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Executives

Melissa Napier - Senior Vice President of Investor Relations

Jan Bennink - Executive Chairman and Member of Finance Committee

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

Marcel H. M. Smits - Chief Executive Officer

Unknown Executive -

Analysts

Jason English - Goldman Sachs Group Inc., Research Division

Andrew Lazar - Barclays Capital, Research Division

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

Robert Dickerson - Consumer Edge Research, LLC

Eric R. Katzman - Deutsche Bank AG, Research Division

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

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

Robert Moskow - Crédit Suisse AG, Research Division

Karel Zoete - Rabobank Equity Research

Sara Lee (SLE) Q3 2012 Earnings Call May 3, 2012 10:00 AM ET

Operator

Good morning, and welcome to Sara Lee's Third 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, Wendy, and good morning to everyone. I'm joined today by Jan Bennink, Marcel Smits and Mark Garvey, who will be discussing our third quarter results. Our results were released at 6:30 this morning. You can find that release along with the slides that we'll be reviewing today posted to our website. Our third quarter Form 10-Q is expected to be filed on or before May 10.

Before I will turn the call over to Jan, who will walk us through the agenda and start talking about pure play progress, I'd like to just refer you, as usual, to the forward-looking statements that are currently displayed and remind you that during today's call, we may make forward-looking statements about future operations, and actual results may differ from those expressed or implied in these statements. All explanations of non-GAAP financial measures are included in our release as well as at the slides in the back of the deck.

We'll take your questions after management's prepared remarks. To ensure adequate time is available, we request that you limit yourself to one question. Jan?

Jan Bennink

Thank you, Melissa. Good morning, ladies and gentlemen. Welcome to the Q3 earnings announcement of Sara Lee. I think this is a very special one as this is the last earnings call at Sara Lee Corp. And I think as of the next time, we'll have 2 separate companies performing the call.

Before going to the presentation, let me take you through the order of the call. First of all, I'll start with the pure play progress, followed by Mark taking you through the financials, and then we take a deep dive into the 2 companies. Coffee and Tea will be taken by myself, and then Marcel will take you through the Meat. And then we go into the Q&A as Melissa just said.

Let me then take you through the progress of pure play. I mean the presentation is getting shorter and shorter as we're nearing the end. So the key milestones, what have we done in this quarter? The IRS Private Letter Ruling, it's done, signed, sealed, delivered, very good. I mean the results were in line with expectations and somewhat above. The debt tender offers and redemption are completed, which is done in March. The D.E Master Blenders Investor Day, happening on March 13 and 14. Also there I think that's been completed, the strategy given and the guidance given.

The SEC review, we filed the F1 on the 1st of March. I can say that all the SEC reviews and the process is going completely according to our plans, and we feel very comfortable. The debt raise for the Master Blenders, also that one is going according to plan, and we'll hope to announce something in the next couple of weeks in terms of the results of the debt raise.

So what are the critical days from now until -- as I -- as you've seen in the press release, June 30, which will be the day of the spin, so that as of July 1, both of the companies will be up and running? An important thing still to be done is the announcement of the boards. That will happen in the next couple of weeks. We will announce who will be in the boards of the Sara Lee current board members, as well as we will announce some new board members who will join the -- both of the companies.

Investor meetings are going on, the Master Blenders on the road in May and June. And MeatCo, as you have hopefully gotten the invitation, will have its Investor Day by June 5. And then the following road shows are happening in June.

The special dividend will occur immediately after the spinoff. And the spin there, as I said before, we are saying the end of June, but to be very specific, June 30 is the day we're all aiming for, so that over the weekend, July 1, we're up and running. So that's all about the spinoff. We feel very comfortable. I think we're really making sure that things are happening the way we want them to happen. And let me then take you through the Chief -- to Mark, who will take you through the financials. Mark?

Mark A. Garvey

Thank you, Jan. Good morning to everyone on the call. I'd like to start by reviewing some key financial highlights for the quarter. Overall, results were mixed. Adjusted net sales for continuing operations grew by 3%. In the North American meat businesses, we're seeing a stabilization of volume trends. Overall, volumes were almost flat for the quarter compared to declines in the previous 2 quarters. In Coffee and Tea, we continue to see strong pricing and positive mix as sales of single-serve capsules do well. However, this positive trend was partially offset by lower volumes.

Adjusted operating income from continuing operations decreased 5% for the quarter and was up 6% year-to-date. A number of factors impacted our results. Volume softness in both businesses has led to some manufacturing inefficiencies, which we are working to mitigate. In addition, both businesses are managing through stranded costs and will continue to do so in fiscal '13. Finally, we had a negative commodity mark-to-market result in the quarter, which led to a variance of $18 million compared to the same quarter last year.

Adjusted earnings per share for continuing operations was down $0.02 to $0.20 for the quarter. Year-to-date, earnings per share was up $0.10 to $0.65.

Looking ahead to the full year, we are beginning to see commodity costs decline in the Coffee and Tea business and stabilize in our meat business. This should have some beneficial impact on our fourth quarter results, particularly for Coffee and Tea, and gives us confidence that we will end up within our existing guidance ranges. To be more precise, we expect adjusted earnings per share to fall in the middle of our guidance range of $0.89 to $0.95, which we provided at the beginning of this fiscal year. And as you'll see later, our earnings-per-share expectation has benefited from a favorable expectations on interest expense and tax costs for the year. For net sales and adjusted operating income, we expect actual results to be at the low end of the current guidance ranges.

Now we would like to look at our results in some more detail. On this slide, you can see a summary of our third quarter and first 9-month performance for continuing operations. As I mentioned, adjusted net sales grew by 3% for the quarter and 4.9% year-to-date. We did see price increases exceeding commodity cost increases from both businesses in the quarter, the first quarter since the third quarter of fiscal '10, in fact, that we have had pricing ahead of commodities in all segments. However, gross margins declined as the benefit of pricing increases outpacing commodity costs were offset by manufacturing inefficiencies in both businesses, as well as the impact of discounts to move aged inventory in our U.S. meats business.

MAP spend, excluding acquisitions and currency, was down for the quarter, with increased MAP at meats and lower MAP at Coffee and Tea. For the year-to-date, MAP is up 3.2.%.

Selling, general and administrative costs, excluding MAP, were down 7% in the quarter, primarily due to lower costs in Meat Co. and corporate, partially offset by increased Coffee and Tea costs because of stranded overheads remaining following the household and body care and international bakery dispositions. In addition, as we approach the spin, both businesses are building their stand-alone corporate functions, and these costs are included in their segment results.

Overall, adjusted operating income was down 4.7% for the quarter, but up 6.3% year-to-date. The adjusted operating margin was 10.5% for the quarter and 10.9% for the first 9 months.

Turning to Coffee and Tea. As you can see here, adjusted net sales were up almost 5% for the quarter, a lower increase than prior quarters as price increases began to lap last year's increases. We saw good mix results for the quarter with capsules performing well. These strong pricing and mix results were offset, however, by lower volumes, some of which are nonrecurring in nature, which Jan will discuss later, and also we had lower green coffee sales.

MAP was down in the quarter as funds were partially reallocated to support volume actions in selected smaller markets and to foster upcoming innovations, but MAP was up 7.1% year-to-date. SG&A costs were up in coffee, primarily due to stranded costs; increased spending behind innovations, some of which were shown at the recent Investor Day; and the buildup of stand-alone costs for the new business. Overall, adjusted operating income was down 8.7% for the quarter, but up 2.9% year-to-date.

