looking for a new person. The rest of the world we see as a critical part for our growth engine, so we want to have -- make sure that we have the right person in place there. We're looking for one. It will be announced in the next couple of months. So that's in terms of organization in Coffee and Tea.

In Meats, very early days. I mean Sean is in there for 2 weeks, so it's early days. First impression, very good. It's very good to have somebody in place who has seen it all, done it all. All the experience from Campbell and I think that's a big advantage and the organization is moving now with greater speed to what we want to do with the Meats business. So organizational-wise, we feel much happier. Things are in place and things are moving. And then in terms of cost structure for the business we -- the fixed cost. I mean we had IT contracts which were in the Sara Lee business which, were significant. They were more for a $30 billion company rather than for a $24 billion company, so we renegotiated all the contracts with all our key contractors. That will result in significant cost savings in the next 2 to 3 years. Mark will come back to it later in his presentation, but that's, I think, in terms of fixed cost, an enormous tick in the box.

We continue to look for opportunities in fixed costs. That's an ongoing process of course, in both of them, But there's still opportunities which we see, and we want to make sure that we do that in a – on the right pace, rather than going too fast for the organization.

Working capital. As you'll also see later from Mark's presentation, working capital is a main issue and a big issue in [indiscernible] opportunity in Coffee Co. We have now dedicated a manager who will do nothing else but making sure that our working capital will go to the targets, which we have set. Within the midterm, we're looking for the 5%. And I haven't completely convinced Michiel Herkemij that we want to go to my favorite 0, but I mean, I'll get him there one way or another. He doesn't -- I hope he doesn’t listen to the call. But anyhow. Portfolio optimization. We continue to look at fine-tune the company to look at for profitable growth opportunities.

The last page in terms of the update, critical dates. Now the IRS private letter ruling, I think we've had a lot of questions about the IRS private letter ruling. We're progressing well, and we expect the ruling to happen in the coming weeks. The moment we have it, we will -- on the moment we will issue a press release where we will give the details of the IRS private letter ruling. It has taken a bit more time that we had anticipated because it's a complex deal, so it is something which the IRS has -- it's more complex than most of the other rulings we asked. So that's why I’ve taken a bit more time. I apologize for that. I think we don't have a good track record in terms of kind of keeping our timing when it implies regulatory approvals, but I hope you will trust us that as of now all our regulatory approvals have ended up in the promises we've made, and so I think also here you should have good faith. As you see filing follows immediately after, so that will happen early March.

The investor days. The 2 investor days, Coffee Co. has been fixed for the 14th and 15th of March in Amsterdam. The invitations have gone out, and I hope most of you, if not all of you, are able to visit the 2-days’ conference where we will really tell everything about what we want to do with Coffee and Tea Co.

The Meat Co. Investor Day has been moved to May. We really want to give Sean a possibility to make the strategy the way he thinks is correct, and we thought that doing it too early would be a little bit bad because he wouldn't be able to just go have a deep dive in the business and have his strategy. So that's why we put it in May. And the spin date, it will be in the fourth quarter of fiscal 2012. So that's the update of the spin. We feel good about the progress. I think things are happening the way we wanted. I mean, sometimes a little bit delay, but at the end, we'll get exactly where we want to be.

Then moving on to Coffee and Tea. If you look at the first page in the Coffee and Tea financials, you see that the net sales in the Q2 has grown by 12%. We increased our MAP by 20%, and you seen our operating income up by 2%. Now the operating income up by 2%. I think that's against a quarter last year, which was of record high margins. So I think, that's one that the comparability is difficult. And secondly also, I mean, just keep in mind that the prices of our raw materials in Q1 are practically equal to -- Q2 and Q1 are practically equal. It's a first in, first out principle we use and new prices or the more favorable prices will kick in, in Q3 and Q4 of this year. First half gets us at 13% growth, 24% up in marketing and adjusted operating segment up 9%. So also there, progress is made.

The volume and mix, I mean a slightly disappointing number if you look at it for face value in terms of volume, minus 6.5%. I'll come back to that in a second in the next page. Mix, very good, up 5%. I think that's actually where we'll be pushing in the future much more on mix, making sure that the high-margin products deliver higher growth and that's the whole game. Price up 11.8%. You see that between Q4, Q1 and Q2, you see the pricing from 14 to 13 to 11, basically. That's not surprising, because the price increases have happened last year. So that you will see taper off in the remaining part of the year. Adjusted net sales up 11% -- 11.6%. Now, why is the volume down the way it's down? 3.1% in Q1, that's the next page. Total volume down 6.5%. The French private label, we've been talking about that very clearly in the past. It is at the same level. It's about 1.5, 1.3%.

But an important number is the Thailand flooding. I mean, our Thai business has been -- it stopped basically and we didn’t sell one case. Our factory was flooded. I mean, our business, we couldn't deliver, and we have no -- we didn't have any backup in terms of delivery for the Thai business because it's a very different instant businesses which we cannot deliver out of anywhere else. So as a result of that, basically, you will see a 0 behind volume and sales and profit for Thailand. That will last another 4 to 6 months. So it will be not easy to just fix that immediately. But that's a part, which has a big influence on the volumes, which means that the ongoing business is slightly down 1.1% versus the Q1, which is scattered around a couple of the countries. But it's overall, we feel that there's no negative trend happening anywhere. We'll come back to some of the key countries later.

Margins, they're steadily improving. I think this is the line we'd like to see, coming from a 12.4, which is the -- we hit the rock-bottom in Q4 going to 13.3% in Q1 and then up to a 14.6% in Q2. And as I said before, raw material prices between Q1 and Q2, there is not a major difference. The more favorable prices are coming down, are going into the financials as of Q3 and Q4. So that's the margin, the progression. I mean just to make sure for the record I mean we've been talking about historical margins in the past. I mean, we're not saying -- we've never said that historical margin will be achieved this year. We’ve said that the historical margins is our midterm guidance in terms of what we want to go in terms of growth as well as the historical margins going back. We see here a positive trend, and as long as this positive trend continues I am very happy.

So looking at our key countries I think is next page, I think looking at our market shares in Holland, France and Spain, which make up a great part of our Western European business and that's also critical. In Holland, you know that, in Holland, we had in 2009, we had a market share of 57%. That was always in that area of 57, 58. We've suffered in 2010 and the first half of 2011 and what you see on this chart that actually the trend is reversing. We've hit the bottom also here, and we're going back to the levels we’re used to.

