Sara Lee Corp. F2Q08 (Qtr. End 12/31/07) Earnings Call Transcript

Sara Lee Corporation (SLE)

Q2 FY08 Earnings Call

February 6, 2008, 10:00 AM ET

Executives

Aaron Hoffman - VP of IR

Brenda C. Barnes - Chairman and CEO

L. M. (Theo) de Kool - EVP and Chief Financial and Administrative Officer

Analysts

Eric Katzman - Deutsche Bank

Alexia Howard - Sanford C. Bernstein & Co.

Ken Goldman - Bear Stearns

Tim Ramey - D.A. Davidson

Todd Duvick - Banc of America

Christopher Growe - Stifel Nicolaus

Robert Moskow - Credit Suisse

Eric Serotta - Merrill Lynch

Kenneth Zaslow - BMO Capital Markets

Jonathan Feeney - Wachovia

Andrew Lazar - Lehman Brothers

Vincent Andrews - Morgan Stanley

Pablo Zuanic - J.P. Morgan

Presentation

Operator

Good morning and welcome to Sara Lee Corporation's Second Quarter Earnings Call for Fiscal 2008. Your lines have been placed on a listen-only mode. This call is being recorded. If you have any objection, 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 Hoffman - Vice President of Investor Relations

Thanks Melissa. Good morning to everyone and welcome to Sara Lee's second quarter 2008 earnings conference call. As always we very much appreciate your time and your interest. Joining me on the call today are Brenda Barnes, our Chairman and CEO; Theo de Kool, our Chief Financial and Administrative Officer.

The second quarter results were released at 6:30 Central Time this morning in a press release you can find on our website at saralee.com. If you have any problem to accessing the release please call Gene William at 630-598-4966. Our 10-Q for the second quarter was also filed this morning.

So 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 conditions. 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 provide additional information in our press release and Form 10-K for fiscal 2007 and I encourage you to review concerning factors that could cause actual results to differ materially from these forward-looking statements.

So with that statement out of the way, let me turn the time over to Brenda.

Brenda C. Barnes - Chairman and Chief Executive Officer

Thanks Aaron. And good morning everyone thank you joining us. I would like to start up today with my perspective on the year-to-date. We feel very good about our second quarter and the first half of the year for a number of reasons. We saw sales increase in every segment in the second quarter and we gained share in the majority of our key categories and end markets.

Our capabilities in nearly every aspect from sale to production to IT to procurement continued to improve. And our bottom-line was essentially flat with last year which is an achievement in light of the meaningful headwinds we faced. Most notably we effectively dealt with a very volatile commodity environment, matching commodity increases with pricing on a one-one basis in the first quarter and offset all but $10 million in the second quarter.

At the same time we made significant investments in our business. We increased our MAP spend by 14% in the quarter and 17% for the first half supporting new innovative products that will deliver incremental sales and margin dollars over the course of the fiscal year. We also went live with our largest SAP implementation and did so with no business disruption.

I am confident that these actions set us up for a very strong second half. My confidence is built on the fact that the strength of our brands and our discipline in skill and pricing will allow us to fully offset the commodity increases for the year. Positively that implies an important catch-up in the back half of the year, as we realized a full benefit of price increases across the business. I also remain bullish as we made significant investments in consumer marketing and new products thus far and we fully expect them to pay dividends as we finish the year.

As we've discussed in the past, we're managing our business with longer term goals, not just quarters in line. Therefore we'll make investments in the business when they make sense, to support the right products at the right time with the right marketing mix. First half of 2008 clearly merited this investment. These investments along with pricing and product mix drove adjusted sales growth of over 4% in both the quarter and the first half of the Company, with increases in all six segments this quarter.

Let's take a look at each of the business segments. Our North American retail meats business is successfully moving its portfolio to consumer focused on-trend value-added products. Adjusted sales grew about 1% for the quarter. As we indicated last quarter, commodity sales are declining sharply as we lack the closure of a facility that largely produced these products. On the other hand retail sales rose 4.4% helping to drive an increase in adjusted operating segment income of 9%.

At the same time we continued to invest in the business with a 16% increase in MAP spending. This investment supports successful new products, like Jimmy Dean Breakfast Bowls and the Light Breakfast Sandwiches leading to a 15% increase in sales for this brand this quarter.

The investment also drove market share gains in 7 of our 8 key meat categories over the past 52 weeks and a point... 7 point share increase for the total packaged meat category. Behind continued new products' success and share gains, our U.S. fresh bakery business had a strong quarter in the face of much higher commodity prices. These results helped offset weakness in our frozen bakery.

For the total North American Retail Bakery Segment adjusted sales rose 9% and adjusted operating segment income sale [ph] $1 million or 7.4%. As we discussed last quarter, we have been increasing pricing in fresh bread in order to keep pace with historically high wheat costs and will continue further increases should wheat prices as continue to escalate. Our ability to successfully partner with our customers during this challenging period demonstrates the real strength of our sales organization and the power of the Sara Lee brand.

We remain the number one fresh bakery brand, growing sales by 13% in the U.S. this quarter. I see tremendous opportunity to further drive bottom line performance in the bakery business which CJ probably will discuss later this month at CAGNY.

As we have discussed with you in the past, our Food Service segment... in our Food Service segment, we are strategically exiting various low or no profit commodity meat products and some of our DST coffee routes, resulting in lower volumes for our Food Service Segment. Over the long term, I am confident the strategy will yield improved profitability.

In the second quarter, commodity volatility combined with these volume declines had a short term negative effect on margins. But we remain comfortable that the business will show better results as we move into the back half of the year, when pricing is expected to catch up to commodity price increases.

Fundamentally we have improved our customer relationships and our category relevance through better selling capabilities and more innovative on-trend products like Café ado [ph] and new sausage products, which were recently launched and have been well received by operators. All of these factors give us confidence in the full year plan.

Building on a strong first quarter, our International Beverage business delivered solid results. Adjusted sales rose nearly 8%, while adjusted operating segment income decreased 1.6% as we ramped up MAP spending to support new product launches around the world.

Importantly, we saw good results across all of our product categories and in the majority of our key geographies. The key driver of improved mix continues to be a successful strategy in Brazil where we are focused more on profitable sales than just volumes. On the strength of new offerings in the first half, International sales rose 9%, almost seven years after the initial launch. The results are very much in line with our strategy of driving revenue through innovation while maintaining or enhancing our attractive margin structure.

With a change in management in Spain and a more disciplined approach to the sales and distribution, our International Bakery business continues to see better fundamentals. Our French refrigerated dough business continues to do well, while our Australian bakery has been repositioned to deliver improved results after a weak 2007. Adjusted sales rose over 4%, while adjusted operating segment income was down about 3% as a result of higher commodity prices. As our new management team continues to improve our marketplace capabilities, we are confident that we'll see solid base business gains over the course of the fiscal year.