The primary drivers of operating income for the third quarter and year-to-date for Coffee and Tea are outlined on this slide. As you can see, price increases of $84 million exceeded commodity cost increases to $58 million for the quarter, a trend which you should see continue into the fourth quarter. MAP was $9 million lower and SG&A costs were $17 million higher, as just explained.

Now let me turn to the North American meats financials, which include the North American Retail and Foodservice segments. Adjusted net sales rose 1.3% for the quarter and 0.6% year-to-date. We have seen improving volume trends over this year, particularly in our Meat categories, whereas our bakery categories remain soft. Gross margins were impacted by discounts on the sale of aged inventories, as well as the impact of lower volumes leading to manufacturing inefficiencies.

MAP spending increased 29% for the quarter behind new product introductions and the Aidells business. Overall, adjusted operating segment income fell by 7.1% for the quarter due to softer gross margin results, higher MAP, partially offset by reduced selling, general and administrative costs.

You can see from this slide that the pricing of the North American business exceeded commodity costs for the quarter, although there's still a deficit year-to-date. SG&A costs improved by $15 million in the quarter and by $41 million year-to-date as a result of cost-savings initiatives are coming through. These savings are helping to offset stranded costs and the buildup of stand-alone costs in the North American segments this fiscal year. Overall, volume and mix were negative for the quarter, with more positive trends in our meat categories being offset by weaker results in our bakery categories. In addition, increased turkey commodity sales and discounts on aged inventory impacted gross margins this quarter.

We continue to benefit from reduced corporate costs for the quarter, although these were partially offset by unfavorable commodity mark-to-market results. Total corporate costs, including amortization and commodity mark-to-market, fell by $10 million this quarter.

General corporate expenses have come down significantly due to corporate headcount reductions, lower pension and casualty insurance costs, and lower overhead expenses relating to sold companies. Additionally, as you would expect with the spin now less than 2 months away, the operating segments are beginning to build their corporate structures, so you were also seeing some migration of costs from the corporate center to the business segments.

Commodity mark-to-market results were $10 million negative for the quarter, primarily due to declining coffee costs, which compares to an $8-million positive over the same quarter last year. This represents a negative swing of $18 million in our operating profit versus last year's third quarter. We now expect that total corporate costs for the year, including commodity mark-to-market and amortization of trademarks, will be approximately $70 million to $80 million.

As we have discussed, rising commodity costs have been a major factor in our results in recent years. And the good news is that we are seeing some improving trends in this area. In particular, our Arabica and Robusta prices are declining, and the North American meats business is also seeing some stabilization in their basket of commodities.

On this slide, you can see the commodity inflation we have absorbed in fiscal '11 and in the first 3 quarters of fiscal '12, adding to about $1 billion of cost headwind. Based on the current direction of our more significant commodity inputs, we are currently not anticipating any significant commodity inflation in Q4, which will benefit our last quarter results. We expect that these trends, should they continue, will also benefit both businesses in fiscal '13, in particular the Coffee and Tea business.

In the third quarter, we incurred $131 million of significant items, with the most significant charges related to the termination of a prior Philips agreement in connection with the acquisition of the Senseo trademark. Secondly, similar to our first and second quarters, we incurred spin-related advisory costs, which we have included in significant items. These costs, including accounting and tax -- include accounting and tax-related costs and legal compliance and consulting costs associated with establishing the 2 new companies. We now estimate that full year significant items will be approximately $550 million, based on plans approved to date, and that 60% of the items recorded in significant items will generate a positive return for the future new companies, such as the benefits from the acquisition of Senseo, adjusting IT contracts, streamlining functional areas and establishing the new capital structures for both companies. We estimate the after-tax costs of these significant items would be approximately $350 million.

In the fourth quarter and following the spin, we expect to release approximately $700 million in deferred tax liabilities related to the repatriation of foreign earnings. This amount will be included in significant items in the fourth quarter, but has not been included in the $550-million significant item expense estimate for the year.

Adjusted earnings per share was $0.20 for the third quarter, down $0.02 from the same quarter a year ago, primarily due to reduced adjusted operating income. Year-to-date, earnings per share were $0.65, an increase of 18%, primarily due to improved adjusted operating income, lower net interest expense and a reduced share count.

This slide summarizes the reported to adjusted earnings per share for the third quarter and year-to-date. The largest impact for the quarter came from significant items, which I just discussed, impacting earnings per share by $0.15.

Now I would like to turn to working capital, provide you with an overview of how we are looking at trade working capital for Coffee and Tea and MeatCo. For the third quarter, trade working capital at Coffee and Tea was 21% of net sales, a 19-basis-point increase from the prior year. Year-to-date, average working capital has increased by 245 basis points to 20.8%. As you can see, this has been caused primarily by inventory, which has been impacted by commodity cost increases. Coffee and Tea is developing plans to reduce trade working capital, as a percentage of sales, to 10% by 2015 with a future goal of 5%.

On the next slide, you can see the same metrics for MeatCo, where the results of focused working capital management are beginning to bear fruit. In North America, trade working capital is 7.7% of net sales for the quarter, showing improvement of 106 basis points from fiscal '11, mostly driven by improvements in payables.

Now I would like to give you an update on overall cash flow and our anticipated year-end cash and debt balances. In the third quarter, cash flow from operations was an outflow of $173 million compared to an inflow of $59 million last year. The decrease was primarily due to higher cash payments for significant items, which included $73 million of termination payments paid to Philips. In addition, there were refundable sales tax payments of $43 million, primarily related to the Senseo trademark acquisition. These refundable taxes will ultimately come back to Coffee and Tea.

For the year-to-date, cash from operations was an outflow of $140 million, a reduction from an inflow of $292 million in fiscal '11. The year-to-date decrease is primarily attributed to a significant decline in cash generated from discontinued operations, as divestitures were completed; higher cash payments for significant items; a onetime EUR 60 million payment to the Netherland's pension plan at the first quarter; and the refundable tax payments I just discussed. As we planned for the new capital structures of meats and coffee, we completed the purchase of $970 million of outstanding notes just after the quarter end. This consisted of redemption of $500 million of 2013 notes and the acceptance of tenders amounting to $470 million related to the 2020 and 2022 notes. The remaining debt on MeatCo of approximately $940 million will have a gross blended interest rate of approximately 4.75% for fiscal 2013.

We are currently in the process of raising debt for Coffee and Tea, and we expect to announce the results of this process very shortly. We continue to expect both companies to have solid investment-grade credit ratings following the spin.

Finally, I would like to close with an overview of our guidance for the year. With 8 weeks to go to the end of the year, we can provide a more refined view of where we expect the year to end. As mentioned earlier, adjusted earnings per share is expected to fall in the middle of the previously communicated guidance range of $0.89 to $0.95. We expect net sales and adjusted operating income for the year to come in at the low end of our previously communicated guidance ranges of $7.9 billion to $8.15 billion for net sales and $875 million to $930 million for adjusted operating income. Primarily due to the early redemption of debt, we expect interest expense to be approximately $65 million for the year, which is down from our previous guidance of $80 million. Additionally, we now estimate the tax rate will be approximately 33% for the year.

We are also reiterating our year-end cash and debt balance guidance. We expect year-end cash and debt balances to be approximately $300 million and $1.79 billion, respectively, for the combined companies. We have maintained the average dollar/euro rate at $1.35 for the full year. You may recall that when we initially issued our guidance last August, we had assumed a dollar/euro rate of $1.44 for the year, and we have not adjusted guidance for the currency decline during the year. This was an approximate EPS headwind of $0.04, which we have absorbed.