And in the December share, although one where it doesn't make a summary, we see actually that things move up now to a 55.3%. Please note that these are shares without the instant. I mean, we will, in the future, we'll give our shares including instant, but we're doing everything for the past and including incidents was a bit difficult, so this is the way we have been working up ‘til now. So this is the roast and ground market, the bean market x instant. 55.3% as a market share in Holland, very good at the expense of private labels.

Secondly, France, which has been a success for the last 2, 3 years. You see that we're moving up from a 22% market share to currently in December at a almost 27% market share, very much behind the growth of Senseo as well as the cups, so the mix plays an important role and the roast and ground market is holding steady. So France, also very good.

And if you would go to the last page in terms of market shares. Spain, which is economically probably not the most favorable country in the EC, but for us, it's our star performer. We have moved up from a 20% market share in 2009 to currently around 27, still growing. We see very high sales and sales growth so it's both market share as well as sell out. They are doing very well, and this is mainly behind introduction of capsules. So that's the result of introducing capsules very successfully. We've also seen a tick up in all our businesses because our relationship with the trade has all of a sudden shifted to a much more focused Coffee and Tea Co.

So that's in terms of market shares. We’ve started with our innovations and this is only the beginning. In the next 2 pages we will talk about -- a little bit about the innovations we put in place. I've talked a little bit of our preference mapping in the past. Now this is just -- we're looking at consumers in Senseo. What they give us back and say the coffee is not often -- we're like to have a bit of a more robust coffee. So we have a whole line extension range of more robust coffee -- more towards the espresso part launch in all our key Senseo countries. That's what we did in Senseo, and we did exactly the opposite in the capsules where people will find the espresso to heavy, give them a Lungo version. And so we extended our range from 11 to 15 variants, give more choices to consumer. And actually the Lungo introduction has had a significant impact in France, because people -- they like the espresso but also not the long coffee as well as in the Nordic countries of Holland and Belgium. So the 4 countries will be our Spain, Holland, Belgium and France. So this is in terms of the Senseo and capsules.

And then when we're talking about the bean market, which is reviving worldwide. I think worldwide the trends are around 7% growth in the beans. We've had basically done nothing in the bean market. We've put ourselves completely on the ground coffee rather than on the beans market. We introduced a range of beans in Holland. This is, you see, one-pack, but also here you see probably 9 variants in the total beans, and that has been introduced in October. So you see a first part of innovations kicking into the business.

Last page in terms of Coffee and Tea before I hand it over to Marcel, what are we doing going forward? I said before the favorable commodity costs in the second half will start coming in. I have to give a little notice. I mean, of course, there will be some price pressure and some pressure from the trade, saying you know what, hey, prices are going down. I'd like to see my prices going down.

So we have some issues with some of the trade, specifically France. Up ‘til now we've been able to keep up with it. I mean we've been able to hold strong. We will not probably see a full fall-through of all the raw material prices back into the profits, but through innovations and through having a good position towards the trade, we think we can hold pretty steady there. But that's, I think, a favorable tailwind we'll be having in the Q3 and Q4 and hopefully, going forward.

Organization. I talked about the top line. I mean people are -- we're making some other changes in the top structure, and in the second layer, we're increasing our commercial skills in the top 100 of the people marketing sales. We've previously -- the organization was much more built on production and finance and I think having marketeers and having salespeople in the organization is a process where Michiel and his team is going through.

Innovations. I think as of, I think, April there will not be one month when there will not be a new innovation coming into the markets. We will see the first relaunch coming into March, April, which is on the premium coffee segment already introduced now in Holland. I mean, presented to the trade, very well accepted. And then you'll see the big relaunches of our segments in the summer. And then followed up, as I said, every month there will be new innovations coming in, and you will see the -- a full range as far as we can show it in our Investor Day in March.

Foodservice. We haven't talked much about for Foodservice. As you might have seen in our press release, Foodservice had only a 2% growth. It's 27% of our total sales, so make the difference -- it's a big difference. We focus mainly on retail, and I think it's now the phase to make sure that we also start delivering very -- much better in our Foodservice business. Michiel has some thoughts. We'll try and give you the first thoughts in March. We've already made a management change in our key country, Holland, for Foodservice. You can guess where the person is coming from; he's an ex-Heineken Foodservice person. Heineken is very good in Foodservice so I think we'll get a lot of expertise integrating Foodservice into our brand experience. I think is the key message we're both going to give you and going forward. But that's work in progress. So Retail doing very well, Foodservice a bit waters down, a lot of work to be done. But progress is in line with expectations. We have ups and downs but we all feel very positive about the way we're going.

Going on to meats, Marcel, up to you.

Marcel H. M. Smits

Okay. Thank you, Jan. Good morning everybody on the call. Just for your recollection, I served as the interim CEO of our Meat Co. business from the middle of September until the recent handover to Sean Connolly. It's been a fun and interesting experience. I've spent a lot of my time in the business. I think we made some solid progress and I have to say that I'm very confident that under the leadership of Sean, the company will do very well. From what I've experienced over the last few weeks, Sean's background will allow him to hit the ground running. The guy obviously knows what he's talking about. So let's have a look on how we did.

After 4 quarters of mid single-digit volume declines which started in the second quarter of FY '11, it was clear that it was an imperative to change that trend line. We said as much in the press release over the first quarter, pointing out that innovation and selective pricing actions would contribute to improving volumes on a go-forward basis. And in addition, of course, we significantly invested in MAP and slotting in the first quarter.

So here are the financials. Let me start at left side of the slide. Adjusted sales were up modestly with 1% in the quarter and that's an improvement over the decline in the first quarter. As the quarter progressed, we saw trends improving and that is really the first key message; sales are up and trends are improving. Adjusted operating income is down $2 million, which is a mixture of pluses and minuses. We see very solid SG&A and manufacturing savings coming through from all the initiatives that were implemented in Q4 of last year and Q1 of this year and good savings coming through is the second key message. We've had to invest back in – surgically in price, and hence we did not fully recover our commodity increases in this quarter and that pulled our operating income down. In all, if I go to the right side of the slide on a cumulative basis then, adjusted sales are flat. MAP is up, reflecting investments and profit is marginally down.

Now let's go a little bit deeper. Here we break out the sales increases and decrease over the last 3 quarters. In Q4 of last year, we recorded a volume decline of 4.9% and that is the upper left figure. In Q1 of this year, we saw a decline of 5.7%, and with the actions that we've taken, we brought that down to 3.5% in the second quarter. As I said, as the quarter progressed, we gradually improved, so Q2 was better than Q1 and within the quarter, we gradually improved.