Household and Body Care made significant investments in the quarter, setting them up for another strong year. While adjusted sales grew a solid 3.4%, adjusted operating profits declined by 12%. The change came largely from a significant increase in MAP spend along with an increase in trade spending, designed to drive trial. These investments support the successful rollout of Ambi Pur Puresse which was launched in three additional countries during the second quarter; helping the brand grow 8% in the first half.

Sanex grew 5% from continued strong yearend sales and Radox is up 12% during the first six months, behind effective sales promotions. All of the sales increases are in constant currency, making them all the more impressive. The outlook for our new product and rapid pace of innovation certainly merits a large marketing investment that we can quickly roll out our best products, positioning the business for excellent long-term growth as we saw in fiscal 2007.

And I am pleased to announce today that we have entered into a partnership with Dial Henkel to begin distributing an air care product in the U.S. based on our Ambi Pur's 3Volution technology. The product is now available in stores; and it's a great example of leveraging our capabilities in a complementary fashion with another company to more quickly and effectively launch a product in the new market.

Turning to the financials. Reported diluted earnings per share from continuing operations were $0.25 for the quarter. This number includes a $0.03 net gain from significant items. I think it's worth noting that the level of significant items continues to decline as we forecasted at the start of the year. Hopefully this makes our numbers much easier to track and understand.

Shifting gears to talk about cash from operations; for the first half, we generated $205 million representing a $167 million improvement. In the first half of 2007, cash from operations was $38 million that included $88 million of cash grow from Hanes brands and other discontinued operations in that period. We also completed our $315 million share repurchase commitment for the year.

Looking forward, we are forecasting diluted EPS in the range of $1.03 to $1.09 per share, which includes $0.18 per share gain from the sale of our tobacco business in fiscal 1999 and $0.03 of net significant items from the second fiscal quarter. Our guidance does not include any other significant items that may occur during the remainder of the year.

Our core EPS guidance, which excludes significant items, is $0.82 to $0.88 per share. We have increase the reported EPS guidance by $0.03 to reflect the net significant items that occurred in the second quarter with no change in the core EPS guidance. We have also increased our full year expectation for the euro dollar by $0.06 to $1.43. That implies that we are not taking the benefit of a stronger euro into our core EPS guidance, suggesting that there is some pressure on the possibility of the underlying business as we face volatile commodities and a weaker economy. We continue to anticipate a 33% core tax rate for the full year.

We also now anticipate sales growth of 9% for the full year which incorporates our modified euro-dollar assumptions. We continue to expect volumes to be flat to up slightly as a result of planned exits of unattractive business that I discussed earlier. These declines will offset volume growth at many of our other businesses. In the total company that means the bulk of our sales growth will come from price, mix improvements and favorable currency exchange rates.

Our guidance for full year adjusted operating margin is 7.5% to 7.9%, 10 basis points lower than previous guidance due to a weaker economy, commodity headwinds and simply the mathematical impact of taking sales up your pricing and thus compressing our margin. This still represents a very healthy 50- to 90-basis point improvement compared to fiscal 2007.

As I look at the results to date, what we need to achieve in second half, I recognize, as I am sure you do too, that we need a strong conclusion to the year. I believe we will still achieve our plans. Simply put we have significant pricing flowing through the business in the second half that will allow us to catch up with high commodity prices. We have invested heavily in marketing and new products in the first half and that should benefit the top and bottom line for the next six months.

Our continuous improvement efforts continued to pay dividends across the business while reducing cost from our systems as well and our IT systems have facilitated better trade spending and strategic pricing. Fundamentally, we are well positioned to deliver our plan with a very strong second half.

And now Theo, Aaron and I are happy take any of your questions.

Question And Answer

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Eric Katzman with Deutsche Bank. Please go ahead.

Eric Katzman - Deutsche Bank

Hi. Good morning everybody?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Good morning Eric.

Eric Katzman - Deutsche Bank

I guess I want to kind of focus on cash flow for a minute. I know that '07... fiscal '07 and fiscal '08 are somewhat muted. Theo, are you expecting any significant cash flow restructuring charges or other items to kind of flow through over the next year or so?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

For the full year Eric, I think, we have said that we expect something like $130 million to flow through the cash flow that's baked into our guidance of $350 million to $450 million. So it's the fresh [ph] versus normal still, and the other element that I mentioned during the 'Meet the Management' in September last year is substantial tax charge because we repatriated money in the first quarter of fiscal '08 and we took that from an accrual that we made already in '06. But the cash flow will be impacted and that impact is somewhat like I would say $400 million.

Eric Katzman - Deutsche Bank

Great, but that's an... a fiscal '08 number?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

That's a fiscal '08 number that's all baked into the guidance of fourth quarter.

Eric Katzman - Deutsche Bank

But in terms of the '09, I know it's pulling out a little bit, but it seems like most of the restructuring actives is kind of ending and so that cash flow impact should come close to end and then the repatriation issue should also kind of end.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

I can only repeat what I said during 'Meet the Management' in September and that is by and large that's true what you are saying. There will be still some cash coming out of accruals from restructuring going through '09 but substantially less than in '08. And secondly there will be only let's say the normal repatriation tax charge for the currency, and nothing in relation to previous years any more.

Eric Katzman - Deutsche Bank

And then if I look over the last five years or so, CapEx has basically been running between call it 550 to 600 in change. Is there any reason why that should necessarily ramp up significantly in the next few years?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Well I don't think so. But this is about the quarter of '08, Eric, so I am not going to give guidance for '09.

Eric Katzman - Deutsche Bank

Okay. So then I guess if... then if my math is correct, I guess this is maybe more a question for Brenda. It would seem given where the stock is currently trading at about $14, if I kind of normalize for some of these things it looks like you may have a... kind of a free cash flow yield of let's call it 8% to 9% pre-dividend. So what... kind of what... what do you think is the right use of that cash as it starts coming in significantly over the next few years?

Brenda C. Barnes - Chairman and Chief Executive Officer

Yes, I think all along we said that the transformation that we are going to have, couple of years of doing what we have been doing and going through the numbers that we're going through in terms of setting ourselves up for a very strong cash flow company, and one that we will have plenty of proceeds to reinvest in our business. So far we have been investing our core brands, I think, getting them on a healthy growth rate, we are gaining market share and the top-line number is quite good. We will continue to look at tuck-in yearend acquisitions like I have said in the past. We have done a couple that you know about Russia's insecticides, bakery in the U.S. and we will keep looking at that. We also will be keeping our eye for other investment opportunities as time goes on.