So overall, albeit a mixed quarter, we are pleased that we will deliver results within our guidance range. We are encouraged to see positive trends in commodity prices, and we're track to execute the spin and to set both new businesses up for a successful future.

With that, let me hand it over to Jan to provide you with some more insights on the Coffee and Tea business.

Jan Bennink

Thank you very much, Mark. Let's now move over to the Coffee and Tea company, or D.E Master Blenders as it will be called as of July 1. Before going into the numbers, what I would like to say, let's take the key messages.

What are the messages we really -- what happened in this quarter? I think first and foremost, very important that they continue -- we see continued good performance of our branded business in all business sectors, be it in Western Europe, be it rest of the world and out of home. What do I mean with branded business? The branded business is our business, excluding the exports, which I will come back to in a minute.

The underlying margins, and excluding currency mark-to-market, are improving. Now currency mark-to-market is something which we've announced that we will take out of the operating line as of July 1, because they can be positive, they can be negative. And I think we've had some favorable things in the first quarters. They're negative at the moment. So I think if you look at the underlying margins, they see a very positive trend and I think we'll come back to that later. But I think that's the key of the story.

The key Western European countries continue to perform well. I think that is encouraging news also because Western Europe, as we all know, is not in the most economically favorable climates. But I think our key countries being Holland, France and Spain, which comprise about 70% to 80% of our Western European business, are doing very well.

Innovation is coming on stream. We launched the premium ranged, as we call it and kind of, we call it almost a naked brick [ph] in our jargon here, is doing very well, although one word doesn't make a summer. In the results -- initial results are positive. In Q4, we'll continue with a new packaging and extensional line -- line extension in the capsules. Also, we will relaunch completely in terms of convenience and in terms of packaging our important tea range in Spain. And then the bigger launches of Senseo, Senseo brand and the launch of Sarista are continuing as planned in the summer as well as Q1, Q2 for this year. So everything is on track to be delivering as announced in the Investor Day.

The positive effect on the decreasing raw materials, unfortunately, doesn't come through in Q3 because as you all know, we've done some forward buying. And I think that's a principle which we prefer also going forward. So actually, the results of the lower coffee prices, which you've all seen and which you all follow probably if you look at the company day-by-day, are not reflected in Q3 but will, as Mark already said, being reflected -- will be reflected in Q4. And going forward, they will also be -- get a creative -- create a good tailwind as well for Q1 as well as for, hopefully, the rest of fiscal '13.

Our SG&A costs have increased, Mark already alluded to it, due to the strength of costs of our sale of our bakery in Spain as well as in France. We have onetime investment costs. I mean the onetime probably sounds a bit weird, but the onetime investment costs are costs which come from ramping up very fast our innovation pipeline. This is not something which will recur -- occur all the time, but it's like an additional expense we've had in the last 3 months.

And not mentioned on the slide, but the thing also here and there are some additional costs, of course, with the ramp-up of our stand-alone cost. All these costs, I can assure you, are under severe kind of -- we're looking at it severely to making sure that these costs will go out as quickly as they can potentially can. I won't promise that they will go to 0, but we'll minimize them as quickly as we can.

The quarterly sales results are dampened by the decision to reduce our green coffee exports. If you really look at our branded business, the growth of the branded business has been 8.6%, while we report a 4.6%. Why did we kind of decide to go out of the export business? And again, we've announced it in the Investor Day. It's a low-margin business, and it carries extremely high inventories. So if you look at the total business model of the exports, it is actually a loss-making proposition. So that's why we decided to reduce them, not completely to 0, but reduce them to a minimum level as possible, and that goes very fast. I'll come back to the numbers later.

There's a weaker performance in selected small countries. We focused a lot in the last 6 months, seeing all the change we've had, on the bigger countries, where we delivered. The smaller countries had some pressure on pricing, and I would specifically mention one competitor, CIBO, who has done some very aggressive pricing, both in Germany as well as in Eastern Europe, which kind of reduced our volumes in the countries where we play together. We've put actions in place to make sure that we get the right balance between margins on one hand and the volumes in the other.

And last but not least, I don't want to put this as an excuse, but quarter 3 has been a period of transition. 4 out of the 9 ExCo members are new. I mean, not to mention CEO, CFO, the COO and operations and the Western European regional head, who will actually -- or actually started on Monday. So a lot of changes happening, no excuses. But that's basically what has been happening in Q3.

Let me now take you through some more specific numbers, going to the next page. If you look at it, what I said, the good sales of the branded business. I mean here you see that the export, which didn't have a real effect in Q1 and Q2, because they were more or less aligned with the branded business in Q3 after the decision to let them go and to reduce them, you see a 36% decline in export. And as a result, you see an 8.2% increase in our branded business. I think that's the underlying growth business, which is important.

Going to the next page, where you will see the growth split by the 3 segments as we've identified them -- Western Europe, rest of the world and Out-of-Home -- with Western Europe being the hero at 10.5% growth, the Retail business growing at 8.4%, and Out-of-Home stabilizing kind of at 2%, 3%, 4% as we've seen during the quarters. So getting us to the 8.2%.

How is the volume/mix buildup? As you see on the next page, you see -- and Mark said it before. You see a beautiful increase in mix. I think that's what we're aiming for also going forward. The whole game is about premium-ization of our products, making sure that we sell more higher-margin products. And I think the mix effect makes that -- makes it very clear. We're talking about premium roast and ground business. We're talking about the capsules. We're talking about the Senseo pods. So that, I think, at least, shows as results.

Price, as you can expect, is an effect which is lessening. We started to increase the prices aggressively as of the beginning of calendar year '11, so here of course, you'll see a lessening effect. And volumes remain at a negative level at 7.3% versus 6.5% in Q2.

Why do the volumes decline 7.3%? I think if you go to the next page, we'll have a little explanation. Also here, we've mentioned clearly the 2 before: the French private label and the Thai flooding. If you take those 2 elements out, the total underlying business is declining by 3.9%.

Now the question, which I've got a lot on the road is, when are these effects going out? So when are we seeing the real results? So if you go to the next page, you'll see that the French private label, we've been taking that into consideration as of the summer of last year. So as of Q1 of the new fiscal, that effect of French private label is out of the system. So that's good for comparison reason.

The Thai factory is up and running again. We started that somewhere in March. We've started the campaign to get our brand back on its feet. And actually, we do that in April. And we expect it will last a little bit, but probably 3 quarters maximum to get us back to where we were. And hopefully, we get even a bit better because we're going to put a lot more focus on our Asian country. Thailand has been performing very well and where we have -- we see big opportunities.

Now, the 3.9%, as I said before a little bit in my keynotes, of decline in smaller countries. That is, the big countries are doing well. Some smaller countries, due to price pressure, are performing less. They're very clearly identified. There's probably 3 countries which contribute most of this to this volume loss, and we've -- we're putting actions in place to make sure that we get the right balance between margins in one hand and making sure that the volume losses will be reduced to 0. A similar principle as we've applied in meats over the last 6 to 9 months. So even there is something in volume growth recovery. That's what we expect. And hopefully, the volume of a minus 7.9%, we are working hard to get that back to a neutralizing 0.