Meanwhile, mix, that's the second line, nicely improved with a 1% gain in the second quarter versus a 0.4% decline in the first. Pricing, third line, is gradually decreasing and let me just recall that a lot of our price increases were put through in Q2 over last year and we're starting to lap. Overall, as I just said, in the past -- or in the last line, we've had a small decline of sales in the first quarter, 0.6%. You see that down below and small plus of 0.9%, up in the second quarter.

Now before we go any further, let me just give you 3 more perspectives on the volume and mix development in Meat Co. Firstly, as we've been doing the sums, it turns out that the volume decline in the second quarter is nearly entirely driven by the declines in seasonal items such as cocktail links and pies and a couple of others. All the nonseasonal items together, broadly flat with of course there being pluses and minuses but they broadly cancel each other out. Not doing well in your seasonal items is not exactly a badge of honor but it adds to our confidence that the base business is stabilizing.

Second perspective then, and you've read about it in the press release, is the transfer of part of our accounts to a broker, which took place in Q1. These accounts represent approximately 15% of our retail sales, and as we’ve transitioned, we’ve held back on our promotional spending in these accounts, and we suffered some volume loss. It will take a bit of time but we're absolutely confident that we'll get that right.

The third perspective then is the split between meat products and bakery products, and on that one, I have a slide. As you can see here, if you split out our meat products from our bakery products, you see a more rapid improvement. That's a helpful perspective. The trends in meat products are improving rapidly both on the retail and on the Foodservice side.

On the Bakery side, we have work to do. In all our Bakery business we saw volume declines of approximately 10% in the quarter and part of that is the seasonal items that we’ve just talked about. Our Foodservice Bakery business, I think, is fine, but it's suffering from market shifts in the restaurant business, and I saw analysts commenting on that yesterday. Out-of-home desserts in restaurants are down in the double digits, and we are faring better. On the retail side, we will have to focus on innovation with competitors being particularly aggressive on price, in particular in pies.

A long-term measure how we're doing from a volume perspective, of course, is market shares, and on that side, the news is very encouraging. I'm not going to dwell on all the details of this slide, but as you can see here, we're starting to improve. In most categories we’re showing an improvement versus the first quarter; that's the second column. And then a number of categories, shares actually improved on the year-ago period as shown in the first column.

If you take a step back the messages are the following. We feel great about Jimmy Dean, which continues to deliver very strong results on the back of added value breakfast products. Our success has been noticed; others are trying to follow but we seem to have the upper hand, and we have a very good pipeline of new products coming down the line. We have work to do in Hillshire Farm lunchmeat, that's a large business. And we're working on a string of innovations, largely coming from the Energy in Motion initiatives. We feel good about Ball Park. The brand is delivering against expectations, and we have exciting communication and products in the pipeline.

Not shown on this slide is Sara Lee Deli. It's a delicate business, no pun intended, and much smaller than the 3 brands shown here and we've got good plans in place to strengthen it, and we have the technical capabilities to do well with a bit of focus. And those headline statements lead me to quickly review some innovations. This is another Jimmy Dean breakfast proposition. We have bowls, we have sandwiches, we have crumbles, what-have-you. And we’ve just launched sausage, gravy and biscuits, and we have more to come in the second half.

As I said, in Hillshire Farm, we have work to do. In the quarter, we launched Gourmet Creations and Deli Carvers. Both of which tried by the Schmidt family and approved, and American consumers seem to feel exactly the same. We're working hard to bring further innovations to the market in Hillshire Farm brands.

Meanwhile, we're proud to say that with Aidells, we've done a great acquisition; Jan has already referenced it. The company has come with a strong management team, wonderful people and they're delivering great results. They operate in a more premium segment that the rest of our company and there's good growth in that segment and they are capturing more than their fair share. We've given them the Gallo brand to manage and we're excited about what they're doing to revitalize that business and that's the second benefit.

And last but not least, I've observed that people from Sara Lee are all over the Aidells new family members and we're quickly absorbing entrepreneur spirit and ideas. The Aidells people keep saying that they're just a rounding in our figures but that really self-insures. As a company, we've learned a lot from how they operate.

To round it up, let me just give you a couple of broad assessments coming out of 4 months of being the interim CEO. I think it's fair to say that the business had gone through a lot of change in restructuring. The sale of the Fresh Bakery business in North America and the sale of the North American Foodservice Coffee business were impactful, and over and above that, we pushed through a very significant organization change and cost reductions in Q4 of last year and Q1 of this year.

All of that is being absorbed and the company's holding up pretty well. I have to say that as much as I enjoyed being interim CEO, it's very helpful that we now have a permanent CEO with a strong background in American food products. In addition, it is fair to say that we’ve stretched the pricing in order to deal with the onslaught of commodity cost, and Mark will talk about the size of the figures that we're dealing with.

Strategically, that's exactly the right thing to do and we will continue to lead, but we can't get out too far ahead, and it's encouraging to see that if you make small changes to the dial you actually see an immediate effect coming through. I'm comfortable, by the way, that we can afford to be competitive as our cost structure is improving very rapidly.

Meanwhile the movement of our sales account to a broker is the right thing to do. But as these things go, there was some disruption. We're dealing with reputable people and we have high confidence that together we will get it right. It's fair to say that in Hillshire Farm, we've got real work to do. This slide puts it fairly bluntly. We have to tip our hats to competition who out-innovated us in lunchmeat, but we have the plans and the actions in place to get it right. And lastly then, seasonal items were tough for the second quarter, partly in meat, partly in bakery. About 2/3 of our bakery products, however, are in foodservice, and that's a quite profitable business. We have the products, we have the innovation and we now how to make sure that the equation works with focus and hopefully consumers going back to eating more desserts.

And with that let me hand it over to Mark.

Mark A. Garvey

Thank you, Marcel, and good morning to everyone on the call. I'd like to start by reviewing some key financial highlights for the quarter. First, we are reaffirming the adjusted earnings per share guidance that we provided at the beginning of the year. The range remains unchanged despite a weakening euro. Adjusted net sales were up 6% for the quarter due to improved pricing and mix, offset by volume declines, which Jan and Marcel have discussed. Adjusted operating income increased 18%, $256 million assisted by a continuing reduction in corporate costs. Adjusted earnings per share was $0.27 for the quarter, up 29% from $0.21 in the same quarter last year.