Eric Katzman - Deutsche Bank

Okay. And then just kind of switching to a shorter term, then I will pass it on. The... are you seeing any kind of demand elasticity, relative either to your categories or to yourself within those categories as you have been taking pricing up.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Yes, we are looking quite closely at that and read the report you put out which we thought was very good. We are not seeing any change in the demand curves as we know them or any trade-down from the consumer that one could expect to see as pricing is going up. So we have been able... especially in coffee there's no major change in past behavior from the consumer standpoint as the commodities go up and down, coffee tends to fluctuate more often than the other items we sell. There is not so much there. And in the U.S. on meat and bakery we are... we are gaining share in every single one. We are not seeing a shift to private label on the bakery segment that one could see, perhaps, if there was trade-down from the consumer standpoint.

So not... we have not seen it to be honest; we are keeping an eye on it, but no major changes so far.

Eric Katzman - Deutsche Bank

Okay. Thanks. I will pass it on.

Brenda C. Barnes - Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from the Alexia Howard with Sanford Bernstein. Please go ahead.

Alexia Howard - Sanford C. Bernstein & Co.

Hello there.

Brenda C. Barnes - Chairman and Chief Executive Officer

Good morning.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Hi Alexia.

Alexia Howard - Sanford C. Bernstein & Co.

Hi. Just a couple of quick ones and the margin expansion in the back-half, obviously there is a lot of investment in the first-half of the year and margins are down. I guess about 40 basis points in the front-half and the guidance is still for between 50 and 90 basis points of margin expansion for the full year which implies at a minimum we should be looking at 140 basis points of margin expansion in the second half, if my guess is correct. I really want to get a sense is, is that going to be really primarily just on pricing and may be a bit of reduction in the -- the year-on-year increase in marketing spending or there are other things, maybe one off items that have impacted performance in the first half that are going to go away in the second half. What is it that is likely to lead to that kind of margin expansion through the second-half?

Brenda C. Barnes - Chairman and Chief Executive Officer

The two that you mentioned are in fact true, let me just take you through those for a second. On the pricing side, as fast as things have been going up, commodities have been going up, you can't always get it day-one that the commodity cost go up no matter how you anticipate it and how much you try to pass it on into the marketplace. So there are markets that take a little bit longer to pass it on, Spain would be one example, we need a longer lead time to implement it with the marketplace there. Foodservice is another where there are some contractual terms that it just takes longer.

So what we will have is a continued flow of what we have taken so there will be a catch-up aspect to what we weren't able to recoup in the first-half flowing into the second-half. And we are also anticipating if anything else goes up from a client standpoint we will respond very quickly there. So pricing certainly is one, there was as you pointed out a significant investment in MAP in the first-half, 17% higher than year ago. We will not have that kind of increase for the back-half. So it will be a moderation of that level, not... for all the right reasons, we spent when we launched the new products which run into marketplace.

So that's the third reason new products that are going in now will have the full benefit of second-half sales revenue at whatever good margins on these new products. So it's really... although as you remember last year in the fourth quarter we had a significant investment, so the margin was a bit lower in the fourth quarter a year ago, so it is an overlap factor going on.

But we recognize the change in trends, first-half to second-half and believe me we've been all over at looking in all the aspects of our business and still feel confident that that's going to happen.

Alexia Howard - Sanford C. Bernstein & Co.

And the... and the promotional activity on the household products side. I know that was a bit of challenge in the first quarter as well -- and it seems to have persisted into this quarter. Is that... I presume that was to do... more to do with the launch of new product particularly Et Brushes [ph]. Are we kind of through that now, does that go away in the second -half or is that the residual future impact that might be there?

Brenda C. Barnes - Chairman and Chief Executive Officer

You will see a reduction and improvement in second-half in Household. We did in fact rollout Ambi Pur Puresse, as a new product launch and Ambi Pur getting more markets, all of those as we talked about before are discounted to get the starters in the market with the consumer and then the refills are what we replenish at a higher margin. So that is moderating as we go into the second-half.

Alexia Howard - Sanford C. Bernstein & Co.

Okay, great. Thank you very much, I will pass it on.

Operator

Thank you. Our next question comes from Ken Goldman with Bear Stearns. Please go ahead.

Ken Goldman - Bear Stearns

Good morning.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Good morning Ken.

Ken Goldman - Bear Stearns

A question about commodities. Last quarter you discussed if I am correct. Commodity increases for the year above $300 million and since then obviously some of your important inputs have risen. I am wondering if you can update us a little bit on your expectation here and how hedged you are for the back-half of the year?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

We don't give specific on hedging Ken, but in some categories we are 100% hedged and in some with less. So there is only 5 months to go. So yes, the major ingredients they are hedged to a large extent and that's where we base our $300 million on as well.

Ken Goldman - Bear Stearns

And that $300 million number is still good?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

It's still good.

Ken Goldman - Bear Stearns

Okay. Then a question on your long-term guidance. I think if I am correct, your adjusted operating margin long term, you still want to get to 12% overtime and I know there is no year on that anymore. I understand we are in a period of unprecedented inflation. But if costs for wheat freight, et cetera, don't drop off a bit, how realistic is getting to that 12% in the next few years?

Brenda C. Barnes - Chairman and Chief Executive Officer

Well, we still have a plan and our approach that we want to have consistent margin improvement year-to-year. So we do not put a timeframe on the 12%. We think if there is not a let up on commodities there will be recalibration in terms of what the consumer sees as prices paid for food. So, no one will be at a competitive advantage or disadvantage in that regard. And I think the consumer will adjust as they seem to be doing right now.

Ken Goldman - Bear Stearns

Okay. So you are staying with the 12% for now is that you still see a path to that?

Brenda C. Barnes - Chairman and Chief Executive Officer

Yes, what we have said since the last time we put that out as a target, we still have that as our target and what we have said so far and will continue to say is that each year you should see margin improvement year-to-year.

Ken Goldman - Bear Stearns

Okay, thank you.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Welcome.

Operator

Thank you. Our next question comes from Tim Ramey with D.A. Davidson. Please go ahead.

Tim Ramey - D.A. Davidson

Good morning. On the Bakery segment, very good performance there, flowers had great performance too. Somewhat counterintuitive given the more commodity like nature of baked goods versus packaged foods; how do you... do you attribute that to the competitive environment or internal changes or what... how would you explain that?

