Executives
Aaron Hoffmann - VP, IR
Brenda C. Barnes - Chairman and CEO
L.M. (Theo) de Kool - EVP and Chief Financial and Administrative Officer
Analysts
Christopher Growe - A. G. Edwards & Sons, Inc.
Terry Bivens - Bear Stearns
Eric Katzman - Deutsche Bank
Alexia Howard - Sanford C. Bernstein & Co.
Pablo Zuanic - J.P. Morgan
Todd Duvick - Banc of America
Timothy Ramey - D.A. Davidson & Co.
Jonathan Feeney - Wachovia Securities
Robert Moskow - Credit Suisse
Andrew Lazar - Lehman Brothers
Kenneth Zaslow - BMO Capital Markets
David Adelman - Morgan Stanley
Eric Larson - Piper Jaffray
TRANSCRIPT SPONSOR |
Sara Lee Corporation (SLE) F4Q07 Earnings Call August 15, 2007 10:00 AM ET
Operator
Good morning and welcome to Sara Lee Corporation's Fourth Quarter Earnings Call for Fiscal 2007. Your lines have been placed on a listen-only mode. This call is being recorded. If you have any objections, please disconnect at this time.
I would now like to turn the call over to Aaron Hoffman, Vice President of Investor Relations for Sara Lee Corporation. Thank you Aaron, you may begin.
Aaron Hoffmann - Vice President, Investor Relations
Thanks Wendy. Good morning and welcome to Sara Lee's year-end 2007 earnings conference call. As always, we very much appreciate your time and your interest. Joining me for today's call are Brenda Barnes, our Chairman and CEO and Theo de Kool, our Chief Financial and Administrative Officer.
Our year-end results were released at 6.30 Central Time this morning via press release that you can find on our website at saralee.com. If you have any problems accessing the release, please call Jennie William at 630-598-4966. Our 10-K for the fiscal year is expected to be filed in about two weeks from today.
To begin, I will caution you that our remarks this morning contain forward-looking statements about Sara Lee's future operations, financial performance and business condition. These forward-looking statements are based on currently available competitive, financial and economic data as well as management views and assumptions regarding future events. Such forward-looking statements are inherently uncertain and investors must recognize that actual results may differ from those expressed or implied in these statements. Consequently, I need to caution you not to place undue reliance on forward-looking statements. We've provided additional information in our press release and Form 10-K for fiscal 2006, and I encourage you to review concerning factors that could actual results to differ materially from these forward-looking statements.
With that out of the way, let me turn the time over to Brenda.
Brenda C. Barnes - Chairman and Chief Executive Officer
Thanks Aaron and thanks to everyone for joining us this morning. Let me start by offering my perspective on fiscal '07 and I really can say confidently that we are in a very different place than we were a year ago. We're well positioned for growth and are ready to build on the progress we achieved last year. Our one-time transformation initiatives are complete highlighted by the spin-off of Hanesbrands and the completion of our reorganization around the consumers and customers.
Most recently, we eliminated a layer of management in the Sara Lee International management structure resulting in a more integrated operating company. At the same time, we have trained over 10,000 employees on continuous improvement and fully implemented a centralized procurement strategy, all of which helped deliver a $0.25 billion in savings in 2007.
We are also well on our way to a very successful SAP implementation. We're bringing the right products to the market and have an innovation pipeline in process that will help ensure we continue to deliver on-trend launches over the long term. We have also delivered significant value to our shareholders. We have paid around $1 billion in dividends and repurchased about $ 1.2 billion of stock over the past two years. Last year we reduced net debt by nearly $2 billion and repurchased $685 million of our stock, which was a 185 million more than we had forecasted.
We aggressively look forward some of the planned purchases for fiscal '08 into '07, as we saw the underlying business fundamentals continued to improve nicely. In addition to all those actions we spun off Hanesbrands to our shareholders and that stock has appreciated more than 40% consistent.
So adding it up, we have returned cash to our shareholders, given them a new terrific stock and meaningfully improved our balance sheet. The progress story doesn't end there.
Looking at the financials for fiscal '07, we've seen results begin to improve. Adjusted sales increased 3.6% for the year behind innovative new products across all of our segments that are pricing strategies and improved selling capabilities. Our strong sales results are ahead of our guidance and reflect smart marketing investments behind outstanding new products and growth ideas.
MAP spending was up 8% for the year and yet I am even more enthusiastic about the improved quality of our marketing. Campaigns are better and executed more effectively. We are getting more for our money to as we have shifted non-working media dollars into working media. And as assured, adjusted operating income growth of 5.4% outpaced our strong sales performance and brought us to an adjusted operating margin of 7%.
This performance is all the more meaningful as we overcame about $145 million of incremental input costs. In general, commodities remain at relatively at high levels. During fiscal '07, the combined markets, where the baskets of commodities we purchased, rose by 16%. Our ability to offset that increase of pricing actions speaks to our improved skills and appropriately assessing the situation and successfully implementing changes with our customers. It also speaks to the strength of our brands.
If we zero in adjust the fourth quarter, the quick takeaway might be that operating segment income was down in the number of businesses. I think that might be the wrong viewpoint.
In the quarter, we increased MAP investment by 24% as we had important new product launches that merited strong support. The pay-off was adjusted sales growth of almost 4% in the quarter and an investment that helped set us up for future growth. While we are making strong marketing investments in the quarter, we also face negative commodity situations in several businesses. But the total company input cost rose $65 million in the quarter, exceeding our ability to fully pass-through the pricing by about $10 million dampening some of our profit growth.
Now let's drill down and take a look at the individual business segments, because there are some good stories and results. Our meat business is successfully moving our portfolio to consumer focused on-trend, value-added products that help drive adjusted sales growth of 3.6% for the year, while adjusted operating segment income was down slightly.
Our meat business stayed $20 million of input cost headwinds. In order to properly manage our price points at retail, we chose to limit pricing increases to only about $10 million for the year. I do expect that in fiscal '08 as meat costs continue to rise, we will take appropriate actions to help mitigate commodity increases.
We continue to support successful new products like Jimmy Dean breakfast bowls, sandwiches and skillets with a strong marketing campaign and a 15% increase in MAP investments for the year.
For the year, the business maintained or grew market share in five of the big categories. At the same time, as we detailed in our second fiscal quarter, we experienced issues with our Mexican joint venture, which resulted in a loss in fiscal '07. After making changes to management there and our approach to running the business, I feel much better about the outlook for the joint venture and for our meat business overall.
North American bakery finished the fiscal year on a strong note, increasing adjusted operating margin in the fourth quarter by a 160 basis points and by a 140 basis points for the full year. We achieved these results in the face of extremely high wheat and fuel costs that remained an industry issue.
For the full year, we were able to cover over $30 million of incremental input costs through pricing actions, and already in fiscal '08, we announced an additional price increase in July that will go into effect in September reflecting escalating wheat prices. Our retail partners are tuned to the rising client environment and generally have supported a fair increase.
Adjusted sales were up modestly for our branded division, particularly the Sara Lee product continues to show good growth. Sara Lee remains the number one brand of fresh bakery with the 7.9% national share and sales growth of 15%.
I continue to see tremendous opportunity to further drive top and bottom line performance in bakery behind the strongest brand in the industry, world-class product innovation and many operational improvements.
Our Foodservice segment delivered a solid year reflecting the numerous organizational and operational changes we've implemented. Adjusted sales grew by about 1% and volumes declined as we deliberately exited low or no profit business in commodity meat and DSD coffee. The effect can be seen in an adjusted operating margin which was up 70 basis points for the year. We have and will continue to exit parts of our commodity meat business and unattractive pieces of our DSD coffee business in fiscal '08 and anticipate lower volumes and sales as a result. All these actions should help improved the margin structure and overall help for the business.
We also have some similar commodity headwinds as we've seen in our retail business, which will necessitate pricing actions in fiscal '08. Nonetheless fundamentally, we have improved our customer relationships in our category relevance through better selling capabilities and more innovative on-trend products.
In our international beverage business, adjusted sales rose almost 8% and adjusted operating segment income increased 7% on the strength of improved pricing and better product mix. And we held an adjusted operating margin at a strong 17.4% in spite of about $30 million of incremental commodity costs.
MAP spending increased 14% to support products like Café Switch and new Senseo offerings. In fact, we continue to drive very strong Senseo sales even six years after the initial launch with full year sales up 26%. These results are for the most part very much in line our strategy of driving sales through innovation while maintaining our attractive margin structure.