Now let me discuss our guidance in a bit more detail. As you may recall, when we began this fiscal year, our guidance had assumed an average euro dollar rate of $1.44 for the year. We're now projecting an average rate of $1.35 or $1.32 for the remainder of fiscal '12. Despite this decline, however, we are comfortable that we can keep the earnings per share and operating income guidance ranges unchanged, aided somewhat by reduced corporate cost expectations.

Consequently, we are reaffirming our earnings per share guidance of $0.89 to $0.95 and operating income guidance of $875 million to $930 million. We're also maintaining our net sales guidance range of $7.9 billion to $8.15 billion. However, you will appreciate that the declining euro makes it more challenging for us to achieve the top end of this range. Net interest and tax rate guidance are also unchanged.

On this slide, you can see a summary of our second quarter and first half performance for continuing operations. As I mentioned, adjusted net sales grew by 6% for the quarter and year-to-date. Gross margins declined as both pricing and commodities have risen, causing a percentage decline, as well as commodity costs not being fully offset during the quarter at Meat Co. MAP spend, excluding acquisitions, was flat compared to last year with increased MAP at Coffee, Tea and lower MAP at Meat Co. For the half year, however, MAP was up 9%.

Selling, general and administrative costs were down 8% in the quarter assisted by reduced Meat Co. and corporate costs somewhat offset by increased Coffee, Tea cost due to stranded overhead remaining from the Household & Body Care dispositions.

Overall, adjusted operating income was up a strong 18% for the quarter and 12% year-to-date, and adjusted operating margin was 12.5% for the quarter and 11.1% for the first half, an increase of 130 and 60 basis points, respectively. The primary drivers of operating income for the second quarter and first half are outlined on this slide. Overall, commodity costs were not matched by pricing in the quarter, primarily due to pricing actions at Meat Co. as Marcel just discussed. At Coffee, Tea Co., pricing did just offset commodity costs for the quarter as we had expected. MAP was flat and the other drivers of operating income improvements come from lower SG&A costs and lower non-commodity costs and cost of goods sold somewhat offset by a negative volume mix.

Here you can get a perspective as to the significant commodity cost increases our businesses have been managing through. In fiscal '11 we had commodity cost increases of $646 million, and for fiscal '12 we expect an additional $415 million, of which $323 million has been incurred year-to-date. Therefore, for fiscal '11 and '12 both Coffee, Tea and Meat will have absorbed approximately $1 billion of higher commodity costs.

Our corporate costs continued to decrease as we prepare for the spin. General corporate expenses were $21 million for the second quarter and $31 million year-to-date, representing a significant reduction from fiscal '11. These reductions were achieved due to lower headcount as we have moved to reduce sales functional areas at corporate that are not focused on the spin. And in addition, pension expenses are lower than last year. We now expect general corporate expenses including trademark amortization expense to be in the range of $85 million to $95 million for the fiscal year. Also during the quarter, there was a benefit of $15 million from commodity mark-to-market gains compared to a loss of $2 million in the same quarter last year.

This analysis shows adjusted earnings per share for the quarter and the first half at $0.27 and $0.45, respectively. Adjusted EPS grew 29% in Q2 and 36% year-to-date. This is due to improved operating income, which, in this slide, includes the impact of acquisitions, lower interest expense, somewhat higher tax expense and of course, a reduced share count.

The next slide shows earnings per share as reported and as adjusted for continuing operations. We reported earnings per share of $0.05 for the quarter. This number was impacted by significant item charges, primarily related to the renegotiation of key IT contracts as well as spin-related advisory costs. There were also some adjustments to tax reserves during the quarter. Backing these costs out, our adjusted earnings per share was $0.27.

During the quarter, we had significant item charges of $170 million, excluding impairments and gains or losses on the sale of businesses. There were 2 major components of these charges. Firstly, as I mentioned, we renegotiated our global IT contracts with our key vendors IBM, HP and AT&T and have now established separate contractual rate arrangements for Coffee, Tea and Meat Co. for their required services going forward. This renegotiation was also necessitated by the significant disposition activity we have had over the last 18 months. We had termination costs associated with changing these contracts, and those charges have been included in significant items. The contract reset will lead to annual savings of approximately $30 million, which was included in our previously communicated savings estimate of $180 million to $200 million for fiscal '12 and fiscal '13.

Secondly, similar to our first quarter, we incurred spin-related advisory costs, which we have included in significant items. These costs include accounting and tax advisory-related expenses, legal compliance costs and consulting costs associated with establishing the 2 new companies. We now project significant items, excluding impairments and gains or losses on the sale of businesses, to be between $525 million and $550 million for fiscal '12. But this projection has increased since our prior guidance, primarily as a result of the termination of prior agreements with Philips at a cost of approximately EUR 50 million. We estimate the after-tax cash impact of these significant items will be approximately $350 million to $400 million.

An approximately 50% of our projected significant items will be costs that we incur on projects which will benefit future companies in terms of savings, such as the IT contract resets. The remaining costs are those costs associated with executing the spin and disposing of discontinued operations.

Now I would like to turn to working capital and provide you with an overview of how we are looking at trade working capital for Coffee, Tea and Meat Co. As Jan mentioned, we have appointed a full-time working capital manager for Coffee, Tea and their role will be to focus on significantly reducing trade working capital as a percentage of sales. As you can see here for the first half year, average trade working capital was 20.3% at coffee of net sales compared to 18.1% in fiscal '11. You can see that this has been caused primarily by inventory, which has been impacted significantly by commodity cost increases. As Jan mentioned, Coffee, Tea has been given a target to reduce trade working capital as a percentage of sales to 5% in the next 2 to 3 years.

On the next slide, you can see the same metrics for Meat Co. In this segment, trade working capital is currently at 8.3% of net sales, showing an improvement from 8.6% in fiscal '11, mostly driven by payables and receivables.

Finally, I would like to give you an update on overall cash flow and our anticipated year end cash and debt balances. In the second quarter, cash flow from operations was $253 million compared to $205 million last year, and for the year-to-date, cash from operations was $33 million, a reduction from $233 million in fiscal '11. The half year decrease was primarily attributed to a onetime EUR 60 million payment to the Netherlands’ pension plan in the first quarter, higher cash payments for significant items and the decline in cash generated by discontinued operations as dispositions have closed.