Brenda C. Barnes - Chairman and Chief Executive Officer

In Bakery and Fresh Bakery there has not been, excuse me, growth in private label for quite some time during the market share. I believe there's the combination of two things; the brand support is getting much bigger and stronger in those segments than it ever had been in the past. Just four years ago, you didn't have a national brand like Sara Lee. And I think consumers still trust and believe in quality of brands, and Sara Lee certainly carries a lot of that with it. So that's one. And the other aspect of it is it's... there's a huge factor of in-store execution and DSD [ph] impact that makes this category what it is. And the better... the Company says do that better, I think, end up getting the shelf space, the consumer sees it there and gravitates to where there's in-stock fresh product. That's how I would explain the two factors.

Tim Ramey - D.A. Davidson

And Theo I would be lying to you if I said I understood the $37 million tax benefit. Can you go over how that actually occurs please?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Yes, I am glad you never lie. But yes what it is, is that we... when we make operating losses in a certain country then in the first instance we book a receivable on the risk [ph], because we feel that when we make future profits, we will make up for that. Then we have the continuing losses in Germany. We made a valuation reserve against that receivable. And now since we are about three years again in a profitable situation and the future looks good enough, we took that evaluation reserve off for equity that is released into profit, and we booked that as a significant item.

Tim Ramey - D.A. Davidson

Is there still an overhang of other such situations out there that we are going to continue to see or is this pretty much a one off?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

This is pretty much a one off, but if you may remember that last year we took an impairment charge in Brazil and at the same time we booked valuation reserve versus our tax asset... deferred tax asset in the country as well. If things continue to go well in Brazil, then over time I hope that we can take off that valuation reserve as well. But those things happen, and it has to do more with the fiscal situation within a certain country and prospect to make net profit there.

Tim Ramey - D.A. Davidson

And just a quick... the FX benefited if given at $0.01 was less than I would have thought if I... unless I read that wrong. Why would it be less? You did have a significant FX benefit year-over-year and --

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

I am not sure what your question actually is?

Aaron Hoffman - Vice President of Investor Relations

Can you rephrase that just for us.

Tim Ramey - D.A. Davidson

I think I read that the FX benefit was only a penny to the quarter, is that right Aaron?

Aaron Hoffman - Vice President of Investor Relations

It was $20 million on operating income, so that's more than $0.02.

Tim Ramey - D.A. Davidson

Okay. I am sorry; I missed this [multiple speakers].

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

We published our EPS the first year, just want to clarify what you are asking.

Tim Ramey - D.A. Davidson

Thank you.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Thank you.

Operator

Thank you. Our next question comes from Todd Duvick with Banc of America Securities. Please go ahead.

Todd Duvick - Banc of America

Good morning.

Brenda C. Barnes - Chairman and Chief Executive Officer

Good morning.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Good morning.

Aaron Hoffman - Vice President of Investor Relations

Hi Todd.

Todd Duvick - Banc of America

Quick question for you, and first of all I appreciate you filing your 10-Q so promptly. That's very helpful. And in the 10-Q there was a comment actually about the upcoming debt maturities and I think the comment that I was looking at was the debt obligations due to mature in the next year, you're talking about potential new long-term debt issuance. Can you talk a little bit about the timing, are we are looking at maybe an FY '09 event?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Yes, we certainly don't look for an '08 event to issue long-term debt under current circumstances. And we will... I think we still have this year upcoming $450 million or so in maturities. And we will finance that with commercial paper.

Todd Duvick - Banc of America

Okay.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

And then look at the situation again in '09.

Todd Duvick - Banc of America

Okay. And when you talk about '09, you are talking fiscal year '09.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Yes correct.

Todd Duvick - Banc of America

Okay. That's helpful. And also I appreciate the comments about cash flow priorities, free cash flow priorities going forward. Can you just kind of remind us beyond this fiscal year, what you have said in terms of share repurchase activity?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

We have committed... talked to you about [ph] $2.5 billion to $3 billion and we have executed so far $1.6 billion, $315 million year-to-date; year-to-date the quarter I think it was $218 million. We committed this year to $315 million so that is it for the remainder of the year.

Todd Duvick - Banc of America

Okay so the --

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

About $1 billion to come in the next two years, if nothing changes otherwise.

Todd Duvick - Banc of America

Okay, very good. That's helpful. Thank you very much.

Operator

Thank you. Our next question comes from Chris Growe with Stifel Nicolaus. Please go ahead.

Christopher Growe - Stifel Nicolaus

Thank you, good morning.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Good morning Chris.

Aaron Hoffman - Vice President of Investor Relations

Hi Chris.

Christopher Growe - Stifel Nicolaus

Hi guys. So I just wanted to ask one follow-up on the cost inflation, I think for the year, we are talking like $300 million in the quarter, where we look at around $75 million, could you give that number?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

It was just under $100 million.

Christopher Growe - Stifel Nicolaus

Okay. And then, I am curious on the Food Service division where you are cutting back on some DSD runs for coffee and certain meat products and that's been going on for couple of quarters now. Are we seeing a related mix benefit from that movement, or should we start to see that going forward?

Brenda C. Barnes - Chairman and Chief Executive Officer

You should start seeing that going forward, yes.

Christopher Growe - Stifel Nicolaus

Okay. And then are there any other invested requirements or sort of money, if you will, that we spend to launch the Ambi Pur in the U.S. Will that be coming through Household and Body Care, is that something that will be upcoming here in the next couple of quarters?

Brenda C. Barnes - Chairman and Chief Executive Officer

No this is a licensing agreement with Dial Henkel, and it will launched with their marketing support.

Christopher Growe - Stifel Nicolaus

Okay, so there's no expenses from you side. Okay, and then one final one, there was comment in your 10-Q about a goodwill... a potential goodwill impairment in two divisions. Is that just sort of a warning that the businesses are okay right now, and when do you do your annual review? Is that the end of the calendar year?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

We do our annual review at the end of the quarter, second quarter so we just did it and that's what the 10-Q was talking about, and since there were two businesses, let's say close enough to say, we put them on the watch list, we are disclosing that in our 10-Q as well.

Christopher Growe - Stifel Nicolaus

Okay. Great, thank you.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Welcome.

Operator

Thank you. Our next question comes from Robert Moskow with Credit Suisse. Please go ahead.

Robert Moskow - Credit Suisse

Hi, thank you.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Hi Bob.

Robert Moskow - Credit Suisse

I just want to... I'd like to follow up on Eric Katzman's question, cash flow, just remind me that the guidance for 350 to 450, is that after CapEx?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

No that is before CapEx.