As we discussed in the second quarter international bakery had a key customer moved to a private label version of several of our best-selling products which affected sales and contributed to double-digit decline in adjusted operating segment income.
Our management team is dealing with issues of pricing action, distribution and route realignment as well as cost elimination. We are also continuing to focus on our innovation pipeline and successfully launched Bimbo White Crust bread in Spain. Through much better execution and management of the retail situation, I fully expect this business to show improved results in fiscal '08.
Household and body care simply put, had a terrific year. Behind our renewed innovation pipeline, new marketing initiatives and the use of shared learnings from around the world, we saw volumes up over 5%, adjusted sales up more than 5%, adjusted operating segment income up about 13% leading a 90 basis point increase in adjusted operating margin.
Importantly the positive results came from all four of our core categories: body care, hair care, insecticides and shoe care. As we discussed in the past, as our renovation pipeline continues to produce winning products, we are supporting them with advertising, buying strong new campaigns, as well as proper pricing, trade management and promotional activities as evidenced by a 17% MAP increase.
Benefiting from these actions, Ambi Pur 3Volution has now been successfully rolled out in ten countries helping the brand grow 15%. Sanex grew 12% from continued strong deodorant sales and Radox was up 19% this year behind the launch of new products like Daily Elements.
Turning to the full year financials, let me start with reported diluted earnings per share from continuing operations which were $0.16 for the quarter and $0.57 for the full year. The full year number includes a negative $0.10 of charges partially offset by $0.16 per share from the tobacco gain.
Core EPS was $0.72 per share compared to our core guidance of $0.63 to $0.69. And as you remember core EPS is reported EPS less significant items and the tobacco gain but including a $0.21 per share tax benefit that occurred in the first quarter and was always part of our core guidance. And to save you the effort, the tax rate associated with our core earnings was 25.5%. The reconciliation for this rate is provided in the IR section of our website.
Now I know that you all recall the guidance for the reported rate from continuing operations for the full year was 18% and we actually ended up with a slightly negative rate. This is a result of numerous one-time discrete tax items as well as the favorable settlement of various tax audits around the world. Specifically in the fourth quarter, the rate was lower than anticipated as a result of several additional discrete tax items that we really couldn't factor into the rate until they actually occurred. All in all I recognize that our tax rate has been tough to fall in FY07.
Going forward we expect things to get clearer as we have fewer transformation-related significant items and less discrete tax items.
Now let we shift gears and talk about cash. As we reported this morning cash from operations for the full year was around $490 million, representing a decline of about $775 million versus a year ago. As a reminder, cash from operations this year includes $88 million from the timing on Hanesbrands and European meats in the early part of the year. There are several other factors to consider.
First, keep in mind that the comparable period of last year included cash generated by several divested businesses which account for virtually for all the decline in operating cash flow.
Second, our cash taxes in '07 exceeded those paid in '06, by about $250 million mainly driven by the repatriation of foreign earnings, of which the vast majority were paid in the first three quarters. During the fourth quarter, we generated significant cash from operations from an improvement in working capital.
Let me close by reviewing our guidance for fiscal '08. We are forecasting diluted EPS in the range of $0.95 to a $1 per share which includes $0.18 per share gain from the sale of our tobacco business in fiscal '99. It dose not include any other significant items that may occur over the course of the year.
Our core EPS guidance which excludes significant items is $0.77 to $0.83 per share and has a 33% tax rate associated with it. The reconciliation for this rate is provided in the IR section of our website.
As you know, we've had a large amount of significant items over the past two and a half years. I expect that number will shrink considerably in fiscal '08, as we reach in the back end of the transformation and as those items are incorporated into the segment P&L. The primary driver of significant items this year should be our ongoing implementation of SAP.
Additionally, we anticipate sales growth of over 3% which assumes essentially flat currency translation effects. Reported volumes are likely to be flat to up slightly as we continue planned exits of unattractive business in our DSD bakery, DSD foodservice coffee system and our commodity meat position in foodservice. These declines will offset good volume growth in many of our other businesses. We'll also see solid price and mix improvements.
The result is that we should grow our adjusted operating margins by 60 to 100 basis points for the year to 7.6% to 8% continuing our positive trajectory of margin improvement.
Finally, you will notice that our guidance for cash from operations is down somewhere between $50 million and a $150 million. The decline comes primarily from our incremental repatriation of foreign earnings, resulting in nearly $200 million of additional cash taxes.
As a reminder in the fourth quarter of fiscal '06, we took a charge to accrue for the future repatriation of about $1.8 billion. We brought back some of the cash associated with that charge in fiscal '07 and we will bring back even more this year, resulting in our higher cash taxes.
However, on a positive note, as a result of increased profits and better cash management we will see better cash from operations from the actual businesses that are simply offset by the cash taxes on repatriation.
Now cash and leverage was the hot topic in our third quarter earnings, so let me get that out of the way. While we continue to have a substantial amount of cash on our balance sheet as we've consistently communicated there are clear plans for refuge. Looking at just fiscal '08 we have $1.4 billion of debt coming due. We will repay half and refinance the other half. At the same time, we will pay about $300 million in dividends and repurchase $315 million of stock.
Our free cash flow will end up negative as a result of cash transformation costs and higher cash taxes for repatriation. These actions leave us with about $1 billion of cash at the end of fiscal '08 where we have about $2.5 billion on hand right now. Looking further forward, the remaining $1 billion will be used in future years to allow us to fulfill our various capital structure commitments.
To summarize, fiscal 2007 marked clear improvements in most of our business segments compared to last year. We have been working on the execution of our plan that is about building brands, organizational capability and the culture of growth and resiliency and all of those qualities were on the square I believe in the year we just concluded and will be evident in fiscal 2008. The progress we talked about is translating into positive performance and reinforces my confidence in our ability to deliver further positive results.
And with that Theo, Aaron and I are happy to take your questions.
Question And Answer
Operator
Thank you. [Operator Instructions]. Our first question is from Chris Growe you may ask your question and please state your company name.
Christopher Growe - A. G. Edwards & Sons, Inc.
It's A. G. Edwards. Good morning.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Good morning Chris.
Aaron Hoffmann - Vice President, Investor Relations
Good morning.
Christopher Growe - A. G. Edwards & Sons, Inc.
Hi guys. I just had two questions for you. The first one is relative to the operating margin for '07 and also looking ahead to '08, you had a guidance range of like 7% to 7.3% for '07, is at the lower end of that range for the year. Was there something incremental in the fourth quarter? If yes, we know the input cost to marketing, does that work against that margin? Was... is that sort of as expected?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Yes, there are couple of elements, Chris. The first one is indeed that we have some happenings from commodities that didn't help. And secondly our sales for the year went a little higher than we expected which was partly in an area where we didn't make a lot of profit. So that occurred that as a percentage. Overall I think we are on track to fulfill our 7.6% to 8% margin for '08.
Christopher Growe - A. G. Edwards & Sons, Inc.
Okay. And then relative to that figure, is there a certain level of cost saves that we know are coming through? I am not sure of the figure, if there is one but is there... give an estimate for cost savings coming through from the transformation?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
No, we have not disclosed that but we will disclose some numbers during Meet the Management in September.
Brenda C. Barnes - Chairman and Chief Executive Officer
We clearly have an identified number that is baked into our plan. So we know what's in there and we'll be able to share that with you.
Christopher Growe - A. G. Edwards & Sons, Inc.
Okay. And then just relative to... I guess the same point, the gross margin was down about 100 basis points I think roughly in the quarter making some adjustments to get there. But was that in line with your expectation? And I was surprised by that relative to the cost... I am sorry the price realization that you achieved in the quarter?
Brenda C. Barnes - Chairman and Chief Executive Officer
The escalation of commodity increases that happened in the fourth quarter happened quite rapidly. So we get ahead as much we can on the cost increases, adjust our pricing but in the fourth quarter as I mentioned, we just fell short by about $10 million in terms of being able to pass that through.
Christopher Growe - A. G. Edwards & Sons, Inc.
Okay. Thank you.
Aaron Hoffmann - Vice President, Investor Relations
And Chris, just for the record, the adjusted growth margin in the fourth quarter was down 50, five zero basis points.
Christopher Growe - A. G. Edwards & Sons, Inc.