Now we've talked about the underlying margins on the currency mark-to-market, so it's good to see if you strip that out, as we will do as of next year, what has been the progress in our underlying margins of our business. Now you see that for Q4, we had an 11.7% x mark-to-market. You see the numbers of the -- the reported numbers below. So it's 11.7%, 12.1%, 13.6% and 14.7% for this quarter. So if you look at this, I think actually our underlying business is performing well. Our margins are increasing, and that's exactly where we're aiming at, making sure that our business get back to, as we said, historical levels.

So key countries. Western Europe, we've mentioned before. We've taken out Holland, France and Spain as the one who we should follow-up on. What are the market shares doing? We've had, in Holland very positive news. I mean in the first quarter, we've seen a 55.4% market share after -- it's almost a percentage points pickup in the first quarter. We expect this to continue based on what we're doing in Holland. We're putting a lot of focus on it. Also, the premium launch, we'll see starting its effect in the next quarter, so that's not reflected in this 55.4%. So overall, very happy with Holland back to the high levels where we're used to.

France, our jewel. What can I say more than this chart? I think it is -- if you would like to design the chart, it is probably an ideal way of doing it. 25.9% market share versus 24.7% in the second half of last year, so continue a very positive sales in France.

Spain, and we made a huge jump in the second half of last year. We're able to hold on to the high-levels also there. We see very positive growth in terms of volume, in terms of market share. And I'd say in one of Western Euro's most depressed countries, we feel actually pretty happy.

Now here during Investor Day, I got a lot of people asking, disruption in ground business, this thing which are proposing, how is it doing? Because you've been in the market for 4 weeks, and kind of, is it doing well? Is it doing not so well? Management wouldn't like me to show this yet, but I think we owe it to you to see that how are the initial results. And I'm stressing that our initial results is 10 weeks in the market. How are we doing? And you see that the premium business is up 7%. The base is up 3%, and total roast and ground is up 3% since launch.

And I think those are very positive news you see. This is with the same promoted volume as we had in the last year, so there's no extra promotion. There's just similar comparable numbers. You see that actually customers like change. They want to have change. They want to see new things. And after 40 years of doing nothing, it is very beautiful to see that they react to this.

Also, our shares, we've seen some indication of our premium shares. The real shares will come out a little bit later, but they're close to doubling of the premium segment. So very good results, but keep in mind, it's 10 weeks in the game, but very encouraging.

In Q4, you will see more. We'll see a launch of the new capsules in packaging and product extension in Q4. The same thing as I said before, you'll see a complete relaunch of our tea range, and this is high margin, an important part of the Spanish business of the Hornimans brand, extending of the lines, better and more convenient packaging and big extension in terms of flavors. And the market in tea is growing in Spain. So here also, a very big relaunch in one of our key Western European countries. And this is all preparing ourselves for the bigger tornado in summer and Q2 of next year, Q1, Q2.

Let me stop for a second on raw materials. I think we've talked a lot about raw materials. I mean, you've seen the magnificent chart of Mark where we see a $1 billion of headwind we had in terms of raw materials over the last 2 years. I think that is hopefully and luckily, seeing whatever we can see, going the other way. The favorable raw materials are starting to creep in, in Q4, getting into Q1. And then hopefully, if prices will continue to go as the way we're seeing it now, we will have a significant tailwind in the full fiscal year next, which is very good news and very encouraging on the time of the spin.

Now lots of people have asked prices. What are you doing because you see market prices of $1.85, $1.80? That's not Arabica. That's Robusta. So here what we've done is given you an overview of what the market average prices have been over the first 9 months. What you see here on the chart, $2.42 for Arabic and Robusta $1.02. In -- our prices in the first 3 quarters have been $2.63 and $1.14, so we've been actually buying higher than the market. I mean sometimes you win; sometimes you lose.

And for Q4 and Q1, we have now blocked all the -- all our purchases until October. And here you see the locked-in prices from now until October: $2.26 for Arabica and $1.04 for Robusta. So you can see here the pricing reflected for the next 7 months to come. I have to note that this is -- these are numbers, excluding Brazil, because it's a bit of a specific market, so -- but at least it gives you an idea of what's in the numbers, what can you expect and can give a bit more transparency in terms of where we are in terms of our markets.

Now before handing it over to Marcel, what is the business working on? What are we making sure is still delivered? The small countries, who have been dragging us down a bit in volume. They're -- there's very -- there's an active plan to make sure that the country -- countries are going back on track and getting the attention they need.

Fixed costs. I mean you've seen the SG&A in this quarter. I mean, I cannot say that there's -- you cannot put more attention to the fixed cost as the team is currently doing. They really want to go after them and making sure that the targets, which you have heard from Michel, as he's given them very clearly, that they will be reached. And I hope they will do slightly better, but let's make sure that they reach them.

The working capital at the atrocious level of 21% for this quarter. That is -- you all know my targets and 5% is what I've mentioned. And I wouldn't mention the other number, which is even better. But also there we're working on -- we will be helped a lot by eliminating our export sales, because export sales is in our best estimates representing even up to 5% of our working capital. So reducing that inventory level and reducing exports will help out a lot to get working capital down fast.

Innovations to market. I mean you've seen the effects, and this is very initial, and I say it again, of our brick [ph]. Innovations are critical to the market. They -- we need to innovate. We need to change. We need to make sure that the promise Michel made, that no SKU would be unturned in the 24 months, will really happen. It is a stretch for the organization, but we will make it work. And now with a new management board in place, I think that's something where they put a lot of focus on.

The organization has to be focused. It has to make -- we have to make sure that it works well. Will it be ups and downs? Absolutely. It won't be perfect. There will be some flaws coming in. And as we said, it is a transitional year coming forward, but it's -- I feel pretty comfortable that all the promises made on March 13, 14 will be met.

So having said this, and we'll meet -- we'll put it over to Marcel, who will take you through the MeatCo.

Marcel H. M. Smits

Thank you, Jan, and good morning to everybody on the call. Now before I start, let me just note one more time that we have an Investor Day coming up with our new CEO, Sean Connolly, on June 5. And I'm very pleased to see the enthusiasm and experience he brings to the party, and therefore, I'm not going to steal his thunder. So let me just keep this short and crisp with a quick update.

Now you'll recall from our earlier earnings calls that we've been working hard to stabilize our volume trends while protecting profitability. And in the early part of fiscal 2012, we came to the conclusion that we needed to dial back on pricing selectively in order to protect our competitive position. And fortunately, we were concurrently working through a large cost reduction, which allowed us to be more competitive without jeopardizing too much of our bottom line. So this is where we are on the slide.

The volume in the first quarter -- in the quarter showed another sequential improvement. We were close to flat, aided a bit by the timing of the Easter holiday, but an improvement nevertheless. Jimmy Dean and Aidells continue to be our best performers, and we've had some good innovation coming through, in particular in Jimmy Dean, Aidells, Ball Park, Sara Lee Bakery and Hillshire. And in the quarter, we were steadily on air to support innovations, so we will do the same in the fourth quarter. Ball Park will be on air for the first time in a couple of years.

One of the many things we changed in fiscal '12 was a move of some of our smaller customers through a broker. And as you will recall, we had some teething problems as we went through the transition. But we're making good progress in getting them sorted. And then last but not least, our efforts to reduce costs are helping to protect the bottom line.

That said, there's further work to be done. In lunchmeat, we are still challenged. And frankly, we've been out-innovated. Management of the business is very focused on the entire spectrum of product and packaging innovation, as well as a refresh of the brand positioning. And in the meantime, we're shoring up our position with tactical pricing, but that's not the long-term solution, but more of that to come on the Investor Day.