Robert Moskow - Credit Suisse

Before CapEx. So I am just trying to get through a normalized number for what '08 would be. If I add, let's say the mid point is 400, and I add the two items that you mentioned, the tax charge will be repatriation and then the restructuring. Bring that to a number of like 930, but then if I subtracted CapEx and dividend, I really wouldn't have any cash left. So it strikes me that there is not a lot of leftover cushion here for share repo or debt reduction. Am I looking at that right?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Yes, your math is I think right. And the free cash flow actually this year, is slightly negative. So... and that's actually where the whole finance picture has been based on as I said before, the proceeds come to divest... are being used to invest in our business and over time we will improve our cash flow like we plan to do and actually we are doing apart from those individual elements.

Robert Moskow - Credit Suisse

Okay. And then another questions for Brenda. You are mentioning that second half of the year you expect pricing to flow through and help you make your rather aggressive second half target. Brenda if you look at what your... if your business managers have shown you as to what the potential sensitivity of the consumer is to higher pricing in the past, how much does volume come down when pricing goes up. Are you comfortable with the model that they are using, you think that they have robust historical data to look at. And how does that compare to maybe sensitivity models that you saw when you were at Pepsi?

Brenda C. Barnes - Chairman and Chief Executive Officer

Well in terms of the general... the models, we have to keep in mind these are unprecedented commodity increases. The old model never at one... I don't think ever across the board had such a severe increase of commodity increases. So you have to say okay will the demand supply to anchors [ph] stay the same shape just at a different level or will there be something else going on. And that's why to Eric's question, we said we are watching it very carefully because we are operating at a higher level in one move than you would do just moving up the curve. The curve is shifted. So I feel very good about the analytics behind everything that we have done and at the same time watching the consumer behavior at price points that are just ratcheted up. I don't know if that answers your question, but it's a very different time frame right now.

Robert Moskow - Credit Suisse

And maybe this isn't a fair question to follow up with, but how much of a shock do you think the consumer is going to see in certain categories just in terms of what they are going to pay at retail?

Brenda C. Barnes - Chairman and Chief Executive Officer

No, they have already seen it. So I think that's why we feel quite good about and confident about the future of the second half. The prices are in the marketplace, especially in the bakery category, they have been out there and they go out very rapidly. The meat segment is... they are out there as well, coffee is out there, so there's nothing that is yet to show up. Now we may have missed a couple of months or some weeks of gain by the time that got implemented but the consumer has seen them. And the question is will the commodities go up even further that we have to take even further increases and take the price points up. That remains to be seen.

Robert Moskow - Credit Suisse

And then also as you said it's going to go flow through more... through [indiscernible]. But maybe it hasn't yet but it will be flowing through more in your second half. On the consumer it's not... probably not changing sequentially quite as much.

Brenda C. Barnes - Chairman and Chief Executive Officer

Like I said we just haven't seen that severe consumer shifting going on.

Robert Moskow - Credit Suisse

Thank you very much.

Brenda C. Barnes - Chairman and Chief Executive Officer

Welcome.

Operator

Thank you. Our next question comes from Eric Serotta with Merrill Lynch. Please go ahead.

Eric Serotta - Merrill Lynch

Good morning.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Good morning.

Eric Serotta - Merrill Lynch

Want to touch again upon the North America retail bakery. In the press release and I think in your prepared remarks you talked about a reduction in MAP spending. Was that all behind the repositioning at Senseo in the U.S. and was the profitability for fresh bakery apart from Senseo up, down or flat for the on year-over-year basis for the quarter?

Brenda C. Barnes - Chairman and Chief Executive Officer

The reduction in MAP is in part due to Senseo and the profitability on fresh is up.

Eric Serotta - Merrill Lynch

Okay. You said it's in part due to Senseo. Was --

Brenda C. Barnes - Chairman and Chief Executive Officer

There's another part that's clustered in that segment reporting and it's frozen bakery.

Eric Serotta - Merrill Lynch

Right.

Brenda C. Barnes - Chairman and Chief Executive Officer

I mentioned that it was offset by some declines in frozen bakery profitability. So that fresh going up and dragging it a little bit is the profit decline on fresh and frozen bakery and Senseo.

Eric Serotta - Merrill Lynch

And you are MAP spending on fresh bakery was up?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

We don't break it out at that level.

Brenda C. Barnes - Chairman and Chief Executive Officer

I don't have that to give you.

Eric Serotta - Merrill Lynch

Okay. And then just circle back on the licensing arrangement with Henkel on the... for the 3Volution product, you guys have been pretty focused in your geographic market in the HPC business in the past but I guess the exception is Kelley [ph] which is worldwide. I guess if you see more opportunities to license some of your brands and products in HPC and the U.S. market or maybe take some of these product to the U.S. directly if it seems like the later could involve a lot of extent to which I think what Chris was getting. Just wondering is there any strategy change here or should we look for any changes going forward?

Brenda C. Barnes - Chairman and Chief Executive Officer

Our strategy to date has been not to enter the U.S. market directly and with our international Household and Body Care products, it's a very competitive market as you know, strong players here and could be a very costly market entry. That's why we feel really good about doing the entry in the U.S. via Dial. We think it's a creative way to take a marketplace innovation and partner up with someone who's got strength in the marketplace with... and use it as their trademark. We could except to see that; hopefully this will be great, and we'll have other opportunities to do more.

Eric Serotta - Merrill Lynch

Okay. But definitely not entering the U.S. on your own?

Brenda C. Barnes - Chairman and Chief Executive Officer

Right.

Eric Serotta - Merrill Lynch

Terrific. Thank you very much.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Thank you.

Operator

Thank you. Our next question comes from Kent Zaslow with BMO Capital Markets. Please go ahead.

Kenneth Zaslow - BMO Capital Markets

Hey, good morning everyone.

Brenda C. Barnes - Chairman and Chief Executive Officer

Good morning Ken.

Kenneth Zaslow - BMO Capital Markets

In terms of your pricing innovation Brenda you spoke about doing bigger, better ideas. Can you talk about the new price innovation and are you at the pipeline where you want to be and which areas of the... is it a U.S. or international where you think that the pipeline is still underdeveloped and there's work to be done and certain new areas where you think that the pipeline is actually where you wanted to be. Can you just kind of give us a framework for that?

Brenda C. Barnes - Chairman and Chief Executive Officer

Sure, we have been targeting that we want to have somewhere in the mid-teens percentage of our sales coming from new products. And so... and that would be a continuous flow where products that were launched a couple of year ago drop off as new and new ones fill it. So the pipeline always has to be full and we always have to keep replenishing it. So we feel good about the process and methodology we have in place because you always have to keep in touch with the latest consumer trends. So far I'd say year-to-date through '08 we are at... roughly 15% of our portfolio is coming from new products. So we feel really good about that and I think that's an indication that what we had put in the pipeline is coming out naturally generating the kind of revenue that we expected.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

And just for a point of clarity on that number that is excluding our food services business that is retail businesses only, just... for those of you at home trying to tie that number out and figure out what it means based on the total sales base.