50 basis points, okay. Okay. Great. Thank you.
Operator
Thank you. Terry Bivens you may ask your question. Please state your company name.
Terry Bivens - Bear Stearns
Good morning. I am from Bear Stearns.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Good morning.
Brenda C. Barnes - Chairman and Chief Executive Officer
Hi Terry.
Aaron Hoffmann - Vice President, Investor Relations
Good morning.
Terry Bivens - Bear Stearns
Hesitate to weigh into the tax issue here, but are we correct in looking at 5.3% tax rate to get to $0.13 in the fourth quarter? Is that correct?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
The overall tax rate is 5.3% for the year on a reported basis which includes tobacco and unusual but excludes discontinued.
Aaron Hoffmann - Vice President, Investor Relations
Theo meant to say for the quarter.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Sorry for the quarter 5.3, yes.
Terry Bivens - Bear Stearns
5.3 for the quarter so if you fully tax it or use kind of a pro forma rate and it looks like $0.08, right?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
I think it's... if you take continued including unusual and excluding unusual you get to about I think $0.09.
Terry Bivens - Bear Stearns
On the $0.13 base pay of that, that's quite a swing. I mean this strikes me. I mean, isn't that material? Isn't that something that should have been pre-announced, that's a big swing in a quarter?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Yes, but here are the elements that is, there are not discrete items that you don't know when they occur and you cannot plan for it. And the accounting we'll simply say you have to cut them out as discrete items. Secondly we have some benefits from losses in European jurisdictions that were baked in the number in the fourth quarter which we actually did not take into account there. So, that's the explanation.
Terry Bivens - Bear Stearns
Cash flow guidance also looks a bit like to me, I mean the... is the difference there I guess what... what you are saying Brenda is that from the business it's going to be up, but the difference is going to be the increment in the repatriation, is that correct?
Aaron Hoffmann - Vice President, Investor Relations
That is correct.
Brenda C. Barnes - Chairman and Chief Executive Officer
Correct, Aaron.
Terry Bivens - Bear Stearns
How much would that increment be? How much you are looking at now?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
It would be about $200 million of cash taxes.
Terry Bivens - Bear Stearns
200 over, the payout this year.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
This200 million more than in '07 because of increased repatriation. Correct.
Terry Bivens - Bear Stearns
Okay. Last thing for me, the share repurchase that came in considerably like from what I was looking for. What's the reasoning there?
Brenda C. Barnes - Chairman and Chief Executive Officer
Well we accelerated as I mentioned the '08 plan and bought it earlier in '07, because we thought there were favorable times in our business. So we are still on our long term track to repurchase what our commitment was, and so that's the number we have planned for '08.
Terry Bivens - Bear Stearns
All right. Thank you.
Operator
: Thank you. Eric Katzman, you may ask your question, and please state your company name.
Eric Katzman - Deutsche Bank
Hi good morning everybody. It's Deutsche Bank. Brenda I think you've briefly mentioned that the SAP rollout, I think up to now the company hasn't been that specific as to kind of when that launching, and maybe how much of a cost headwind that could be in '08. Can you kind delve into that a little bit more?
Brenda C. Barnes - Chairman and Chief Executive Officer
Sure and I think... I don't think, we will definitely talk about it at Meet the Management, our approach all along has been to very effectively plan for the implementation before we actually put the flitch and go wide. So our planning is virtually done in the U.S., and we are right on the cuts of going live on a very major piece of it. Internationally we have been... they were on SAP and we have been doing this project connect where we have been adding new countries, and new capability to that current SAP systems. We have actually done that Asian connection in some other countries. We are on track. We are on track with the cost as we estimated it, and we are quite confident that we won't have any problems with the implementation.
Eric Katzman - Deutsche Bank
I mean is it cost? Is that a material amount in '08?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
The cost of implementation is booked at significant items Eric.
Eric Katzman - Deutsche Bank
Okay.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
So there will be some of that basically as we said that the main element of significant items will be this SAP implementation going forward.
Eric Katzman - Deutsche Bank
Okay. And are those items... so you are kind of calling that out as a discrete item and your guidance excludes them?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Our guidance excludes them. We will report them when they occur.
Eric Katzman - Deutsche Bank
Okay.
Brenda C. Barnes - Chairman and Chief Executive Officer
And that was a part of the original transformation, one time cost of roughly $1 billion that we talked about so. It was a part of that all along.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Just to give you some color on the transformation expenses, Eric, we had forecasted about 1.1 billion of transformation expenses. We have spent year-to-date from an accounting perspective almost a billion something like $970 million, the remainder, the main part of that is SAP implementation process still has to run through the P&L.
Eric Katzman - Deutsche Bank
Got it. Okay and then second, Brenda you mentioned about pricing in bakery, everybody is focused on wheat. How much of a price increase did you go through?
Brenda C. Barnes - Chairman and Chief Executive Officer
Well it varies by the type of product but it was enough to offset the wheat increases.
Eric Katzman - Deutsche Bank
Then, are we talking 5%, 7% on average?
Brenda C. Barnes - Chairman and Chief Executive Officer
I don't have that percentage off the top of my head.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
A little less I think.
Brenda C. Barnes - Chairman and Chief Executive Officer
Offset the wheat costs.
Aaron Hoffmann - Vice President, Investor Relations
I'll get that for you.
Eric Katzman - Deutsche Bank
Okay. And then lastly, I think this is kind of follow-up to Chris' question on the margin improvement. How much of a cost headwind are you factoring in, in that? Or I guess given the experience that you had earlier during the transformation... that your... I would assume that, that's a fairly conservative number given, what is a fairly volatile input cost environment. I mean it would seem to me to be ashamed if you are making progress on the top line to kind of forecast the margin improvement in the face of very volatile inputs and then you have to come back to us and kind of say, the input cost environment surged more than we thought and therefore 60 basis points in margin improvement on the lower end is now going to be 30.
Brenda C. Barnes - Chairman and Chief Executive Officer
Yes, the way we look at this whole thing and we certainly experienced in '07, you can plan and anticipate the best you can. There occasionally will be things that shoot up higher than you thought, like there was in wheat, wheat I don't think we ever anticipated the height that wheat has hit. I think what's different about today is the ability to not... I talked in the past about building the capability to be really selective and surgical about how we take pricing and that's what we are doing. So our capability is much stronger. Our expertise on the procurement side is much better. So we are locking in things the way we think we need to, in terms of decreasing the volatility and our go-to-market approach with our customers is better. So taking all these things into account, it's not as simple as, just pass it on. We have to pass it on smart on the right places, on the right types of products. That in combination with mix shift, it's going to help our margins. We are getting out of businesses as I mentioned that we don't make money in and that's just... that's a drag on that margin improvement and we just have to make this up... take this up to make that happen.
Eric Katzman - Deutsche Bank
Okay. Good luck, thank you.
Brenda C. Barnes - Chairman and Chief Executive Officer
Plusnew product side on the upside.
Operator
Thank you. Alexia Howard, you may ask your question and please state your company name.
Alexia Howard - Sanford C. Bernstein & Co.
Hello guys. It's Sanford Bernstein. Hi there.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Hi Alexia.
Brenda C. Barnes - Chairman and Chief Executive Officer
Hi Alexia.
Alexia Howard - Sanford C. Bernstein & Co.
A question about the shape of the margin expansion in 2008. I mean, it's very encouraging to see that you are expecting between 60 and a 100 basis points of margin expansion this year, which actually I guess if you combine that ways about 3% sales growth implies very strong sort of mid teen operating profit growth on a recurring basis. But given that with single pricing margin decline this quarter and we are expecting commodity cost inflation to continue to pressure the company into I guess in the next couple of quarters at least. How do you see the shape of that margin expansion playing out through the course of fiscal '08?
Brenda C. Barnes - Chairman and Chief Executive Officer
On quarter-to-quarter I would like to mention, you mentioned the decline, we did significantly increase our MAP spending, so that, that is coming through not in the food rate but across a lumpy rate, in that lumpy rate links to when we pull out new products. So that is something that affected the trend in fourth quarter that I don't want to see it as one time thing, it's going to happen again but this will not be necessarily smooth quarter-to-quarter. I can't, maybe at Meet the Management could do a better job of breaking the 60 or 100 based on sources of that. However, the sources are what I was saying earlier, offsetting cost savings obviously, margin mix improvement, continuing lean activities that we have in place across the board, the new product introductions that are coming out, for the most part, always have a higher margin than what our ongoing rate is and just a total mix shift between where we are growing and where we are exiting but the whole company's mix shift is happening.