We are also updating our year end cash and debt balance guidance. This is primarily due to the recent acquisition of the Senseo trademark, the decision to remove Australia Bakery from strategic review and the recent Coffee and Tea Co. acquisitions which Jan mentioned earlier. We now expect year end cash and debt balances to be approximately $300 million and $2.4 billion, respectively. And finally, we expect to pay a $3 dividend in the fourth quarter of this fiscal year.

With that, Jan, Marcel and I will be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Eric Serotta, Wells Fargo.

Eric Serotta - Wells Fargo Securities, LLC, Research Division

Wondering whether you could go into the stranded costs related to HBC and the other divestitures. How much of that has been eliminated to-date, and how much of that do you still have on your plate?

Mark A. Garvey

Eric, it's Mark. What we had said last quarter, we approximately $50 million to $60 million of headwind as a result of stranded overhead. We would still keep that amount in terms of the guidance we're giving. We had just closed a lot of these businesses so that's still a work in process, so not a significant amount has been removed to-date, I would say.

Eric Serotta - Wells Fargo Securities, LLC, Research Division

Okay. And then shifting gears in terms of -- I think it was Jan's comment on anticipated pricing pressure in coffee as commodity costs have started to come down. Have you actually seen or experienced some of that pricing pressure to-date, and I guess what gives you the confidence that you're not going to be sort of giving back all the expected windfall from costs coming down?

Marcel H. M. Smits

There has been some pressure. I think most of the pressure has been in France with one of the big customers. So far we've held the price and I think, as I said, will everything fall through from the 100%? We'll hope that 70% will stick with us. I think it's because the margin improvement, because we have covered the absolute cost of the coffee prices, but not the margin improvement, so we're still behind in that respect. So there's a lot of things we can talk with the trade about. The innovations is the second thing, which gives me all the confidence, because if we move with our innovations as fast as possible, that means that the whole pricing element becomes far less of a discussion, because we'll have new packaging, new prices, new formats and that will help a lot in the discussions. So will it be 100%, no. Will there be difficulties, absolutely yes. But we feel comfortable that we can keep a significant part with us.

Operator

Chris Growe, Stifel, Nicolaus.

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

I have just a couple of questions for you. My first one, Mark, I don't know if you could provide this, but do you have a cash flow from operations estimate for the year? If you gave it out, I may have missed it; I'm sorry.

Mark A. Garvey

No, we haven't been giving cash flow from operations estimates, Chris. What we've done is given the year end cash and debt estimation. We haven't given a specific cash flow from ops.

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

Okay. I just had 2 quick questions within the business then. And I'll give them to you and let me just get some comment please. The first one is your mix improvement in coffee, I know that's been part of the plan and part of the new productivity. Is that what I credit a lot of the improvement in mix to as sort of new products and the way you're moving the business? And the second question relates to Meats. If I could add what you just said. I'm seeing a lot of categories that you’re pricing a good bit below the category now. Seen more recent, an increase in promotion. I know that's, again, part of the plan. Do you see that second half of the year where your pricing is still below your cost inflation in meats because of the activity you're doing at retail?

Jan Bennink

Well, I'll take the Coffee part and Marcel will take the Meat part. In terms of mix, it's exactly -- it is the innovations which we put in. I think capsules has played an important part clearly. And the premium rollout of some premium products in the Roast and Ground. Those are, I think, the 2 key elements. And in one of the big countries, Senseo has done a positive role. And I'm talking France here.

Marcel H. M. Smits

In pricing in Meats, let me just give you a couple of perspectives. We're not now undercutting competitors by being more aggressive on price. We were, as I've said, we were ahead in selected categories and we've corrected that. I think we've been saying consistently raw material prices need to be reflected. And what you then see is that not everybody takes immediately the same perspective. There's time lags. We got ourselves a bit ahead of a number of people. We've corrected that and we've just become more competitive. And the second half what will help is 2 things. First of all, we're seeing selectively that commodity costs are now flattening out. Beef price is still going up. But on porks and the pork and sauers, things are starting to come down. So that's going to be helpful. And in the Foodservice side, we're in a position where a lot of the price increases contractually lag with the commodity prices in the market. So on the Foodservice side, we'll have the benefit in the second half. Now those 2 things will help. We haven't given any projections for where our costs in pricing are going to come out. But we -- it's not that we have a huge hole in the ground for the second half from cost and pricing. It's conceivable that we end up with a small plus.

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

Is the $90 million or so in incremental input cost you expect for the second half, is that mostly in meats?

Marcel H. M. Smits

I don't have that split, but that's probably a significant amount of the [indiscernible] in meats, yes because in meats, prices have been on an upward trend, and it's actually only over the last 3 months or so that. It has started come down a bit on sauers and pork, as I just said, on beef price -- beef prices continued to increase. On the coffee side, the market, I think, has turned earlier than what we’re seeing in Meat, and we don't have a turn in Meat yet.

Operator

Eric Katzman, Deutsche Bank.

Eric R. Katzman - Deutsche Bank AG, Research Division

Jan, I guess the first question is, you’d talked about the IRS approval. I don't expect you to give a quantification of what that means in terms of expected outcome versus good outcome, but could you -- maybe quantitatively you could do it but can you...

Jan Bennink

I think the reaction here is -- gives you an idea as to what the answer will be. Let's continue, Eric. Sorry.

Eric R. Katzman - Deutsche Bank AG, Research Division

Maybe you could just give us some idea as to what the feasible outcomes are of that resolution since it's taken over a year now since you initially indicated. And then I just have one follow-up on Coffee.

Jan Bennink

Eric, I'll answer it. We really can't. However, we expect to be talking to you very, very soon about the outcome. The discussions are progressing as we would want them to progress. And from that perspective we feel pretty good about what we will be talking to you about in a few weeks.

Marcel H. M. Smits

And I think the other thing to say is there's a lot of work going into this from people from the IRS, and it's not appropriate for us to give you all sorts of indications and color while those discussions are going on. So we're having that dialogue. We're hoping that soon we'll back to you. And it's a fairly complex transaction. So there's no hint of criticism or anything that we think that the IRS is moving too slow or -- we're happy with the way it’s moving.

Jan Bennink

Yes, I would just add from sequencing perspective here. We've got the ruling to come. We're going to file our statements with the SEC probably beginning in March. And then we've got Investor Day at the middle of March, so over the next 5 weeks, you'll see a lot of things coming through.