Kenneth Zaslow - BMO Capital Markets

So I mean what I am trying to get at is are there areas of your business where you still think that the pipeline is not fully developed that you... that it will take another year or so. And can you just kind of differentiate which areas are actually ahead of schedule, behind schedule, and kind of on target?

Brenda C. Barnes - Chairman and Chief Executive Officer

Across the board we have more in the pipeline that we can probably execute. So I would call that full.

Kenneth Zaslow - BMO Capital Markets

No I was just trying to get a relative basis. And then my other question is the timing in which you can take pricing relative to the commodity. One of your competitors have said that the pricing lag is actually narrowed pretty considerably. Are you seeing the same thing?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Can I ask you Ken just to clarify at least if not naming that competitor what category it's in, because that makes a big difference probably in how we would answer relative to that statement.

Kenneth Zaslow - BMO Capital Markets

It's more of a peer company more than across a portfolio which has bakeries and cereal and a couple of other products. But it was just kind of a more general question about to what extent... because there was a point in time that the lag seemed to be call it 9 to 12 months, now it seems like it's kind of coming down to three to six month. I don't know if that's fair or not.

Brenda C. Barnes - Chairman and Chief Executive Officer

It's sure that the time it takes really verify what segment you are in, really very. So, I would say in the Bakery and Coffee side it's pretty short, takes a little bit longer time on retail meats and even longer time on Food Service. I think what could be helping... not helping but influencing all of us is that there isn't a competitor out there that isn't facing that. So the fact that everybody is calling on the trade with the same story, I think probably helps the selling process.

Kenneth Zaslow - BMO Capital Markets

But is the timing changed or is it the same time that was three years ago? And again it doesn't matter which category [multiple speakers], categories have a... has the timing stayed the same?

Brenda C. Barnes - Chairman and Chief Executive Officer

I don't know, to be honest with you. I don't have a relevant point to compare to. I don't know.

Kenneth Zaslow - BMO Capital Markets

All right, thanks.

Brenda C. Barnes - Chairman and Chief Executive Officer

It's happening I know as fast as we can get it done and it's almost immediate in the two categories that I mentioned.

Kenneth Zaslow - BMO Capital Markets

All right, cool. Thank you.

Operator

Thank you. Our next question comes from John Feeney with Wachovia. Please go ahead.

Jonathan Feeney - Wachovia

Good morning and thank you.

Brenda C. Barnes - Chairman and Chief Executive Officer

Good morning.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Good morning Jon.

Jonathan Feeney - Wachovia

Hi. Brenda just wanted to have one follow-up on... I mean we are hearing a lot of great things on pricing. And I know when you talked to us all in December you were saying it's a great environment. I don't think you are alone is saying that pricing power is strong. You are saying that there's very little demand elasticity from what you have seen although you are watching it closely. And I guess I just... when you look at the numbers and you certainly you go back to couple of years, you had a 12% operating margin goal and now we don't have a timeframe on that, but that's sort of what you'd like to get to, to get to tier II companies. I guess what's stopping you from taking more aggressive pricing if you are not seeing demand elasticity and you are very clearly still funding, if you will, price points with your productivity and the internal sort of cash proceeds. Why not ask the consumer to foot the whole bill right now if you are not keeping elasticity right away?

Brenda C. Barnes - Chairman and Chief Executive Officer

Well I am with you. We should price to what the market will bear without a doubt. And we are talking about passing on commodities. The underlying story about what is helping us here to what we are doing, and we will keep looking at it because we should price to what the market will bear.

We implemented our SAP system, which was wholly geared to trade management and effective pricing. And we have rolled out, like I have told you in the past, the whole process behind pricing discipline across the company, all around the globe. Those two things combined with the data is really what's enabled us to take pricing in the right place, and the right product, and the right SKUs with the right package sizes, with the right trade promotions. So our level of capability on where and how to take pricing has got a whole lot better and I only mentioned that because that's a real tool and enabler to deal with the commodity headwinds that we have. But I agree with you if the consumer will in fact pay for more, we will continue to test that.

Jonathan Feeney - Wachovia

Okay. Thanks so much.

Operator

Thank you. Our next question comes from Andrew Lazar with Lehman Brothers. Please go ahead.

Andrew Lazar - Lehman Brothers

Good morning.

Aaron Hoffman - Vice President of 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

A quick follow-up on John's question and that is I know you are marginally or more hedged for this fiscal year as you talk about. Do you... I guess if we see some additional changes or volatility in input costs, such that there's more adjustment and if at all that happens in fiscal '09, is the pricing you are taking now kind of getting you to where your cost curve is this year with respect to your hedges and such that you will be kind of behind the curve again in FY '09 should cost move versus where your hedges are today? Or is there a way to think about being a little bit more anticipatory such that you don't have to maybe keep coming back into the trade and the consumer and kind of constantly finding yourself behind the cost curve. And this is obviously not just a question about Sara Lee, it's been pretty consistent throughout the industry.

Brenda C. Barnes - Chairman and Chief Executive Officer

I'm going to say something that maybe Theo can join in here but really another great thing that's been happening in our Company is the cooperation and coordination between our procurement department and our sales and marketing teams. So we have timeframes on how far out do we see what is likely to happen on commodity cost with some very good forecasting from very sophisticated people within the procurement department. And we are thinking up how and when we take pricing relative to what we can anticipate going forward. So it's your point about looking at the curve. We have as far a visibility as we can see is integrated into our teams in terms of how we take and when we take pricing in the marketplace. It's not answering your hedge question.

Andrew Lazar - Lehman Brothers

Yes.

Brenda C. Barnes - Chairman and Chief Executive Officer

But it is thinking up how far out do we see and how do we match that up, and what kind of inventory in stock do we take, and how we match that up with what prices we are taking to the marketplace.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

And if I can add to that Andrew then our hedging strategy is that we hedge in principal the time period that it takes... effectuate a price increase to the trade. Secondly, the question is basically how to overshoot in pricing so that you are protected for a while. And the answer is well only very, very limited, because there's dynamics with competition of course.

Secondly, we have been seeing price increases month after month affecting our P&L with $30 million, $40 million sometimes in a month's time. So that means that of course you are going to lag behind. Now for the second half, we don't expect that price increase any more as we look at it today. So there will be catching up impact from pricing on the overall business and that's one of the reasons why we are more bullish about the result in the second quarter versus... second-half versus first-half as well.