Alexia Howard - Sanford C. Bernstein & Co.
And do you have any specific guidance on how much you expect MAP spending to increase in fiscal '08? If it was up I guess almost 8% this last year, how much we're going to see it going up again next year?
Brenda C. Barnes - Chairman and Chief Executive Officer
Yes, we haven't yet given guidance on that, we'll be [indiscernible] I think Meet the Management on the specifics.
Alexia Howard - Sanford C. Bernstein & Co.
Okay. Appreciate it. Thank you.
Operator
Thank you. Our next question is from Pablo Zuanic. You may ask your question and please state your company name.
Pablo Zuanic - J.P. Morgan
J.P. Morgan. Good morning everyone.
Brenda C. Barnes - Chairman and Chief Executive Officer
Good morning, Pablo.
: Pablo Zuanic: Brenda, just on the system margin expansion argument, I know you don't give sources but [indiscernible] again North America will be a driver of margin expansion in '08 and international goes back to the more of game of stabilizing margins there. Do you see your input higher margins into international in '08?
Brenda C. Barnes - Chairman and Chief Executive Officer
Your voice was in and out a little. So I am going to try to answer what I think you asked.
Pablo Zuanic - J.P. Morgan
Okay.
Brenda C. Barnes - Chairman and Chief Executive Officer
The effect of the international business in our margin, I am thrilled, absolutely thrilled with the performance of our international business. And I think all of you should be thrilled. It's a large percentage of our company, a very large percentage of our total operating profits and these are categories that we are demonstrating ways to hold the margin and drive the top line. So that's what we are going to continue to do in both segments both household as well as coffee and tea and I think '07 is a great demonstration of that, that we've been able to expand our entries of products, take them into current geography and grow... continue to grow in underdeveloped markets where we are just beginning to really make headway.
Pablo Zuanic - J.P. Morgan
Okay, but just to... excuse me.
Brenda C. Barnes - Chairman and Chief Executive Officer
Yes we have something different, maybe clarify that may not apart everything.
Pablo Zuanic - J.P. Morgan
Yes, I am sorry about that. So what you are saying really is that there is heavy listing in terms of 60 to 100 basis points in margin expansion, recent example of North Americ a, international where you are most stable and I understand that. But then I look at the performance of North American meats in 2007 and there was no margin expansion there. So that would boil down to bakery and foodservice being the drivers of margin expansion in '08. Is that a fair way of putting it?
Brenda C. Barnes - Chairman and Chief Executive Officer
Well if you look at margin expansion for the total company as a mix of all those businesses to the extent that international growth it increases our total margin for the company. Though it's... but it is fair to say that the margin percentage in the U.S. has more heavy listing to do and the margin requirements in international to the best we can keep the margin high while driving top line. So in total that increase for our company fits the numbers we gave you.
Aaron Hoffmann - Vice President, Investor Relations
I thinkalong with Brenda's comments that along the international businesses in general holding steady international bakery which had a sort of depressed year this year, hopefully we'll get ourselves back on track and that could be a source of margin improvement coming out of the international business, but to kind of go along with everything else.
Brenda C. Barnes - Chairman and Chief Executive Officer
Yes, it's a good point. That business is a very, very high market share and has a very good margin for that DSD business.
Pablo Zuanic - J.P. Morgan
Right, and just the corporate expenses, the fourth quarter number, is that the number that we should think it's a normal quarterly number for '08?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
We don't give guidance on the corporate expenses Pablo but there is significant number of unusual items in that number. So you cannot just take that number.
Pablo Zuanic - J.P. Morgan
Okay. And before I asked you...
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Wemanage on the overall SG&A cost as a percentage and that's what we do. But I can give you the number that is included in the corporate expense number one second.
Aaron Hoffmann - Vice President, Investor Relations
And maybe while Theo is looking for that I will just mention the point he was making and that is we do talk a lot about SG&A excluding that to kind of get a view of how much we are spending to run the entire enterprise. And what you would see is that, that number has gone down by 90 basis points for both the full year and for the quarter which I think is a good reflection of our ability to take cost out of the business over the past 12 months.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Yes,Pablo, that number of $340 million on a full year basis was excluding unusual items 268.
Pablo Zuanic - J.P. Morgan
Okay, and is it... all right, now that's helpful. And just in the cash flow Theo, just last quarter you had changed your operating cash flow guidance, you guided by 100 million to range of 300 to 400 million and now you come out with a 480 million number there. What's changed? And then I have a follow up on that?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Well you have a good point there Pablo and that is we have... we have kind of disappointing cash flow generation in the first nine months for several reasons that we knew but still it was below our expectations. We gave it a lot of effort and focus in the fourth quarter and actually that paid off. There is an increased essential to working capital. We also have a system in place that allows us to manage our payables more close to the payment in terms of we agreed to that gave us some benefit on payables but also inventories and receivables contributed to the higher cash flow number.
Brenda C. Barnes - Chairman and Chief Executive Officer
Theo,it's certainly the rapid Theo came on in the organization and everybody knew working capital needed to be improved. So he effectively got the metric on the right direction.
Pablo Zuanic - J.P. Morgan
That's good. Congratulations Theo. So but just on that number... needs a guidance for '08, on what operating cash flow guidance for '08?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
I think between 350 and 450 is what you can see on the guidance table.
Aaron Hoffmann - Vice President, Investor Relations
On that table in the press release, Pablo, on page 5 of the release.
Pablo Zuanic - J.P. Morgan
All right. And just the last follow-up.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Andto your point earlier Pablo, just as you understand it right, that that includes our cash taxes and our cash taxes for the full year, $200 million higher because of increased repatriation. So if you take that into account you can see that our cash flow generation from the businesses if you exclude that tax impact is actually improving, in line with the improvement in margin as well.
Pablo Zuanic - J.P. Morgan
All right and just one last one. I think you had given guidance before 20 to 51 tax rate long term. So, when I hear you give your tax rate of 33 for '08, I am saying great. There are going to be particularly more cash which is what you are saying and then great, they're going to have more cash to buy back stock. But you are not increasing your buybacks for '08. So, I am just wondering the higher cash that you are repatriating in '08, where is that going to be used in and what changed? I mean, you knew how much your capital was and net payments were?
Aaron Hoffmann - Vice President, Investor Relations
Let me... Theo is going to answer the second part of that. Let me clarify something on the first part of your question, and that is, you said 33% tax rate and I want to clarify that the guidance for the reported tax rate... the tax rate that is the GAAP related tax rate is 29%. The number that Brenda referenced and that's in the same table Pablo, on page 5 of the press release. And the number that Brenda referenced on the call that kind of help people understand the rate associated with the underlying business of 33% is the rate what we have referred that is associated with the core earnings of the company which would be the reported earnings per share less in this case of tobacco payment. So, if we take that tobacco payment out that gives us sort of 400 basis point benefit in the tax rate. So trying to help you understand what the actual tax rate associated with the underlying business, so that 29 to 31 that we have always guided to is really no difference. That's a reported rate. The reported rate for the year, the guidance is 29% against core is 33%. And we will continue to talk to you guys about that core tax rate to help you better understand the underlying piece of the business and how taxes are moving through there. I think that that will be instructive over time. But I know there is maybe more of the question but I want to make sure that you have some understanding, everyone has understanding on that point.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
But the simple answer to your question Pablo is that cash taxes lag behind the accounting charge. We took in '06 then a charge of more than $600 million for additional repatriation that is now coming actually through the system and is being repatriated physically through the United States and at that moment you pay the cash taxes. So, the cash flow and the accounting don't match up in full year. Cash taxes are lagging behind. But, I have to say that in the 29% or in or the 33% as Aaron explained in our core EPS, we have baked in a normal level of repatriation as well from an accounting perspective.
Pablo Zuanic - J.P. Morgan
All right. And just one last one on the same topic, so it sounds very, let's say that whatever Brenda had tried to say we're going to buy back another $1 billion of shares that we had not planned for. Your tax rate will grow from what 30% to 45% and can you give a sense of that? It just seems that your hands are tied in terms of increasing share buyback, because so much of the cash is overseas. So, I don't know if you can give us a simple math, but $1 billion more into the buyback what does that mean for your tax rate?