Eric R. Katzman - Deutsche Bank AG, Research Division

Wall Street and patience are usually an oxymoron. And then on the fundamental side of it, I understand the adjustment in Coffee volume for the private label and then obviously the Thai flooding. I didn't even know you had a Thai coffee business, but you learn something new every day. But the ongoing business actually weakened a bit sequentially; maybe you could talk a little bit about that.

Jan Bennink

I mean, if you look at the volumes, there's a couple of countries who are doing -- kind of Eastern Europe, that's a part of the volume where it's declining a little bit in terms of volume, specifically Hungary, I think. And then as a scattered one in Denmark there's some volume losses. I would say that overall, if you look at the key countries in Western Europe, they're doing well. I mean, as indicated by the share chart I showed you. But the smaller ones having some hiccoughs and Foodservice is also something which has a 2% sales increase but it's also suffering in volume. So those are the smaller countries. We focused on the big ones in the beginning; smaller ones are suffering a little bit, Eastern Europe, Hungary specifically, and Foodservice.

Operator

Bryan Spillane, Bank of America.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Just 2 questions. One, Jan, in coffee, especially in your large markets, I guess Holland, France and Spain, as you launch innovation over the next year, will there be any churn in terms of your current SKUs I guess as you put more higher value SKUs into retail? Would we expect to see maybe some of the lower value SKUs come out or are you expecting to see an expansion or growth in your shelf space, just trying to understand if there's any churn that we should expect?

Jan Bennink

No, I don't think so. I mean, I think you will see a lot of renovation of all the products which are currently on the shelves, so I would say, we're probably mid-price to high price in some of the markets we're placed. There's no indication that we will take out the lower-priced brands. The only one where we're looking at the lower price of some churn is maybe Brazil, because we have some low volume in Brazil. So that will not be looking at. But if you look at the key countries anywhere else, there will be not eliminating SKUs and replacing them. It is often relaunches of existing ones, making them better looking, better tasting and increase the prices or keep the higher prices in place. But don't expect a big churn in terms of eliminating SKUs.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Okay, great. And then I guess just one last question is just as we move closer or as we approach the split, just -- could you remind us just in terms of what the cash outlays will be better, I guess, unusual as you split? There's -- aside from the special dividend, are there any other -- will it be pension contributions or just any other sort of abnormal payouts that would be connected with timing the split?

Mark A. Garvey

Brian, it's Mark. The 2 big payouts that we’ve currently assumed in our cash and debt assumptions is, of course, the $3 dividend plus payment of the repatriation tax that we’d need to pay if we repatriated that money from Europe to pay the dividend. So they are the 2 big ones that are in there. And then I've outlined in my presentation just what a significant item cash payments are. So you can see that as well.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

So beyond those 3 items, there's nothing else that would potentially use up cash that we should be thinking about.

Mark A. Garvey

At this point, no. Clearly, when we talked to you 3 month ago, we didn't have the Philips agreement. That was something that came through which [indiscernible] advantage for us. And if we see an opportunity that makes sense, we'd obviously look at that, but at this point, no.

Operator

Jason English, Goldman Sachs.

Jason English - Goldman Sachs Group Inc., Research Division

Following up on Eric's question earlier about the private letter ruling, I understand you can't be specific right now. Is there any reason to believe that any of the initial options you were contemplating are now off the table?

Jan Bennink

Jason, I think we shouldn't add anything more than what we've said. We're trying to be helpful and it's fine. I understand that you asked the question, but the appropriate thing to do is to complete that process. We are pleased with the way the IRS dealing with -- is navigating through the file. There's a lot of work going in from the IRS side. We should really complete those discussions with them first before we start talking about it with the investment community.

Jason English - Goldman Sachs Group Inc., Research Division

I can appreciate that. On fundamentals with the business, thank you for the additional color on some of the volume weakness in the Meat business. I think you said almost all of it right now is attributed to seasonal products. Well, seasons have largely passed and your comparisons do get easier. Is it unreasonable to think that we could be looking towards volume stability going forward?

Marcel H. M. Smits

We're hoping that in the back half, our volume figures will be better than in the first half obviously. Whether or not that's going to be 0 or a small minus or a small plus I think is too early to tell. We have made a determination that we shouldn't give guidance on that. There's a couple of things that will help. There's some innovation coming through. We're annualizing some things that we exited. We exited some in-store bakery pie business with selected customers. We provide them with prebaked pies and we exited some of that in the third quarter of last year so that will lap. We've exited a bit of Baking business; that will lap. So that will help, the innovations will help. And as I've said, we're on strategy in terms of -- we want to make sure that we and everybody else recovers the impact of multi-pricing. But we're not going to sit idly by if people work off a different spreadsheet than we do.

Operator

Andrew Lazar, Barclays Capital.

Andrew Lazar - Barclays Capital, Research Division

Just curious, Jan, if there is a positive shift we should consider in the sort of ongoing margin structure for coffee as a result of the new Philips deal. Because I guess there wasn't there a royalty paid I guess on each pod sold or whatever to Philips. Does that change the margin structure going forward? And if so how substantial is that?

Marcel H. M. Smits

Yes, it's true. There was a royalty payment in the old contract, which has been eliminated. And that was in the cost of goods. So you would expect that the cost of goods as a result -- I mean, the margin will improve on the Senseo products, yes.

Andrew Lazar - Barclays Capital, Research Division

And no or at least willingness to quantify that at this stage?

Marcel H. M. Smits

Not this stage, I mean, I think, there's a lot of pluses and minuses. I think we'll wait for the March Investor Day, where we’ll give you the full update. But there, a clear answer, there was a royalty payment; margins of Senseo will be better.

Andrew Lazar - Barclays Capital, Research Division

Great. And then this might be for the Investor Day as well. But I know you've talked in the past about getting the organic top line growth for coffee go up to that kind of high single-digit level. And based on all the things you've got coming, a lot of the reinvestment that you'll do, is it a transition process to get to that level? Or given all the things you've got planned, is high single-digit something you can get to sooner than later?

Jan Bennink

We need to be -- because there's a couple of things happening. I mean there's moving parts. I mean have you seen the organization? It's probably the key bottleneck. I mean, how fast can I get the people in place to make it happen? I mean, execution -- the ideas are all there. How fast can I get it executed? I think that's what Michiel was currently structure – I mean struggling with; getting good sales, marketing people in, making sure that production is capable of moving all the lines. If I said that all our SKUs will not be looking the same in 24 months from now, that means that production-wise, there is an enormous amount of change happening. So it can't happen overnight. You have to give us time for that.