The bakery business also needs further work. It's a business, especially on the Foodservice side, which is the bigger part by the way, where we are pretty severely challenged by headwind from consumers forgoing their desserts on a large scale in efforts to cut expenses. On the Retail side, the issue is intense price competition. On both sides, the company has work to do.

The third element that impacted performance of the third quarter were efforts to move aging inventory. The income team -- or the incoming team has had a hard look at what volumes will be achieved realistically going forward and have cleared out what they believe was overhang. So that, in short, an overview of the key points for the quarter.

Now let us look into a bit more detail on the points that I've just made. Here are the volume trends. As you can see, we're making progress quarter-by-quarter, and that's in the red box: minus 5.7% in Q1, minus 3.5% in Q2 and minus 0.6% in Q3. We're up against a relatively soft prior year volumes in Q4, but at the same time, we will have to make up for the timing difference of Easter, which gives us -- or which gave us some tailwind in Q3.

We're working through the impact of increased commodity costs. And in Q3, we are still reporting a 4.3% price increase. Going forward, that figure will gradually decline assuming commodity costs hold at or below current levels. And it's not unrealistic to expect that as pricing pressures ease over time, that will help volume.

Now here are some of the growth figures for both Jimmy Dean and Aidells, for which we believe we have bragging rights. Jimmy Dean has held up wonderfully despite commodity cost increases and competitive challenges. Aidells is a great addition to our portfolio, and our business has learned valuable lessons from Aidells and is adopting elements of its management mix.

As we did in the last quarter, here we're making the split between our meats categories versus bakery categories in our total North American MeatCo operations. We're pleased with the sequential improvement in meat categories, where we were positive in the third quarter. In the red box, you can see the impact of the bakery categories. There's a sequential improvement, but we're far from satisfied.

So I just indicated, we're working through teething problems with the transfer of our smaller customer accounts through a broker. This will move -- or this move will give us a cost benefit, and eventually, we believe, also a volume benefit. The good news is that we're gradually improving as you can see in the red bar, but there's still work to do.

Now we had some interesting innovation coming through. Ball Park has launched frozen beef patties. That's a shortcut to making a perfect cheeseburger or a hamburger. It's an interesting proposition as an extension to our hotdog business, which we believe we can do under the Ball Park brand. We're supporting this initiative with TV advertising. Jimmy Dean, meanwhile, added new extensions to its very successful line of breakfast convenience products. Jimmy Dean, of course, is the textbook example of how to leverage what was once a fairly narrow franchise into a much broader offering.

As you can see here, we've made significant -- or we've made a significant step-down in SG&A expenses. It has caused some turmoil, but it has given us a really nice tailwind as you've already seen in Mark's slides. There's more to come, and the new team is busy identifying further opportunities, which we'll talk about on June 5. You will have noted that the business has corporate expenses to absorb next year and some additional stranded expenses, so more has to be done if we want to continue to invest behind our brands.

Now let me quickly wrap it up. The business is stabilizing, but more needs to be done. Lunchmeat and bakery categories are core focus areas. We hired a guy to run the business, who has a focus on innovation as a key business enabler. And I'm very confident that he and his team will do well. More work to be done on the cost side. Some benefits are already baked in as a result of the restructuring taken this year, but we will need to identify more opportunities. The new team will have a lot to talk about on June 5 and is looking forward to engaging you in that dialogue.

And with that, ladies and gentlemen, we're going to turn to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is from Jason English with Goldman Sachs.

Jason English - Goldman Sachs Group Inc., Research Division

A couple of quick ones. First on the meat side of the business. How much did the liquidation of some aging meat weigh on the bottom line for the business this quarter?

Jan Bennink

Ball Park, Jason, I -- it's a bit of a question as to what exactly you count in and what do you count out, but Ball Park is around $10 million-ish.

Jason English - Goldman Sachs Group Inc., Research Division

That's helpful. And then moving to coffee, the margins, particularly the gross margin line, you give us the MAP and the overhead, so we're backing into gross margin. It looks like it was down around 180 basis points or so against a pretty easy comp and some easing cost inflation. I know mark-to-market was a headwind, but in light of your exit of the export business, which presumably mixes up, what were the other contributors there that caused the shortfall?

Unknown Executive

Mark, do you have the...

Mark A. Garvey

I'd say mark-to-market was the clearly biggest headwind we had in there. There were also some manufacturing efficiencies going through our coffee business as well. And that did cause some of the margin weakness, Jason.

Jason English - Goldman Sachs Group Inc., Research Division

What sort of manufacturing efficiencies -- or inefficiencies?

Jan Bennink

Well, there's about a 5 million -- if you took the $10 million here, when you talk about EUR 5 million in coffee, it is just missing of very simple expectations and forecasting, buying in the wrong places. I mean it is a little bit of the ups and downs of changes in an organization, so it's about EUR 5 million there.

Jason English - Goldman Sachs Group Inc., Research Division

One thing that's surprising this quarter was the decline in MAP for the business, particularly in CoffeeCo. If we were to contemplate the amount of money you put into promo dollars, versus the amount of money, so it's a bit of a shell game here, if we combine the incremental promo dollar with the MAP, would it have been up year-on-year?

Jan Bennink

The MAP would have been up? Not in the quarter, no. Not in the quarter. It wouldn't have been up at all. No, no, no. It was planned to be down so there's nothing kind of extraordinary that we kind of all of a sudden have to do things, but it was planned to be down, to ramp up for Q4 more, and to make sure that we have the right balance because the innovations are coming in later. So that's -- it would not have been up. It would have been negative.

Jason English - Goldman Sachs Group Inc., Research Division

So it's an innovation timing thing?

Jan Bennink

Yes.

Marcel H. M. Smits

Jason, the -- on ad spending in Coffee and Tea, we're up accumulative for the year. In meat, I think we're now up accumulative for the year. And we're going to -- last year, we actually took a really big cut in the second half. We're not going to do that this year, so we have a sort of a steady state of MAP expenditure.

Operator

Our next question is from Andrew Lazar with Barclays Capital.

Andrew Lazar - Barclays Capital, Research Division

You talked a bit in Coffee about some of the aggressive pricing actions in some of the smaller markets for coffee. Can you talk a little bit about what you're seeing in some of the key Western European markets on that front on pricing as input costs ease? And then, Jan, you talked a little bit about a -- at one point potentially trying the best to hold onto that 70% of price. Is that still a relevant number? Or has that changed a bit?

Jan Bennink

I still stick with my 70%. I mean, it's like -- I'm following it up very closely because I've made that statement, and I've been mocked by it by you and lots of others. I mean would my 70% still hold? So far, yes. I mean if I take the bigger countries, I mean, we went through what has happened with our price differences between private labels and our key competitors. The price is going down because, of course, that's the big question. Price indices, and I'm talking here Nielsen data through March, show absolutely no increase in the gap between us and private labels. On the contrary, I'm seeing in some countries even a contrary indication where private labels are coming closer to us rather than going further away. So that's, I think, positive news. In France and Spain, we've held our prices completely. I mean that was in the negotiations. In Holland, we went down by 5% in pricing in order to enable some of our innovations going in faster. So in Holland, somewhat down. So far, the 70% still holds. I mean, I'll keep you posted if it doesn't work. But so far, we feel good in this, in the bigger countries where we put a lot of focus, on the smaller ones, where we haven't been focusing on a lot. And this is completely due to management changes. I mean I've been focusing on the big stuff. There you see Hungary. You see Germany. I mean for us, it's a smaller country, where I would say CIBO has been very, very aggressive on their pricing. And I think if you looked at the coffee announcements in the late -- CIBO has announced increased sales. I think they announced it 3, 4 days ago. And I think it is just because -- behind aggressive pricing. So at least, Europe and Germany.