Brenda C. Barnes - Chairman and Chief Executive Officer
Wellwe look at our capital structure is the right capital structure in total for our company in the businesses we are running. So, it's really an exercise in picking up one piece and China have prophesized or speculated about what that would mean. We have been very planful about everything we are doing and how our capital structure fits the needs of the business to grow, incorporate, make the change as we are. So, it's really a Pablo, exercise to say, hey what would happen there.
Pablo Zuanic - J.P. Morgan
Right. Okay, thank you very much.
Aaron Hoffmann - Vice President, Investor Relations
Welcome.
Operator
Thank you. Our next question is from Todd Duvick. You may ask your question and please state your company name.
Todd Duvick - Banc of America
Yes, Banc of America.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Hi Todd.
Todd Duvick - Banc of America
Good morning. Thank you for the guidance on the --
Aaron Hoffmann - Vice President, Investor Relations
Todd,could you speak up a bit. We're in a real hard time hearing you here in. And we want to make sure we hear your question properly.
Todd Duvick - Banc of America
Is that better.
Aaron Hoffmann - Vice President, Investor Relations
Fine.
Brenda C. Barnes - Chairman and Chief Executive Officer
Yes.
Todd Duvick - Banc of America
Okay. Thanks for telling me. I appreciate the guidance on the cash for 2008. I guess one housekeeping question is, can you give us a debt balance for fiscal year end '07?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
We can give you the number and that is the gross debt is about $4.3 billion, and the cash balance is about 2.5 giving a net debt level of 1.7.
Todd Duvick - Banc of America
Okay, very good. Thank you.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Welcome.
Todd Duvick - Banc of America
And I guess with respect to what's going on in the overall industry it seems that there are lot of businesses on the market for sale and even more that are speculated that may be for sale. And my question has to do with your acquisition appetite. You have consistently stated that you are primarily focused on improving operational performance, but you would consider a small bolt-on acquisition if it was right in your warehouse. Is that still your view today?
Brenda C. Barnes - Chairman and Chief Executive Officer
That is. I mean we are... yes, that is what we are looking at.
Todd Duvick - Banc of America
Okay. And in terms of the business, you've completed the divestiture program. Do you continue to review some of the businesses for potential divestiture?
Brenda C. Barnes - Chairman and Chief Executive Officer
The point I was making is there are within each of our business segments specific products or channels or types of customers, any one of those that we don't make money or margin is very, very low. So, it's not a divestiture as much as it is shifting of mix within in our core businesses.
Todd Duvick - Banc of America
Okay.
Brenda C. Barnes - Chairman and Chief Executive Officer
Yesin terms of portfolio we are in, we are very happy with the segments we are in. I have said it before and I will never accept that we are in commodity businesses that don't have growth. I will never accept that. We have big businesses. We have demonstrated the capability to innovate against every single one of them and when you spring something to the consumer that's worth it, they'll pay for it. So, we are very bullish about all of our segments.
Todd Duvick - Banc of America
Okay. And then I guess finally just tying it back to what you said about $1.4 billion of debt that's coming due in FY08. In terms of refinancing half of that, I guess you're going to be looking at coming to the capital market sometime in FY08?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
No, we try to get for the moment. We can comfortably finance that. It's a commercial paper and we will see a... when that moment is there because we repaid $900 million that we could pay that from cash repatriated but when we need to do the other $500 million, we will see what the market is looked like and how we are going to finance it short term or long term.
Todd Duvick - Banc of America
Very good. Thank you.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Welcome.
Operator
Tank you. Tim Ramey you may ask your question, and please state your company name.
Timothy Ramey - D.A. Davidson & Co.
Good morning. D.A. Davidson.
Aaron Hoffmann - Vice President, Investor Relations
Hi Jim.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Good morning Jim.
Brenda C. Barnes - Chairman and Chief Executive Officer
Good morning.
Timothy Ramey - D.A. Davidson & Co.
Brenda, one of your opening comments was that you had accrued savings of about $250 million from your transformation efforts in FY07. And if you just look at that from a margin perspective, one could argue well then the base business earned $5 million and there was a 5% and there was 2% from transformation. If we kind of roll the tape back to the announcement of the transformation we started at 7.7% or 8% operating margin and we were going to go down for a year and then march back up and I know you had given up the 12% target. But it seems to me one of the central premises here of the transformation is that these cost savings are additive to earnings and so far they really haven't been. How would you...?
Brenda C. Barnes - Chairman and Chief Executive Officer
Hey here's what I've said, first of all I would like to clarify that the 12% was never locked away as a target. We still have that as a target, what was changes was the commitments to hit that in fiscal 10.
Timothy Ramey - D.A. Davidson & Co.
Understood.
Brenda C. Barnes - Chairman and Chief Executive Officer
Just to clarify that, and running any of these businesses any food company or anybody you talk to in your plans you have to offset inflation and you have to offset commodity increases as they come at you. So had we not some of the things we've done we will be short by $250 million to offset those incremental costs. So the private transformation was to build an ongoing systemic solution to do that on an ongoing basis every year no matter what those cost increases are. In addition the transformation was built on a model of building capability and skill and a focus on innovation that in addition to that of that to offset ongoing cost increases, we also built a new product portfolio that was a higher margin because of the value added aspect of the nature of those products. So, those two combined have to be in place and I don't think it's fair to say that $250 million was... I mean it is what it was and had we not done that we would be seeing numbers that were totally different.
Timothy Ramey - D.A. Davidson & Co.
Right. Okay, and Theo, on your remark regarding the SAP implementation, again I am looking at the table on page 5 it doesn't show any significant items there but maybe that relates to the GAAP guidance. Can you give me the rationale of why an SAP implementation would be viewed as a significant item that analysts should adjust for?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Well, because it's such a massive undertaking that is so disruptive to the organization if you do it all in once. When it would be a gradual change of systems then I would agree and that's actually what we have in our normal operations. But to kind of redesign all our processes and make them fit SAP is a massive undertaking of which we have announced at the start we'll take another $235 million which was announced as part of the transformation and this is just how we roll it out. So there is no decision there. And if your question at all... it's a question that's we should have asked ourselves two years ago and made the decision to make to it part of the transformation. But let me assure you that only ongoing costs, hardware and all the legacy systems and everything else is part of our ongoing operating costs as it will be after this one time effort.
Timothy Ramey - D.A. Davidson & Co.
And just a question on the DSD coffee business you made a couple of comments on that there were routes that you are considering exiting and some that you did exit. As I recall there was about a $200 million plant built not too many years ago, for that business, is there... has that any of that plant been impaired at this point?
Brenda C. Barnes - Chairman and Chief Executive Officer
You may be referring to Suffolk, the liquid plant we built?
Timothy Ramey - D.A. Davidson & Co.
Right.
Brenda C. Barnes - Chairman and Chief Executive Officer
Possibly... so that's a plant that is still...
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
$100 million.
Brenda C. Barnes - Chairman and Chief Executive Officer
$100 million, as Theo is correcting here, that plant is... was part of our coffee divestiture and not a liquid part that main coffee plant went with divestitures to Courtaulds [ph]. So no, there is not an impairment.
Aaron Hoffmann - Vice President, Investor Relations
What I would point out Tim is that that is a different product line. The DSD coffee system is generally roasting ground. I think there has been a little bit of liquid in it. But the liquid product that is produced in the Suffolk facility which is the Cafitesse product and I think that's what I was preferred to I think in our foodservice division now to one touch. It's the product that's generally sold on a more wide scale through our international sales organization, the customers like Burger King. This is a very large account. We are using Burger King about 9,000 outlets for instance.
Brenda C. Barnes - Chairman and Chief Executive Officer
And in addition with DSD system but we also in total we have a very healthy outlook in our liquid coffee business, so no is the answer of your question.
Timothy Ramey - D.A. Davidson & Co.
Got it. But that asset still exists in your systems somehow.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Well as we explained part of it Tim, because part of this factory including there roasting capacity and the packaging machines for the normal traditional roasting ground business has been sold to say Sego Fredo [ph]. We kept the liquid factory part of it.
Timothy Ramey - D.A. Davidson & Co.
Got it.Thank you.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Welcome.
Operator
Thank you. Jonathan Feeney, you may ask your question and please state your company name
Jonathan Feeney - Wachovia Securities
Good morning. It's Wachovia Securities. Thank you.
Brenda C. Barnes - Chairman and Chief Executive Officer
Good morning.