Operator

Robert Moskow, Crédit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

I thought the tone about Europe was more positive than what we've heard from other consumer staples companies. You mentioned share gains being a big driver of it in the Netherlands, France and Spain. So it sounds like your business is regaining some momentum. What about the overall environment though? Is coffee continuing to be a rather unique inelastic category in a recessionary climate or are you concerned about what you see going forward?

Marcel H. M. Smits

I am not really concerned. I don't know whether you saw also the Nielsen data, which is on the consumer staples in the first 4 weeks of the year. They were actually all up basically. So coffee is unique. I think it is -- the cost of coffee is not necessarily prohibitive for growth. It's like people paying for Starbucks coffees much more than they pay for the normal coffees. I don't see it suffering. There's a lot of upside in terms of -- there's no competition. I mean very little competition in the countries where we're playing. Our competition is private labels. In France, we have Kraft. So that's a bit more. So you're playing against people who are not focused manufacturers. So I think there's a lot of upside in market share gains; market will not be growing. I think market will be profitably stable. I don't expect any big, big declines or upticks, but it’s more a market share gain. So I'm not worried about the economic climate for coffee, not at all. Normally we start a presentation and we talk about the economics. We start there and we’ll stop the presentation; we take a cup of coffee and we’ll start all over again. This is not the way I run the business.

Robert Moskow - Crédit Suisse AG, Research Division

Okay. Well, let me ask then about a follow-up to Andrew's question about the high single-digit growth. As you look towards fiscal '13, you're going to be lapping all these price increases. Does high single-digit growth imply some kind of price element to it, and is it possible it could go negative in fiscal '13?

Jan Bennink

I mean, it's a little bit too early to talk about that, but overall I would say will 2013 be the year where you'll see everything happening? As I've said before, no, it won't. Will it go negative? I don't think it will go negative. I think it's -- will pricing be a part of it? There might be some inflationary pricing or mix pricing getting in there, but I do not foresee if the raw material prices continue the way they go that we’ll have any price increases on our current stand of products. So it will be -- volume and mix will be the driver rather than price.

Operator

Alexia Howard, Sanford Bernstein.

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

Just coming back to the Netherlands Coffee business. I know that a few quarters ago, you were worried about private label encroachment in Senseo. I'm just trying to interpret the graph here in terms of the share trends. Are you now basically saying that year-on-year, you're gaining share rapidly? Here I'm getting a sequential picture but, for example, in the fourth quarter, was your branded Senseo share gain in the category up materially year-on-year?

Marcel H. M. Smits

If you take specifically, Senseo, no. I mean, Senseo is the laggard in the Dutch portfolio at the moment. So everything is growing except for Senseo. So that's where we have a lot of work to do and that's where also a lot of our relaunches and focus will be on for the next 6 months. So the rest is doing okay.

Operator

Robert Dickerson, Consumer Edge Research.

Robert Dickerson - Consumer Edge Research, LLC

Just couple easy questions I guess of really just between 2 cash flows. I'm curious, I know you saw or I saw you increased your year end debt balance from, I guess 2 1 to, was it, 2 4, so it's about $300 million. But the year end cash flow balance isn't changing at $300 million, so I guess I come back to I guess the question is, the actual trademark spend,I didn't see it in the press release for Senseo. Should we assume that, that cash is being paid out this fiscal year or could that potentially be deferred to fiscal '13?

Mark A. Garvey

Rob, we're assuming it's paid this fiscal year. It's EUR 117 billion between the actual trademark purchase and the termination of prior contracts with Philips.

Robert Dickerson - Consumer Edge Research, LLC

And then when I split out the 2 businesses and I look at what potential EBITDA could be conservatively, and I look at the debt, it would seem like the Meats business would need to acquire all the debt or sort of assume the debt because it will be the parent. And if I do that, then the leverage on the Meats business winds up being like almost 5x. So I'm just wondering if could give us some color around, I guess, the potential of maybe increasing debt on the Coffee business and then helping pay down that leverage on the Meats business.

Mark A. Garvey

Yes. And what we've said before is that we're assuming, and you'll see a lot more of this, of course, in the Investor Days, but we're assuming that both companies have investment-grade credit ratings. That's what we're assuming and how we're moving forward here. That would mean, from a U.S. perspective, where we have all of our debt essentially right now, that some of that will have to come down, and we would have to have debt raised in Coffee Co. Now the mechanics behind that we'll go through at the appropriate time. Again, we're getting the ruling, we're going to get the SEC's statements in, et cetera, and you'll have Investor Days. And so you'll understand that more in the coming weeks. But you should not assume that Meat is going to be levered 5x. I think...

Robert Dickerson - Consumer Edge Research, LLC

No, right, right. Okay, great. And then one last easy question. I know obviously you continue to point to the frozen breakfast category, which you're doing well in and the category itself is doing very well in, and I'm just curious, what do you think is actually driving that consumption? We hear from the cereal players that cereal is really helping wellness, but not growing. So I guess, one, do you think you're taking share from cereal, kind of as an anytime meal and/or do you think consumers basically just want to buy taste and not health and wellness?

Jan Bennink

What we're providing is we're providing a convenience proposition and actually a fairly good start to the day. And that's the campaign that you're familiar with from Jimmy Dean. That's actually a proposition that resonates with consumers. You can back it up with good data that show that if you eat a meat-based piece of breakfast, that helps you to be more energized throughout the day. And I'm not going to go further into that, because I think that's something that the Meat Co. needs to further develop. But meat in the morning is a good start to the day. And I've had the privilege of working with a lot of people in the business and there's quite a bit of data, which actually underpins that. So we have a good advertising campaign which gets that message across and that's a fact-based campaign. So all these products are just a decent start of the day. And for moms who want to give their kids something wholesome and helpful, which gets them through the day all the way to lunch, a meat-based breakfast is an excellent choice.

Operator

Sean Baumgartner [ph], Telsey Advisory Group.

Unknown Analyst

Just thinking about single-serve in Western Europe here and particularly the single-serve espresso, given your emphasis on longer-term mix contribution. How are you thinking about longer-term risks from private label there and even from fresh competition? I realized there isn't much overlap right in your Reasons for Ethical coffee. But as the category develops, how are you thinking about longer-term margins I mean, even with the Nespresso patents expiring?