Andrew Lazar - Barclays Capital, Research Division

That's very helpful. I appreciate it. And then just a quick follow-up would be the 14.7% or so underlying EBIT margin that you saw in coffee this quarter. Is that a run rate that we can sort of build off sequentially? Or is the run rate really closer maybe to 13.5% if we were to...

Marcel H. M. Smits

You have to be very careful with this 14.7% because I have to do it in the IFRS. And I think -- let's make sure that -- the best one to answer is Michel because he's been going through the IFRS conversion. There's no one else, so where this 14 -- because if you take the currency out, and there's another part, which is the pensions, so I think just -- we can come back to that, but I think it's better that Michel answer that question because he is all over this.

Andrew Lazar - Barclays Capital, Research Division

Sure. No problem there. What I was getting at is even not necessarily the absolute number. I guess more in the quarter you also benefited the margin by about, let's call it a point or so due to the lower MAP just in the quarter itself. I know it's gotten better sequentially, but part of that was the lower MAP. So I was just trying to get a sense of, are we at a -- whether it's 14.7% or not, as you -- as MAP goes up ultimately...

Jan Bennink

There's a lot of elements in working in our favor in Q4, and I think that is if you -- on a U.S. GAAP basis, I feel very comfortable with the 14.7% or something, which I would not be afraid of saying.

Marcel H. M. Smits

I think, Andrew, you also get to that outcome if you do the GAAP analysis of what we have achieved today to what we have to do in the last quarter in order to get to the guidance range. You'll see that the fourth quarter has -- is projected to be decent quarter, and some of that is driven by commodity favorability in particular on the coffee side.

Operator

Our next question is from Alexia Howard with Sanford Bernstein.

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

Can I ask about the acquisition strategy in the coffee business? It seems to be -- there's been a series of small bolt-on acquisitions: Tea Forte, the coffee company, which I think was a series of cafes in the Netherlands; the House of Coffee business, which I think is a food -- office foodservice kind of business in Scandinavia. It feels as though you're going to a lot of different business models there. I know they're very tiny acquisitions, but I just wondered if you could give us a few comments about whether that's going to distract management or what you're trying to learn.

Jan Bennink

These are actually very small acquisitions. I mean if you talk about the last one, I mean, I could pay it easily, personally, out of my own pocket. It's very...

Marcel H. M. Smits

That says more about the [indiscernible] about the acquisition, by the way.

Jan Bennink

Jokes aside. But I mean I think those are very small acquisitions which actually strengthened the current business in the countries where they are. And the management, take Brazil, where we do it -- I mean it's actually -- they're already -- we're already running this via this distributor. What we're doing is we can now -- he's now owned by us rather than having him as a separate entity. So the Tea Forte, I mean that was a business which was there and run by itself. And Peter is still running the business as if we've never been there, so he continues to run the business so Michiel [ph] and Michel have very clearly -- we make these acquisitions, keep them doing what they've been doing so far. The Scandinavian one is actually bought by Friele, our joint venture partner. He is doing the integration. We have nothing to do with it, so as we -- we've just paid our fair share of it. So there's all -- it's not a distraction. Going forward, I think it is best to have Michiel [ph] talk about it. I mean he talked about it a lot in -- not a lot, but he talked about it in the Investor Day. We're clearly looking at M&A opportunities which will help us to get our high-growth, high-margin story and strengthening us in parts where we are not, or strengthening us in businesses where we have a business which is not necessarily the size we want have it. So we can become more specific once we've gone through the whole M&A strategy with Michiel [ph], with Michel and that process with the new board. And I think then we can be more clear to you.

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

Okay. Just one quick follow-up on the meat side. Could you just give us a couple of comments on the lessons learned from transitioning to the broker? It's obviously been weighing on volumes for a few quarters now. But if you got to do it again, what would you change?

Marcel H. M. Smits

Yes, I think -- I don't think you change all that much. We've had some system issues that we needed to work through, so in particular, the broker -- the people who move to the broker -- inside the broker -- there's staff from us and there's also staff that was with the broker and they have to get onto our systems in order to support the business in terms of promotional planning and so on and so forth. So that has caused some hiccups, and at the same time, we combined this with being fairly strict on promotional push. Would you do it again? I don't think you'd do it a lot different. If you get it over and behind you, in an ideal world, you have 3 more months to make it....

Jan Bennink

We would absolutely do it again. I think it is a wise decision. I mean, just -- I mean, the broker we're talking about, I mean it's a change. It's a transition. Every transition, you see these kind of things happening. It's a bit worse than we have expected. But just imagine, the same broker took on Kraft and Campbell. So he is -- we'll do something different probably, kind of other [ph] timing, which a bit more appropriate, because I think having 3 accounts of the size of Kraft and Campbell and us coming together has been challenging. So I feel very comfortable. The choice is great. I mean the distributor is absolutely perfect, so we'll get out of it. And I would do it again because it's a better cost-benefit analysis and the fact that Kraft and Campbell, just to mention 2 very important American companies, do the same, I think it is -- reinforces the message.

Marcel H. M. Smits

We have confidence that, that's been the right move.

Operator

Our next question is from Rob Dickerson with Consumer Edge Research.

Robert Dickerson - Consumer Edge Research, LLC

I guess it's 2 questions. I guess the first question is a little bit more housekeeping, which just is the cost savings targets I know you've called out, which is the $180 million to $200 million, which was inclusive of I guess, Project Accelerate, and then overall just corporate savings. Has that changed? Or is the timing or split between '12 and '13 changed just because now, I guess, when we started the year, we were at $115 million for corporate expense. And now we're at $70 million to $80 million. So it's -- just I guess, the point of question is just the cost savings that we're seeing now, are these cost savings that you expected to maybe partially come in '13, but we're seeing more now than we would in '13.

Mark A. Garvey

Yes, Rob. It's Mark. The answer is yes. Firstly, the $180 million to $200 million is the target that we set. We continue to see those cost savings come through. They have come through faster, frankly. We've seen more come through, as you've seen, in corporate. We're also seeing some good SG&A savings come through in the U.S. business as well. They've been offset somewhat by some of the softness in the gross margin side or the gross profit side that we've talked about. You'll see some of those flow into next year but I think Michel Cup, when he talked about coffee, gave you a good indication of his saving targets going forward. And at Investor Day, you'd also get a good update from meats, in terms of their investor -- their savings going forward as well.

Marcel H. M. Smits

The other thing that I think we should mention here is that the savings have come forward. So more of them have landed in '12 than in '13. Some of the stranded costs -- because some of the deals came a bit later, some of the stranded costs have moved more into '13 than in '12. So the balance is -- has shifted.

Robert Dickerson - Consumer Edge Research, LLC

Okay, perfect. And then another -- the second question just on coffee pricing in Europe. In some of the data that we see, it just -- I guess what it looks like is it looks like their -- that the delta between coffee prices at retail in Europe versus prices that you're actually able to get -- or across Europe just seems higher in general than what we're seeing in the U.S. And I was just curious, as coffee costs roll off, would you expect the retailers -- that the retailers should be following pricing coming down on your end? Or would you expect some of the retailers in Europe to potentially try to capture some of the margin back?