Jonathan Feeney - Wachovia Securities
Brenda, I know you haven't... you didn't want to like guide specifically about that MAP spending for next year but would you be willing to say that MAP spending is going to increase in the context that your guidance had a greater rate than your sales guidance?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Yesmore than 3.
Brenda C. Barnes - Chairman and Chief Executive Officer
More than 3% that I suggest.
Jonathan Feeney - Wachovia Securities
Yes. Okay, thank you. I just wanted to clarify that. As far as I know... I apologize if I missed this, but the volume guidance for the next year, it says... are you not giving volume guidance or you see the change of 0% to 1%. Could you clarify that?
Aaron Hoffmann - Vice President, Investor Relations
That's the change. We don't give the actual volumes. I mean we are not going to give a number like 12 billion units because it basically means in something like that that, in those columns.
Jonathan Feeney - Wachovia Securities
Right.
Aaron Hoffmann - Vice President, Investor Relations
But we did give you the change. So, really the volume guidance is flat to up one.
Jonathan Feeney - Wachovia Securities
Okay. And just finally a real deep detail question here. But I see in the footnote that you had a pretty substantial gain in the commodity meat business due to hog sale. Could you clarify that a little bit? It looks like a 28.4% increase. That should kind of to carry that business.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
I think you are referring to --
Aaron Hoffmann - Vice President, Investor Relations
Yes. Here is the situation Jon. In the past, the commodity meat business had not been accounted for in our unit volume calculation. It had only been in package retail package piece within there. So, what we are doing is we are trying to give a little additional detail to understand what's happening because that obviouslythat volume decline is going to affect the sales of the overall segment.
Jonathan Feeney - Wachovia Securities
Sure.
Aaron Hoffmann - Vice President, Investor Relations
Like you to understand that as we exit that very low margin or no margin business that we are going to see some volume decline but actually it's a very good thing because we'd like to see that volume leave our system. It just wouldn't show up in that volume number otherwise. So, we are trying to also get a little extra clarity there.
Jonathan Feeney - Wachovia Securities
I appreciate that but I guess do you have any... I mean, we can follow up offline about it, but it says there is a 28.4% increase in that commodity business in the fourth quarter, is that... am I reading that correctly?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Thatwas just on the commodity price, just on the all hogs, because we did not do that before and probably change in our system is that we do that in depth.
Jonathan Feeney - Wachovia Securities
I see. So that's just a change in your reporting structure, not an apples-to-apples number.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Yes, correct.
Jonathan Feeney - Wachovia Securities
Thank you very much. Okay, I am sorry. Thank you very much.
Operator
Thank you. Robert Moskow, you may ask your question and please state your company name.
Robert Moskow - Credit Suisse
Thanks Robert from Credit Suisse.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Hey Rob.
Robert Moskow - Credit Suisse
I guess my question is when you go through the math for the guidance for fiscal '08, I know we have gone through this several times. But it kind of implies like 15% to 18% operating income growth fiscal '08, if you just take the sales growth in that and the margin expansion on top of it. So... and that's excluding any kind of benefits from currency according to your guidance. No other food company is growing at that pace, especially not in this commodity environment. So, are the key drivers here is just the fact that you have the savings in place and they are starting to flow through in fiscal '08 or that the results were just in '07 just were below expectations and therefore you try to get better?
Brenda C. Barnes - Chairman and Chief Executive Officer
Your calculation is pretty accurate. And why the heck that we do this transformation? Well why the heck we did that was to take us from a lower performing company relative to the peer group to a company that performs at or above our peer group. So, if we don't improve at a rate faster than everybody else, we did a lot of things that are... I think to dividend. So, we have done a lot, you know it all the things we have done. So, it is starting to pay dividends for us.
Robert Moskow - Credit Suisse
And then to Eric's question, do you think you are setting the base at a conservative level or an appropriate level, or an aggressive level at?
Brenda C. Barnes - Chairman and Chief Executive Officer
We set our targets that what we are comfortable setting out in the range of those.
Robert Moskow - Credit Suisse
Okay. And then Brenda can you give a little flavor about the R&D pipeline and what's in store for fiscal '08 to drive those results?
Brenda C. Barnes - Chairman and Chief Executive Officer
I think you will see a lot of Meet the Management. I'd say it's a general statement. We have really advanced both our talent our capability, our processes and our outlook. So, we can look into '08, '09 and '10 until we have lined up, and when we have that meeting I think you will see the specific products and what we are expecting to roll out.
Aaron Hoffmann - Vice President, Investor Relations
You'll get to eat, drink and wash with them and also...
Robert Moskow - Credit Suisse
Shower.
[Multiple speakers]
Aaron Hoffmann - Vice President, Investor Relations
You can shower with them. That will be the US first hand exposure on new product.
Brenda C. Barnes - Chairman and Chief Executive Officer
That'sthe deodorant you want to have.
Aaron Hoffmann - Vice President, Investor Relations
That's right.
Robert Moskow - Credit Suisse
And then lastly Theo, you said that you would take in bit of a clamp down on working capital. Have you ever looked through all the different business units and then compared your working capital turnover to your peers? It's hard for us to do because we've got everything on a consolidated basis. But where do you think you stand in terms of working capital turnover in bread and meets and all your other product lines?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Sure we did, is the answer. And secondly, the rough conclusion is that on those businesses that have a big fresh element, like bread and meat, we are doing pretty well, does not mean that we cannot improve whether it's just less opportunity. And we also identified and agreed to the business in the international business, more specifically in household and body care, on the inventory part, there is more to get. That is not kind of huge but still significant enough to mention it.
Robert Moskow - Credit Suisse
And what about coffee?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Ourcoffee is more or less in line but under our philosophy of continuous improvement, they can improve as well, and it has to do with the improvement of our overall processes, our forecasting capabilities, our system capabilities, the accuracy of everything we do, and also there is of course a different model of cooperation with our suppliers that still has an opportunity in... to be reflected in working capital.
Brenda C. Barnes - Chairman and Chief Executive Officer
And a key part of what we have been doing in the last couple of years is increasing our shared service capability. So bringing all things together, whether it's payroll, accounts payable, receivable, we have an in-depth look at where all the businesses are running and are continuing to drive improvement there as well.
Robert Moskow - Credit Suisse
That reminds me, in the quarter you mentioned procurement savings in several parts of your business, have you consolidated your suppliers, or have you switched suppliers in any key businesses?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Yes, we have now 70% of our strength with only 200 suppliers, which is a huge shrink from where we are coming from. That is still in the tail end or rather small supply and I guess there will always be a number of small suppliers in the tail end. We are happy with the number we achieved, about with 200 capable few, and we are building more strategic relations with them, which means that they get included in our innovation process that we work with them in a totally different model than we did before. It's not kind of ordering and get a low price and run away, we have an integrated business model with them which to your earlier question also will have an impact on working capital.
Robert Moskow - Credit Suisse
And Theo where have you taken hedging positions on commodities for fiscal '08 and how hedged forward are you on those positions?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
For competitive reasons, we'll not give any specific details on our hedging program.
Robert Moskow - Credit Suisse
Okay. Thank you very much.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Welcome.
Aaron Hoffmann - Vice President, Investor Relations
And let me come back to the Jon Feeney's question about the commodity meet, I know this is a pretty arcane subject but I want to make sure, we get it right and I apologize I was answering the question, a different question. The issue is as those of you paying close attention, recall during fiscal 2007, we announced the closure of our West Point Mississippi meat processing facility which included a whole hogs slaughter because of that as we started to exit that business, in the past we would sell off only some of the unused components of the hog but because of the closure of the facility we... during the late sold whole hog which resulted in the 28% and in others, we sold the whole thing instead of just parts of the whole thing which created higher unit volumes as a result of that. Yes, we were trying to give you a little bit extra clarity, probably more than you want to know about slaughter and hogs than what we do but we are exiting West Point over time. This will become a non-issue, just a small factor there that we didn't want to make everyone aware of that in that point now. Thank you Jon for bringing up the issue. Happy to clarify it.
Operator
Thank you. Our next question is from Andrew Lazar. You may ask your question and please state your company name.
Andrew Lazar - Lehman Brothers
Lehman Brothers. Good morning.
Brenda C. Barnes - Chairman and Chief Executive Officer
Good morning Andrew.