Marcel H. M. Smits

I think that will all -- depends a little bit on how Nespresso is doing and how they will be able to keep up their legal battles. I think the legal battle of Nespresso continues the way it is and the patent's keeping up, and I think there's a lot of leeway still in their patents because they're filing all the time. The private labels have little chance of entering massively. There's -- if you look at it, it is a minor player at the moment everywhere. There is -- it's basically between us and Nestlé. So will there be some pressure? Potentially. Do we expect it a lot? No, I don't think so and I don't see it. I think there's only upside and I think it is upside in terms of if we'll be moving geographically to other areas, there's a lot of upside for that.

Operator

Ken Zaslow, BMO Capital Markets.

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

I just have 2 quick questions. One is did you discuss what type of savings you're expecting from moving to the broker network? And can you talk about how that’s going to affect you -- how much volume is going to be affected for how long on that? And then the second question is, in terms of going, staying on the Meat business, the MAP spending being down, is that a function of just waiting for the innovation to catch up? Or is that something that -- I guess what’s the outlook for your MAP spending beyond the next couple months?

Marcel H. M. Smits

Okay. Let's first talk about the broker situation. That's a double-edged sword. Our analysis would indicate that we will have saving because we're talking here about accounts, in many instances, smaller accounts, and therefore, the broker actually leverages across a wider group of products than just the Sara Lee products, so you have saving. And by the same token, we're confident that we will achieve a better sales performance. So it's something that works in both ways. So far we're seeing the savings coming through, and as we transition, we're confident that in the next few quarters, we'll make sure that the increase in sales will come through as well. We have high confidence. These are people who work for a variety of fast-moving people in North America. Sean actually experience with them so the confidence level is high that we will achieve both benefits. In terms of mass spending for the back half, what I think you should anticipate is that wherever we have relevant innovations, we will support them appropriately. And I'm not going to pin that down on a specific number, but what we're really -- what we're doing here is we're putting the business on a sustainable path, where by the end of the year we can say this is the profit that we've made and that's based on a sustainable MAP figure, a sustainable pricing to give you a good view of what the operating promise of the business is.

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

Can you quantify the savings on the brokers? Is it a couple basis points, order of magnitude on basis-points improvement on the margin structure?

Marcel H. M. Smits

If you don't mind, I'm going to pass that one, but obviously for that type of fairly complex implementation, we wouldn't have done that if that would be just for a couple of hundred thousand. So there's a meaningful saving. We're pushing through a large program of savings. I think in the earlier calls, we've indicated that we have an FTE reduction of approximately 400 people so that's a big number. And this is a meaningful initiative in that list. It's not the most important initiative, but it's one of the meaningful initiatives that contributes to the overall saving that we're achieving.

Erin Swanson Lash - Morningstar Inc., Research Division

One then just on the MAP side, just to understand, is there structural increase that needs to be done or -- not next quarter, not the quarter after that, but going out like 1 to 2 years, is there a structural shift that needs to be stepped up in the MAP spending or is it something that's just going to increase at a rate of sales growth or something like that longer-term? Are you guys under-investing now and expecting to have a big catch-up? Or is it something that just you've reached the base at this current level?

Marcel H. M. Smits

I don't think we are under-investing. We have, in the past, said that -- both Jan and I have been on record in saying that we think that over time MAP levels in both businesses will go up. But what we now really need to do is we need to give Sean a free hand to take a view and then present his views on the business, because he's going to be driving that business. And by the way, he's got all the background and the training to do that very well. He has an excellent track record. He's a great marketeer. So I think, let’s -- if you don't mind, I'm going to pump that ball to the Investor Conference and then Sean will, no doubt, have a view for you.

Operator

Akshay Jagdale, KeyBanc Capital Markets.

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

My question is for Jan. Just on the long-term prospects of Coffee Co. If you look out like 3 to 5 years, what are some major consumer trends that you think the Coffee Co. will have to capitalize on? And how would that sort of manifest itself into the sales mix for the company? Would it manifest itself into a different sort of country or geographic mix, or more so a product-type mix?

Jan Bennink

I think it will be -- if you look at the big consumer trends, what will happen is single-serve will continue to grow. I think that is a clear indication. I mean, will there be single-serve? In different ways, it might be liquids, it might be different pads, pods, anything. I think single-serve will be an important part. Therefore, our kind of link with Philips is critical. Beans will be another part where I would see growth happening. So just fresh beans, freshness, direct delivery, personalization of new beans, I mean kind of you want to have your own type of beans which you get delivered at home. Prices is unimportant. So I think premium products, beans and single-serve is a critical one. I think if you look at instants, that will continue also to be important, and I think instants, the way we're seeing and developing, I wouldn't be surprised that even in roast and ground markets, instants will become a bigger player than it currently is. So those are, I would say, overall the 3 areas. Roast and ground as a total market will, whether it's filter or ground coffee, will be not -- you will see different things. You will see better products. You will see more catered products. But is there a big trend that you'll see big increase? No. It is more like market share gain but the big trends beans and single-serve, those are the 2 big things and instant will play a role in that.

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

So looking out a few years, I mean if Coffee Co. is able to do what strategically you want it to do, would you see a bigger mix shift on product type, or is it also sort of a geographic mix shift also big component of the strategy?

Marcel H. M. Smits

No, not necessarily. I mean we don't need a geographical fix, but I prefer to defer this question ‘til March. You'll get a full update of where we think the growth will come from, where the segments -- whether it will be growing, whether the consumer trends will go into depth especially in the beginning of the recession, we'll go into all the consumer trends executive questions you're asking and how we're going to play with that. Geographically, we can very well play in the geography we are. Do we need to expand to some geographies to just optimize our portfolio potentially? But we don't need geography in order to get the growth we've been talking about.

Operator

Your last question Priya Ohri-Gupta, Barclays Capital.

Priya Ohri-Gupta - Barclays Capital, Research Division

I was just wondering if you could add some color around capital structure for beverage Coffee Co. As we look out to potential liability management that could ensue in coming months, should we be thinking about debt issuance for Coffee Co. occurring primarily in European markets or the U.S. markets or some combination of it the 2?

Mark A. Garvey

It's Mark. You will get a lot more detail again in March when we have our Investor Day in Coffee, but as you know, we will be looking to raise some debt on Coffee Co., that could be U.S. or European. We haven't made the final determination on that yet.

Melissa Napier

And I believe that concludes the questions. So thank you to everyone for your participation and for listening to us today.

Marcel H. M. Smits

Thank you very much and hope to talk to you very soon.

Operator

Thank you for participating in today's conference. Please disconnect your lines at this time. Thank you.

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