Jan Bennink

I think it's a bit following up on the question from Andrew. I mean, I think the -- what we see so far is that people are pocketing the money and making sure that you build the prices and build the coffee category as much as possible. It hasn't been a very profitable category for retail in the last 5 years. I think this, all of a sudden now, with prices going down, also that was basically the benefit. So will there be a downward trend if the prices of $1.75, $1.80, $1.85 continue? The delta between the price of what they are now and what they were are so big that you might see some of the rollback, yes, I mean, coming back to the 30% of what I mentioned before, so a 70% hang on, but that depends really on the prices. Comparing between Europe and the U.S. I think it is -- every market is relative, depends on the competitive environment, depends on who is your competition. There are difference prices between France and Germany and Eastern Europe and Holland and Spain. So their -- those price differences with different brands also don't really bother us. I mean, there will be no cross-border exports. You don't have a co-brand where people can have cross-border shipments. It is -- every brand stands for itself.

Operator

Our next question is from Eric Katzman with Deutsche Bank.

Eric R. Katzman - Deutsche Bank AG, Research Division

I guess, first, just somewhat related to going back to Andrew's question there. I realize that the IFRS versus the GAAP and various adjustments, but you gave like long-term goals at the Analyst Day in Holland. But in looking at fiscal '13 for the Master Blenders business, can you just give some sense as to kind of sales, how we should think about volume versus pricing as F 2013 progresses, as well as like EBIT growth regardless of what the right base is? Again, whether we use a GAAP or an IFRS number?

Jan Bennink

Full guidance of the CoffeeCo company for fiscal '13, yes. I understand. We -- I think it is more appropriate that, that will be done in August, at the moment Michiel [ph] and Michel are giving their guidance for the year. There will be a guidance for the year. I think if you read between the lines of what I've been telling about the coffee, I think we feel comfortable about coffee. I mean, we feel very positive of the things which are happening. I've given you some indications of what we wanted to do with the volume, where the mix is. You know the raw material input. You know the innovation. So I think overall if you add up everything, yes, there's organizational changes. Yes, there are a couple of countries not performing in line with what we want to do. But overall message is there's nothing which would tell me that are any different from what we've given as a guidance for the long term, that we can't make that. So that's as close as I can get to giving you some help.

Eric R. Katzman - Deutsche Bank AG, Research Division

No, that's fine. That's helpful. And then just on the, right -- so the total company today is paying around $0.46 a share on an ongoing dividend. How do we think about that, like, post-split? Because I think that you're -- if -- coming out of the Analyst Day from Holland, it looked like that was going to be a somewhat lower payout ratio. And just trying to do some pro forma calculations, it seems as if that put a very high payout ratio on the MeatCo in order to get back to, if in fact you're going to get back to, that $0.46 or so a share to the current shareholder.

Jan Bennink

Okay. Mark?

Mark A. Garvey

Yes. So you're right, Eric. At the Investor Day for coffee, we talked about a 30% payout ratio for the coffee business, and that's basically where they will come out approximately. Their board will obviously have to approve that, and management will talk to them about that very soon. For the meats business, they'll talk about that in Investor Day. They haven't -- we haven't said yet what their ratio will be, so in terms of your question as to whether the meats plus the coffee will exactly equal to Sara Lee one, it may not, frankly. So let's just wait and see where the meats come out with at the beginning of June. And then I think it will be very clear for both companies where the dividends will be for the future.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay, and then just last question on the technical thing of the split. So we're going to -- so the coffee company is going to list in Holland. After that, it's going to pay the $3 dividend. Do you know, is there going to be a when-issued equity around the Master Blenders business? Like how technically is that going to work in terms of the -- with the transition from the New York Stock Exchange to European-based exchange?

Mark A. Garvey

Yes, I can give you some flavor for that. So if we assume that we spin on June 30, firstly, you will get 2 pieces of stock, right? You'll get Sara Lee stock. You'll get D.E Master Blenders stock. You will immediately thereafter get the $3 dividend paid out to you as a shareholder on the Master Blenders stock. From a technical perspective, that means a number of weeks before that, we'd be declaring the dividend. And you would expect for a number of weeks you will have an as- and when-issued trading process. I think once we have all of these approvals and the board has approved everything, we will communicate very clearly to people, a, when the dividend gets declared, when it gets paid and when the actual as- and when-issued market will work, and what we expect the first trading day to be for the Sara Lee stock remaining and the actual D.E Master Blenders stock remaining.

Operator

Our next question is from Chris Growe with Stifel, Nicolaus.

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

I want to ask you first about, if I could, Jan, in the coffee business and their very strong mix performance. And I guess when I put it together with the volume weakness, especially given a lot of that volume weakness came from some of the smaller countries, I was surprised that there was not -- and I should also have said that pricing was better than cost inflation. I was surprised there was not a better profit performance in the quarter. Was that mix? Is it not as profitable to the bottom line? Are there costs achieving that, I guess, from the new products, that kind of thing that, are weighing on profit growth for coffee?

Jan Bennink

No, I think the mix has a higher gross margin. So what's dragging the profits down is what we said, the SG&A. I mean the volume overall, I mean, there's like -- there's -- you have the manufacturing, as I said, the 5 million which is in there. So it is more the cost weighing down the gross margins and not the pickup of the raw materials, as we would've liked the way it would have been on the free market. So I mean the mix, all the mix -- maybe I talk specifically capsules, I mean they have definitely a higher mix. Some of the startup of the premium brand, which have launched in Holland, will have start-up costs and that's what I was referring to a little bit in the innovation costs plus the gross margin, because a lot of the things are being packed currently still by hand. So they will pick up. So it is a bit of a mix of those 4, 5 elements, which I just said.

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

Okay. And then the other question I had was just to look at or to better understand the cost savings that you're generating in relation to the continued or the stranded overhead costs. And I guess this quarter you had some manufacturing efficiencies as well, so if you looked at the cost savings, say, this quarter or even as you look ahead, I'm trying to understand how those cost savings would match up with the stranded overhead costs and the efficiencies that occurred.

Mark A. Garvey

Yes, we just talked about it a little bit earlier, but again, those cost savings are coming in earlier than we'd anticipated. It's helping in corporate. It's helping in North America. North America doesn't have a huge push on stranded this year because they are getting the benefit of transition services agreements, as we've sort of done with the bakery and obviously worked with Bainbo [ph] in terms of transition. Once they come to an end, they will actually have a push on stranded overhead next year. So to some extent, you have to realize, that will hurt them a little bit next year. On coffee, you've seen the stranded overhead come in significantly this year. And I think cost saves have helped somewhat, but we've also had some margin softness, which has offset that. But overall, you think about our cost saves, Chris, of the $180 million to $200 million, more of that is coming in this year than we had originally thought. I think we'd said 50-50 approximately before. So you will see less of that coming in next year and you'll also see some stranded begin to hit North America a little bit into next year as well.

Marcel H. M. Smits

We have been fairly specific in the CoffeeCo Investor Conference, and I think we'll do the same on behalf of [indiscernible], so we'll clarify that.

Mark A. Garvey

Yes, both companies then would give you a flavor [indiscernible] that's important....

Marcel H. M. Smits

[indiscernible] that's then a missing a piece of the jigsaw puzzle great [ph].