Aaron Hoffmann - Vice President, Investor Relations
Good morning.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Good morning Andrew.
Andrew Lazar - Lehman Brothers
I guess I am kind of curious to get a little bit more color from you on how, happy you are with the returns you are seeing on some of the higher, marketing spending you've showed over the last two quarters or so, because we saw I guess in this quarter was a deceleration I guess from where you were in terms of volume growth. But maybe that's more some one-off businesses and some things you're doing voluntarily, rather their reflection of what's actually happening why you're spending the money. And the reason I asked this is because again... in thinking about the tailwinds and headwinds as we go into fiscal '08, one of those things that, also we're... I am trying to get a better sense of which would be more of a headwind would be obviously the marketing side. And I want to get a sense of where you are at on that broadly speaking and if there is some longer term target that you set for yourself there?
Brenda C. Barnes - Chairman and Chief Executive Officer
Yes, as you know Andrew the marketing... sometimes the marketing investment doesn't translate into volume in the exact same months in which we spend it. So, the Pur 3Volution as an example, you have to build the awareness, you have to get trial and you have to have people buy these starters before they've come into ongoing consumers that buy the refills that you put in those starters. So on that particular process as an example we had a lot of investments that would not have shown up in the same timeframe as in which we spent it. So, I'd say it's a general rule we're quite happy but also look at very short term promotional spending that you should see right away versus the investments that build the brand or new products and get enough trial that in fact the repeat over time is really what pays the bill.
So it's... I am very pleased and I think, I mentioned in when I was talking that, the overall capability and the quality of what we are doing, I think has improved radically. If you look at our big mega brands the things that we call strategic investment brands virtually all of them have new positioning and campaigns behind them that are integrated really well to online in-store promotional activities. And so, every dollar that we are spending is working harder to deliver the same messages.
So, overall I am fine and to your the other point we do have this drag that we are going to be seeing all next year. I really want to make sure everybody on the call hears this loud and clear that we are going to see volume increases that are not as robust. What we are trying to do is, drive dollar sales at higher margins and so we are going to be exiting some things and cut back on low margin or no margin. So that's going to affect them to as well.
Aaron Hoffmann - Vice President, Investor Relations
And Andrew you can really see that in the volume number because places where we want to cut back where we aren't making delivery exit foodservice, trends and volumes were down 1.8%, U.S. fresh... U.S. bakery volumes down almost 4% and even in the meat business we were deliberately I guess exiting some commodity business had the lowest margin growth of 1.2% of those that were positive. So you can really see it in the reported volume numbers and those businesses trended over to the ones that we are not doing that international beverage up 1.6 and international bakery up 1.9, household body care up 5.6. So I think we are really seeing it, well all the way through we are not deliberately exiting some thing.
Andrew Lazar - Lehman Brothers
Okay. And then if we then, just to furthering that sort of question on mix in the quarter price mix/other was almost 6%. Give us a sense of what part of that was just sort of like for like price increases versus mix and in last quarter a little bit of a 3% of the 5% price mix, was actually mix. So how do you get a sense of how that came up this quarter?
Brenda C. Barnes - Chairman and Chief Executive Officer
I am trying to find that number.
Aaron Hoffmann - Vice President, Investor Relations
That would be... Andrew give me two seconds.
Andrew Lazar - Lehman Brothers
Sure.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Fewseconds going to calculate and then we'll have the number, I believe.
Andrew Lazar - Lehman Brothers
And what I mean to get us a sense of obviously is some of the things you just mentioned around mix is, are we starting to see that come through at least from a top line contribution perspective and is that some thing that...
Aaron Hoffmann - Vice President, Investor Relations
It's about two points of that.
Andrew Lazar - Lehman Brothers
Okay, it's two of the six.
Aaron Hoffmann - Vice President, Investor Relations
About a third of it.
Andrew Lazar - Lehman Brothers
Okay. All right, you had assumed that some of the things... I guess I'd assume that some of the things you are doing that you have just talked about should support that outside of just like for like pricing should support that mix. I would think going forward for some period of time.
Brenda C. Barnes - Chairman and Chief Executive Officer
To support that --
Andrew Lazar - Lehman Brothers
Meaning the contribution or the contribution to the top line from mix... from product mix rather than pure like-for-like pricing?
Brenda C. Barnes - Chairman and Chief Executive Officer
Correct, correct, yes.
Andrew Lazar - Lehman Brothers
Okay. Thanks very much.
Brenda C. Barnes - Chairman and Chief Executive Officer
You're welcome.
Operator
Thank you. Ken Zaslow, you may ask your question and please state your company name.
Kenneth Zaslow - BMO Capital Markets
Hey. Good morning everyone, BMO Capital Markets.
Aaron Hoffmann - Vice President, Investor Relations
Hi, Ken.
Brenda C. Barnes - Chairman and Chief Executive Officer
Good morning.
Kenneth Zaslow - BMO Capital Markets
Couple of questions. 2008 is a year which you are going to accelerate earnings, is that considered the baseline year or '09 or fiscal '10 continue at that rate. I don't want to get ahead of yourself, but what year do you start to believe that you are going to have a baseline earnings that which you could develop a long-term strategic model of?
Brenda C. Barnes - Chairman and Chief Executive Officer
We feel we have that now. We feel we have been working against this since a last couple. We have a core set of businesses that every thing we have been doing has geared to improve those. So I don't... it's hard to answer your question. It's all been geared to improving our core base business at a steady reliable rate.
Kenneth Zaslow - BMO Capital Markets
But your earnings growth in '08 I think is above what you would consider your long-term growth rate?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
I think it's above our long term growth rate, but we have forecasted all the time that during this phase of transformation we would be able to accelerate our margin increase which we now do. We have kind of all the long time items behind us and we can now focus on really improving the business and thus starts to pay off. So, this increase of 0.6 to 1% margin improvement will not last forever. But we are committed to improve our margin substantially in the years to come.
Kenneth Zaslow - BMO Capital Markets
Okay. And I don't know if I heard it correctly or not, in terms of the commodity side. Do you said a to take pricing actions to offset all your commodity or all your increased commodity input for 2008?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
As a view we take that if commodity increases our structure, we should recuperate them in pricing. That does not always happen immediately, there may be a timing difference but of course we take competition and the pricing structure in our model into account. But yes over the course of the year, we should price in our commodity increases into our pricing and that is actually what we forecast to happen.
Kenneth Zaslow - BMO Capital Markets
Your answer which is another question, do you think the commodity prices are structurally higher?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Actually I think that part of it certainly will be more structural. If you think about what's going on the world of wheat and corn and the biodiesel industry then I have no reason to believe that, that pricing will come down quickly.
Kenneth Zaslow - BMO Capital Markets
Brenda,I think it was maybe a year or two ago, you made a pretty strong statement about the foodservice business in the US is being a growth engine. It looks like it may be a little broken for the time being, what are the steps that you guys are taking to fix the US foodservice business and how quickly will the margins start to rebound?
Brenda C. Barnes - Chairman and Chief Executive Officer
Kenif you look at the performance to-date on foodservice, we have seen a significant improvement on the margin in that segment. What you haven't seen is the top-line growth rate and that's because within that segment in our own current business, we have to... what we call internally fix, that's the key part of the strategy within the foodservice group. The industry itself and the consumer dynamics continue to demonstrate that out of home food consumption is still growing quite rapidly. So, a combination of taking out SG&A out of that segment, fixing the mix of the products we offer, adding to it real value added product ideas to our customers. And it's a while back I also said there is a long cultivation period with many of these restaurant accounts. We are now in that and we have gotten great relationships going with many customers that we are sitting at a table being able to talk about the next menu items. For all that we have to sort out that division and get ahead of the curve in terms of our own customer coverage and what not. So, I continue to feel very positively about the opportunity, but there are segments within it that we are going have to keep tweaking.
Kenneth Zaslow - BMO Capital Markets
Have you tempered your view little bit on the outlook, I mean it sounds like a little bit?
Brenda C. Barnes - Chairman and Chief Executive Officer
Probably on the top line in the volume number. That definitely won't be as high as we had once thought, but I still think business will be a good healthy business.
Kenneth Zaslow - BMO Capital Markets
Great. I appreciate it.
Operator
Thank you. David Adelman, you may ask your question and please state your company name.
David Adelman - Morgan Stanley
Hi. Good morning everyone.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Good morning, David.
Aaron Hoffmann - Vice President, Investor Relations
Good morning, David.