Andrew Lazar - Lehman Brothers

Okay. And just a quick follow-up. I realize you are going to spend more heavily on MAP behind when you got various launches coming and the new product news and such. So I understand that the timing impacts between the first-half and the second-half. Do you think though that the key brands that you have got, that you are getting momentum going on, are at a place yet like from a brand value equation where you can sort of whip MAP around a little bit more aggressively in a given year or make a response much favorably to changes like that, given your... you are still on the sort of the building up the brand equity phase.

Brenda C. Barnes - Chairman and Chief Executive Officer

Yes, I look at... I think there are two key metric to maybe answer part of the question. One is our share change and our share is gaining in all of our... in most of our key brands. So we think that the brands are getting more healthy over time and let's take Jimmy Dean as an example, when we launch a new breakfast bowl or a wrap of some sort that has a halo effect over the whole Jimmy Dean line. We didn't have that before, we usually had an item at a time. So I think we are at a point where if we have a brand news out there, it in facts helps the entire brand. So that's going for us. So as a result our share gains are increasing and secondly in some of our categories we are able to carry a significant price premium like in our Hillshire Farm Deli-select meats. So that to me speaks to the strength of the brand. So, I think we have to pulse it enough Andrew to make sure we are present with the consumer, but it may be a different product within the line. Is that clear what I just said?

Andrew Lazar - Lehman Brothers

Yes, okay. Thanks very much.

Operator

[Operator Instructions]. Our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Vincent Andrews - Morgan Stanley

Hey, good morning everyone.

Aaron Hoffman - Vice President of Investor Relations

Good morning.

Vincent Andrews - Morgan Stanley

Just a couple of quick questions. It sounds like right now that competitive pricing environment is very cooperative. But how do you think about going forward, what's the risk that at some point a competitor has same sort of favorable cost structure in place whether it's through hedging or something internal, and they decide to become a little more market share focused in the competitive pricing environment dissipates for a period of time. How you are monitoring or planning for that?

Brenda C. Barnes - Chairman and Chief Executive Officer

That's part of daily life to be honest. It could happen with any trade promotion, any competitor, any time in this commodity environment or one of a different nature. So it's something that we deal with really every week. You just have to be responsive and you have to do the analytics to see when and if you respond and how you respond.

Vincent Andrews - Morgan Stanley

Okay. And then Brenda in your prepared remarks you noted a weaker economy. So I guess my question on that is are there particular areas of the business that you are... you'd be more worried about the weaker economy than others.

Brenda C. Barnes - Chairman and Chief Executive Officer

I actually like to think that our products just simply delight people everyday.

Vincent Andrews - Morgan Stanley

Right.

Brenda C. Barnes - Chairman and Chief Executive Officer

But if they postpone things they will postpone a new motorcycle or washing machine or something like that. So, it's... I don't have any particular product line or category that I am more worried about than others to be honest. I guess if food service, maybe that would be the one that I'd be thinking of if people tend to stop eating out as much, that could have a more negative effect on our food service segment with the whole industry.

Vincent Andrews - Morgan Stanley

Okay.

Brenda C. Barnes - Chairman and Chief Executive Officer

There are some signs of that going on.

Vincent Andrews - Morgan Stanley

And then Theo, if I could just ask depreciation was down year-over-year my guess is that it was all due to divestitures, is that correct?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

No, because that would be in discontinued operations.

Vincent Andrews - Morgan Stanley

So the decline in depreciation on the cash flow was the result of what?

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

I know and I don't know exactly... there is not a single region, it's probably because part of our software cost has been fully amortized, but I have to look into the details.

Vincent Andrews - Morgan Stanley

Okay. Thank you very much.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Welcome.

Operator

Thank you. Our next question comes from Pablo Zuanic with J.P. Morgan. Please go ahead.

Pablo Zuanic - J.P. Morgan

Good morning everyone.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

Good morning.

Aaron Hoffman - Vice President of Investor Relations

Good morning.

Pablo Zuanic - J.P. Morgan

Theo, couple of question I guess about quarter. I am trying to think where in the past you have told us what MAP spending is as a percentage of sales, but if you haven't at least can you give us some clarity in this quarter your consolidated adjusted operating margins of 30 basis points year-on-year. So let's say that MAP spending as a percentage of sales had remained flat year-on-year. Where would have margins come in? I mean any quarter in that regard would help to --

Aaron Hoffman - Vice President of Investor Relations

Pablo why don't I give you the number for the quarter and for the year so you can calculate it as you like. MAP... total MAP spending or the quarter to-date for the second quarter was about $180 million and so the first half was about $330 million.

Pablo Zuanic - J.P. Morgan

Okay. Thank you.

Aaron Hoffman - Vice President of Investor Relations

I will start with that.

Pablo Zuanic - J.P. Morgan

Okay. And then just another follow-up perhaps more longer-term. One question we get a lot is about your ability and flexibility to increase your share buyback program in the future. I think what you said in the past you said because a large portion of your cash generation and cash holdings are overseas if you were to change your long-term plan for share buybacks, you have to repurchase that cash and that will imply higher tax rate. I mean is that correct. I am just trying to get an idea of how much flexibility you really have to increase share buybacks.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

The thinking is correct Pablo. Based on our current share, given the repatriation plans for the year '09 and '10, we can fulfill our obligations of doing roughly $1 billion in the next two years. If we would do more we would need to repatriate more with the tax bill coming with it or borrow locally. But those are the two options.

Pablo Zuanic - J.P. Morgan

Okay. And then one for you Brenda. Coming back to this issue about a consumer, how does that effect your ability to innovate. I mean in terms a lot of these new products at higher price points or rather cater to your convenience need. But then you find the consumer with price inflation and less purchasing power in general that perhaps the response to those types of new products is less strong than normal. I mean is that so and if so does that, to some extent, postpone your plans to accelerate innovation across your portfolio?

Brenda C. Barnes - Chairman and Chief Executive Officer

I think the question you are getting at is somewhere to one that everybody is trying to understand, is there a consumer trade down which was get where you are getting at, that if there's new innovative product that brings some value added in some form or fashion whether it's convenience or quality or whatever the consumer won't buy it. That we haven't seen yet. So... but under any circumstance at this stage we are not slowing down or postponing any innovation that we have. We do believe the consumer response to products that bring them something that they are looking for, wanting, and will in fact buy it for the reason that it adds value, either convenience, taste, quality, or whatever.

If you look at... people don't want to cook. I don't care what the economy is doing if there's an answer that can give them a good meal solution without cooking then I think they will continue to do it.

Pablo Zuanic - J.P. Morgan

Okay. Thanks. And just to follow up at the divisional level. In the case of international coffee, can you highlight at... as one area where market increased significantly when you said meats and Household/Body Care. So why were margins down so much in international beverages. Is that just... is that the higher coffee cost affecting you or has the pricing environment in coffee in Europe changed? Can you help us there, please?