Operator

Our next question is from Ken Zaslow with BMO Capital Markets.

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

Just 2 questions. When you think about -- just following-up on Eric's question, when you think about the dividend payout ratio, I know you can't really give us a number or anything. For MeatCo, who do you think of your comps? The protein companies don't tend to pay out high ratios -- payout ratios. Is there something that would be different in your business model that you think about that would be quite different than the typical payout ratios by the protein-oriented companies?

Mark A. Garvey

Ken, I'm just going to push that to Investor Day because I think Sean and Maria really want to take you through their strategy, their capital structure and dividend and how they're thinking about it versus comps, so they will cover that on June 5.

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

Then the second question is, can you just talk about pricing trends across the categories in your meat business? Particularly, there's a lot of the input costs seem to be, maybe not rolling over, but definitely abating a little bit, so how are you guys seeing the pricing trends across the categories in the meat business?

Marcel H. M. Smits

It's a mixed picture. So you will have seen that pork and sows are coming down. That's an important impact because this is a very important component for us. Meanwhile, beef prices are keeping up and are still high. Energy prices are going up, and the rest is smaller.

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

Yes, but what about the retail side? Actually on the -- to the consumer, sorry?

Marcel H. M. Smits

Yes, on the consumer side, things have quieted down. So we took a fair amount of price increases, let me think, in the second quarter of '11. Yes, that's correct. So we took a fair amount of price increases in the second quarter of '11. We then had smaller price increases coming through all the way up to the fourth quarter of '11. In '12, we've dialed back a bit, so we're not seeing any further price increases coming through. I don't know where beef products -- or where beef is going to go, and products that very heavily depend on beef, we may have to tweak there. But we definitely, for a while now, come to a point where most of our price increases are done. On the Foodservice side, we typically lag a bit. So the Foodservice side is a slightly different story because as a result of these contracts, it all comes in a bit later. So we're pretty much, I'd say, done with pricing up, with a small proviso that I can't predict where beef is going to go. And what we're now starting to see is that our commodity costs are becoming flat. And if we -- if current prices hold, then we may have some benefit coming through next year. That's what the current calculations show.

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

And then I was just thinking one more. On the iPod [ph] business in the coffee side, can you just talk about how that business is impacted, just given the whole Nestlé issue? Just any impact at all.

Jan Bennink

On the capsule, that's really no impact. I mean, there's a lot of talk about the infringement and the patent for Nestlé. I think it is just one court case out of many, and that is a long process, including appeals. Does it have any effect on our sales? Absolutely none, 0, 0 comma 0, at the moment. You can never be sure, but I mean it's -- so far this is what I'm -- this is the clear message.

Operator

Our next question is from Robert Moskow with Crédit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

Just a technical question. In your slides, you talk about excluding the currency mark-to-market impact to get to an adjusted margin, but then in your script, Jan, I think you talked about it more as a commodity mark-to-market. Can you help me again understand the difference between the 2?

Jan Bennink

I don't have a script, so that's probably the problem. But as -- I just talk when I -- what I feel like I talk like and so -- but Mark will give you some clarity here.

Mark A. Garvey

Let me help. Firstly, from a geography perspective, Rob, commodity mark-to-market only appears generally in our corporate cost area, okay? It does not appear in the segment results. Currency mark-to-market appears in the segment results. The difference obviously from a commodity perspective to the extent that you have forward purchases hedges and then the market price of those commodities move, we get an up or down in terms of the commodity mark-to-market results on a quarter-by-quarter basis. The currency mark-to-market relates to the fact that we have to buy coffee in dollars, and then of course, we do matching hedges in Euros. And as those currencies move, we also have to do a mark-to-market there in the segment.

Robert Moskow - Crédit Suisse AG, Research Division

Okay, so when you're giving us the adjusted operating margin in the slides, you're excluding the currency impact that's in the segments.

Marcel H. M. Smits

Correct.

Robert Moskow - Crédit Suisse AG, Research Division

And so there's really -- there's more upside to come here in the next quarter, really that was what you're saying, unrelated to any kind of currency hedging. There's just more upside to come when the currency -- I'm sorry, when the commodity hedges roll over. Is the currency -- is your currency hedging going to have an influence on this adjusted margin in fourth quarter as well?

Mark A. Garvey

Well, to the extent that Jan has taken it out of the number, it won't have an impact on that adjusted number that he has. But to the extent you look at Sara Lee's bottom line results, depending on how currency moves, obviously to the end of the fiscal year, it could have an impact.

Robert Moskow - Crédit Suisse AG, Research Division

Okay. And then one last question. On Thailand, you said you're going to be back in market in April. Can you give us any kind of quantification as to what the upside is to fiscal '13 if Thailand is back online, back to normal?

Jan Bennink

The exact upside, I mean, is just because -- Thailand was basically 0. So I mean everything that it was -- I mean, do I know the exact upside? I have to come back to it. It is a small business, but I mean it has a -- it's a high volume, instant business. But I mean I can come back with the exact details. But I mean volume-wise, assuming all the losses you had, hopefully, we'll get them back. I mean...

Robert Moskow - Crédit Suisse AG, Research Division

Okay. So it's all volume and there's really no impact on profits for fiscal '13.

Jan Bennink

Oh, there is. There is a positive impact on profit. We had a little bit of a -- a part of it was insured, luckily. So there's not completely out of the operating income, but definitely there will be a pickup of -- I don't know exactly. But there will be -- it will be positive.

Operator

Our final question today is from Karel Zoete with Rabobank.

Karel Zoete - Rabobank Equity Research

Two questions please. First one, with regard to your key markets in Europe, you indicated performed well and showed value share charts. What can you say about the volume trends in these 4 key markets in Europe? And then secondly, growth in the rest of the world is slowing down a little bit at retail. Can you say a little bit more about your performance in Brazil and Australia in the third quarter?

Jan Bennink

Okay. I mean volume and value are very much aligned in terms of volume development. I mean they're slightly different levels, but it's -- I don't see very big discrepancies on the key Western European countries. If I go to Australia, I mean, you've seen it in the Investor Day. I mean, what is happening there? I mean, market shares are -- in the last quarter were also positive. So there was a slight pickup, basically stable versus the last half year, but a slight pickup also there, which just -- I mean because we've been taking out -- Australia's promotional driven. It depends very much on the 2, 3 key accounts. So what we've done is we've taken a little bit of the promotional pressure off and kind of went for the volumes, which we did deliver. So that's a little bit of a negative volume development, but in terms of value and in terms of mix, Australia is performing in line with what you've seen in March -- on a March basis. Brazil, flat market shares, no increase. São Paulo, Rio, perhaps a tad down in terms of slight decline, pricing because we priced up extremely heavily, looking at the last pricing charts versus our main competition, being the reopening [ph], in the rest of Brazil. I think they followed us so far. So there's more -- it's going. There's nothing bad or good to mention in Brazil. In the rest of the world, I mean that's what you see is what I've mentioned a little bit of the countries, which is Eastern Europe, because of the pressure from CIBO, which has been negatively influencing us.

Marcel H. M. Smits

Okay. Thank you. I think this is the last question. I would like to thank you very much for being on the call and asking the questions and following the company. And I'll hope to see you in person soon, because on the phone it will probably be difficult. But it was a great pleasure, and I hope we'll continue the nice relationship we've had over the last periods. Thank you very much for investing in the company.

Operator

Thank you. This does conclude today's conference. Thank you for participating. You may disconnect at this time.

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