David Adelman - Morgan Stanley
I wanted to ask three financial questions. First tale on the working capital improvement in the quarter, obviously, in any quarter or any month there are things you can do on a temporary basis to improve the cash generation and reduce working capital. Do you think you ended the year on a sustainable basis and that you will have ordinary working capital trends in the first quarter?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
I would expect positive trend. But I think, the level that we had in the fourth quarter you can just not just kind of multiple that.
David Adelman - Morgan Stanley
Sure. Okay and then secondly tale on the $200,000 million cash taxes that you will incur on the repatriation. Why weren't those funds brought back or why wasn't borrowing put in place to bring those funds back during that window of time when there was very low repatriation cash taxation?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
First of all David, the 200 million is incremental, it's not the absolute amount related to repatriation. Secondly we brought back $1 billion almost I think 950 during that window which was the maximum that we under those rules, could bring back and we did it to the full extent.
David Adelman - Morgan Stanley
Okay. And then lastly in terms of retiring some of the debt that comes during the coming fiscal year, or repaying half of it, why not just maintain the current level of indebtedness and more broadly can you speak to what you think is the appropriate capital structure for the company?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Why not in full because we have a plan in place like Brenda explained earlier that calls for a certain level of share repurchase, dividends, capital commitments, etcetera. And that ends up in that type of capital structure. Now I have said before, we kind of blip from our savings account at the moment and that is the savings account was filled by proceeds from the divestitures that money is actually coming down quite quickly in '08 and also in '09. So I don't take a look just at '08, I take a long term look and say where are we going to end up and then I think we are going to end up in what we are at the moment, a BBB plus company rated... credit rating is I think appropriate for this type of company at this point in time because that leaves us with flexibility to take any actions we want and are appropriately leveraged while when this has all played out. And I think people have talked before, why don't you lever up? I think we are levered at the right moment, at the right level and that is specifically if you look at the gross debt level and not at the net debt because I have to remind everybody that our cash... the major part of our cash is still overseas and comes with a cost to the U.S.
David Adelman - Morgan Stanley
All right. Okay, thank you.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Welcome.
Operator
Thank you. Eric Larson, you may ask you question and please state your company name.
Eric Larson - Piper Jaffray
Yes, Piper Jaffray. Good morning, everyone.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Hi Eric.
Eric Larson - Piper Jaffray
Just that... it's a sort of a follow-on to Andrew's question but it gets to the price mix issue on. I don't know where you ended the year in your mix of MAP spending, consumer spending versus just fewer price promotion and obviously with a lot of new product introductions that you have, you do need significant price promotion, attractive prices to create trial etcetera but where is that percentage today? Where is it going? And I think Brenda given your mix of businesses because every food business has a different ratio on this, what would be... if you could have in your wishes that what would be the optimum mix of consumer spending versus just a fewer price incentives?
Brenda C. Barnes - Chairman and Chief Executive Officer
First of all, the price in promotion and trade promotion is not in that MAP number, I am sure you know that.
Eric Larson - Piper Jaffray
Right.
Brenda C. Barnes - Chairman and Chief Executive Officer
That's taken out to our net, net sales number. So everything that shows up in that MAP number has do with consumer effective spending.
Eric Larson - Piper Jaffray
Correct, correct.
Brenda C. Barnes - Chairman and Chief Executive Officer
And I happen to believe that on pricing, it's a net price that matters, you can make trade spending any number you want depending on how you set the base rate and the discount. It's really the net number that matters and how you allocate that appropriately. Well it's just, I don't think of it as a mix between consumer spend and trade spend, I think it's the right price for the consumer for the right product and the right time of the year at the right display activity coupled with a consumer spend level that's relative to the marketplace and in the absolute drives enough awareness, that's the visibility of the product to try on that we reckon.
Eric Larson - Piper Jaffray
Okay. So you basically try to manage the net price issue?
Brenda C. Barnes - Chairman and Chief Executive Officer
Yes, and I ... to me it's... I don't even think of it as a spend as much as I do, the right price.
Eric Larson - Piper Jaffray
Okay. Thank you.
Brenda C. Barnes - Chairman and Chief Executive Officer
You'rewelcome.
Operator
Thank you. We have follow-up question from Eric Katzman at Deutsche Bank. Your line is open.
Eric Katzman - Deutsche Bank
Hi, thanks for taking the follow up. I just... I guess still I just kind of wanted to go through kind of three lines of the cash flow statement, so just so I can kind of understand the progress here over the last like '06, '07 and '08 or maybe if you have '07 then that's not, but the foreign tax repatriation... how much... so that's going to be 200 million in '08. How much was that in '07 or was there any?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Again Eric, it's $200 million more than in '07 and I have not passed out how much cash taxes we paid because we make, we have income in several jurisdictions around the world and how much more we pay because of repatriation. I've not given that number but I've just said that '08 is $200 million more on the repatriation only.
Aaron Hoffmann - Vice President, Investor Relations
And I believe that it is $250 million more in '07 versus '06.
Eric Katzman - Deutsche Bank
Great.
Aaron Hoffmann - Vice President, Investor Relations
But ifyou want to just say '06 is x, '08 is x plus $150 million.
Eric Katzman - Deutsche Bank
Got you. And then the pension contribution. How much has... has that been?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Give me one second because I don't know if I have it now, I haven't, one second.
Eric Katzman - Deutsche Bank
Yes.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
One second, okay, I don't have it.
Eric Katzman - Deutsche Bank
I think you were saying that, that was going to be in '07 or I think you were saying it was going to be about a $200 million contribution?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Yes, that is correct. I think it's actually $196 million, if I remember right. I just can't find my documents.
Eric Katzman - Deutsche Bank
Okay. And is that going to be up again... is that going to be use of cash in '08 or is that fully funded?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
That was not fully funded. Although, we expect our under funding to come down but we have to wait till we can publish the 10-K to give you that number. But our pension cash contributions are around the same number in '08 as they were in '07. Expansion costs will probably come down somewhat.
Eric Katzman - Deutsche Bank
Okay. And then lastly the cash cost of the restructuring?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
I don't have that number for you. But if you can look it up on the... I will share that with you during Meet the Management as well. But as I said the total cost of the transformation is 970 and the majority of that I think is cash cost. But, we will be more precise when we are at Meet the Management.
Eric Katzman - Deutsche Bank
Okay, all right. Thank you.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
You're welcome.
Operator
Thank you. [Operator Instructions]. Our next question is a follow up question from Chris Growe of A.G. Edwards. Your line is open.
Christopher Growe - A. G. Edwards & Sons, Inc.
Thank you and also thanks for taking the follow up. I wondered if I could ask just a question on the cash flow statement. You referred to some working capital benefits in the fourth quarter that was I guess, sort of call it kind of a point of controversy in the third quarter. So, could you give us some I guess some rough approximation of either how much working capital improved or maybe even the receivable and payable and inventory balances?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
I cannot give you the specific numbers. You will see them when we publish the 10-K in two weeks. But what I have said is that the improvement from as well receivables, inventory as payables and more from payables than from the other ones because of the help of systems implementation that allows us to manage our payables closer to the agreed payment terms than we had the opportunity before.
Christopher Growe - A. G. Edwards & Sons, Inc.
And can you give a number even like total working capital improvement or?
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
No. I can't.
Christopher Growe - A. G. Edwards & Sons, Inc.
Okay. And then just a last kind of follow-up question and that's on... you have like your guidance for the year in your guidance chart there in the release. I am just curious how we should be looking at $1.31 year or versus what the year let's say at a $1.36 roughly. Is that a function of hedging of some sort or...
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Not at all. It is... when we made the plan we planned it at 131 which just happen to be exactly the same as... well almost exactly the same as '07. So, to answer your next question, is the dollar-euro relation will little stay at 136 we would see a benefit from currency in our financial statements as well.
Christopher Growe - A. G. Edwards & Sons, Inc.
Okay. Thank you.
L.M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer
Welcome.
Operator
Thank you. At this time I am showing no further questions. I would like to turn the call back over to the presenters for any closing comments.
Aaron Hoffmann - Vice President, Investor Relations
Thank you all very much for joining us today. We appreciate your time and I will be available for the rest of the day, available as always to take your questions and help anybody out with anything they need and thanks very much.
Operator
: Thank you. This concludes today's conference. Thank you for participating. You may disconnect at this time.
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