Brenda C. Barnes - Chairman and Chief Executive Officer

Yes, there was an increase in MAP spending in coffee as well.

Pablo Zuanic - J.P. Morgan

There was.

Brenda C. Barnes - Chairman and Chief Executive Officer

Yes, it was mentioned there.

Aaron Hoffman - Vice President of Investor Relations

Yes, but the first half first... the first quarter I think you are talking about, Pablo, the MAP spend increased 19% in international beverage. Now keep in mind that that includes to deflate it slightly as a result of currency. That's somewhat lower number when you take it on a constant currency basis but it still represents a fairly significant increase for that.

Pablo Zuanic - J.P. Morgan

Right. But has the pricing environment in anyway changed, Brenda, in present competition here?

Brenda C. Barnes - Chairman and Chief Executive Officer

Not relative to the competition, no. I mean we are dealing with the normal swings on client costs. I know coffee outlook looks like it might increase a bit more for the second half on Arabica [ph].

Pablo Zuanic - J.P. Morgan

Okay. And one last one in case for bread. I know it was more positive earnings but you have said in the past that you recognize sort of tax [ph] charge obviously higher margins and so we... sub-quality... had a better operator. But it would seem to me when I look at some of the scanner data that they are getting better price increases in bread than you guys are... and that their volumes share are actually doing better than yours. Is that so and are you really gaining share in bread? On my numbers, you are not?

Brenda C. Barnes - Chairman and Chief Executive Officer

Well we can give you all the... we use all... use the same IRI data which includes the panel with/without Wall-Mart. So we'd be happy to sit down and go through that with you because we're seeing that we are gaining share.

Pablo Zuanic - J.P. Morgan

Yes.

L. M. (Theo) de Kool - Executive Vice President and Chief Financial and Administrative Officer

I need to make a correction on our previous question. The cash flow statement does include discontinued operations and the majority of the decline is due to discontinued operations being in this statement last year for two months and not this year.

Pablo Zuanic - J.P. Morgan

That's fine. Thank you.

Brenda C. Barnes - Chairman and Chief Executive Officer

Pablo on the share we'd happy to sit down but we'll look at it.

Aaron Hoffman - Vice President of Investor Relations

And just to continue Brenda's point, we track obviously all the public announcements of our competitors price increases and when we kind of MAP those up we can put them on a calendar and almost across the board; everybody's taking the same type of general price increase at almost the exact same time and I think that's really predicated on the change in the overall commodity environment that people have to do it. And on that on Brenda's point we are certainly gaining share and volume trend are holding very steady in spite of the price increase. But there is even very little blip that even in the moment of the price increase.

Brenda C. Barnes - Chairman and Chief Executive Officer

As we pointed out in the past, especially in bread and in meat... the meat category, the category is very fragmented. So if you pick two players out, it is clearly possible that two players are gaining... I can't quote flowers numbers but there are a lot of other smaller players that could in fact be feeling the impact more severely.

Aaron Hoffman - Vice President of Investor Relations

And I think one very interesting point which I think goes to your trade down question Pablo as well as I think this question is that, we said we have been gaining share, holding volumes in private labels across the board is loss share in both the... for the last three months and the last 52 weeks. So it really does suggest that our pricing actions are going through without really any change in previous trend.

Pablo Zuanic - J.P. Morgan

That's good. Thanks for that. And Brenda I guess one very last one. The Americans who Value Act since shareholders have already said that, is that affecting any way your strategy, are you changing anything... just cash management?

Brenda C. Barnes - Chairman and Chief Executive Officer

I think Value Add, it's an important shareholder for us of course. One of our top three and they like any other shareholders want us to deliver the kinds of commitments that we indicated. So if anything that makes us even more vigilant and diligent about making sure that we make our plans follow through.

Pablo Zuanic - J.P. Morgan

Okay, thank you.

Operator

Thank you. Our next question comes from Eric Serotta with Merrill Lynch. Please go ahead.

Eric Serotta - Merrill Lynch

Hi again. Just a quick follow up. Brenda you mentioned that you are not flowing through the $0.06 incremental currency benefit to your full year guidance, because I think you sighted the softer economy and higher commodities. Could you specify or give a little bit more detail as to which segment or which businesses are actually tracking a bit below expectations when you gave guidance last?

Brenda C. Barnes - Chairman and Chief Executive Officer

Well we give guidance for the full year. So we never really gave you quarterly guidance by segment. So [multiple speakers].

Eric Serotta - Merrill Lynch

I guess I am saying that last quarter you were obviously looking for overall operating profit for the full year to be equivalent of $0.06 per share higher, and now you have operating profit at currency. Now currency is making up for the difference. So you are looking for a well over underlying profitability of businesses. I guess I am looking for... which business are you looking for lower profitability on versus your previous expectations for the full year?

Aaron Hoffman - Vice President of Investor Relations

Before Brenda... and Brenda is going to answer that. But before she answers that I want to clarify something very, very important in front of everybody listening. And as we reference page 5 of the press release such as the guidance table, Eric, what you just said, if I think, what... we said $0.06 change positively in the euro-dollar relationship, not $0.06 per share EPS effect. And that is a very important distinction that everyone has got to get.

Eric Serotta - Merrill Lynch

Okay.

Aaron Hoffman - Vice President of Investor Relations

So if you look on our... you look on that guidance chart on page 5 you will see the $0.06 is the change in the euro-dollar relationship. It is not an EPS calculation.

Eric Serotta - Merrill Lynch

Okay. I see. Thank you for that clarification [multiple speakers] unclear how it's written there.

Aaron Hoffman - Vice President of Investor Relations

Just want to make sure everybody fully understands that that is really important. We have not calculated an EPS effect for the currency. You could do it, but we have not done it in this document.

Eric Serotta - Merrill Lynch

Okay, thank you.

Aaron Hoffman - Vice President of Investor Relations

And yes, but it is still a good question.

Brenda C. Barnes - Chairman and Chief Executive Officer

Maybe to answer your question, we would anticipate that our Retail Meat segment has more upside in the back half relative to its first half performance.

Eric Serotta - Merrill Lynch

Okay.

Brenda C. Barnes - Chairman and Chief Executive Officer

And the same would be true for Food Service.

Eric Serotta - Merrill Lynch

Okay, great. Thanks a lot and thanks for the clarifications Aaron.

Aaron Hoffman - Vice President of Investor Relations

You bet.

Operator

Thank you. I show no further questions at this time.

Aaron Hoffman - Vice President of Investor Relations

Great. Listen,thanks everybody, and as always we are available here and always to take any further questions. So thanks, thanks much.

Operator

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

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