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Hillshire Brands (NYSE:HSH)

Q4 2012 Earnings Call

August 09, 2012 10:00 am ET

Executives

Melissa Napier - Senior Vice President of Investor Relations

Sean M. Connolly - Chief Executive Officer, Director and Chief Executive Officer of North American Retail & Food Service Business

Maria Henry - Chief Financial Officer

Analysts

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

Andrew Lazar - Barclays Capital, Research Division

Rohan M. Patkar - KeyBanc Capital Markets Inc., Research Division

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

Kenneth Goldman - JP Morgan Chase & Co, Research Division

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

Jason English - Goldman Sachs Group Inc., Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Operator

Good morning, and welcome to Hillshire Brands Fourth Quarter Earnings Conference Call for Fiscal 2012. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect at this time. I would now like to introduce your first speaker, Ms. Melissa Napier, Treasurer and Senior Vice President of Investor Relations for Hillshire Farm (sic) [Brands]. Thank you, Melissa, you may begin.

Melissa Napier

Thank you, and good morning to everyone. Welcome to the first earnings call for our Hillshire Brands Company. Today, I'm joined by our CEO, Sean Connolly; and our CFO, Maria Henry. Sean will provide his perspectives on the quarter, progress being made on the plans that we've provided at Investor Day and some comments around fiscal '13. Maria will then discuss segment performance for both the fourth quarter and the fiscal year and provide guidance for fiscal '13.

I'd like to remind you that in our financial slides, we will only be talking about results through operating segment income from continuing operations. In connection with the June 28, 2012 spin-off of the company's international coffee and tea business into an independent public company named D.E MASTER BLENDERS 1753, Hillshire Brands has classified the historic results of its spun off international coffee and tea operations as discontinued operations. We issued a press release on August 1 reporting that accounting irregularities involving the previously reported financial results for the Brazilian operation of D.E MASTER BLENDERS were discovered. And as a result, D.E MASTER BLENDERS will restate its previously issued financial statements.

Hillshire Brands also reported that it will restate its previously issued financial statements to reflect the impact on its results from discontinued operations. There is not expected to be a meaningful impact on the results of operating segment income from continuing ops, and the restatement is not expected to impact Hillshire Brands' fiscal 2013 results. An investigation is being conducted by D.E MASTER BLENDERS. And as the investigation is still ongoing, we will not be providing additional commentary on this matter during today's call.

Our results were released at 6:30 a.m. Central Time this morning and you can find that release along with the slides that we'll be reviewing today posted to our website. We expect our 10-K to be filed by the end of August pending the completion of the investigation in Brazil.

I'd now like to refer you to the forward-looking statement currently displayed and remind you that during today's call, we may make forward-looking statements about future operations, financial performance, business conditions and our outlook for 2013. Actual results may differ from those expressed or implied in these statements, and all explanations of non-GAAP financial measures are included in our release.

You already know that today's discussion will be focused on results for adjusted operating segment income from continuing ops. I'd like to highlight some other changes that we've made in our reporting to provide our investors with information that is most reflective of how we manage our business. As we highlighted at Investor Day, the Aidells and Gallo businesses are now being reported in the Retail segment, while hog and commodity pork and turkey sales are being reported in the Foodservice segment. Our segment names have also been slightly tweaked. Results from acquisitions are now included in our results from the time of acquisition. In previous reporting, we had backed out the impact of those sales as a reconciling item between reported and adjusted results. You'll still see the impact of acquisitions, in this case, Aidells, in our earnings release bridges. We are also discussing total adjusted sales and organic sales performance, which is without acquisition results and excludes changes in foreign currency movement. And finally, results for businesses that have been disposed of or exited, such as our Senseo business, are now backed out of all reported periods.

To help you understand the year-over-year changes, earlier this morning, we filed a current report on Form 8-K that contains our quarterly segment results for fiscal 2012 and fiscal 2011, consistent with the basis of presentation reported in this release.

We will take your questions after management's prepared remarks conclude. And I'll now turn the call over to our CEO, Sean Connolly. Sean?

Sean M. Connolly

Thanks, Melissa. Good morning, everyone. Maria and I are excited to be speaking with you today and to share the results of our fourth quarter and fiscal 2012 performance. But before I jump into the quarterly results, let me just step back a minute and frame up the big picture for you. 2 months ago, we shared with you our plans to unleash the potential of our company and drive strong and sustainable shareholder returns. These plans included our vision to become the most innovative meat-centric food company in the U.S. This growth-oriented vision was born of a clear-eyed recognition that our greatest assets are our brands and that attempting to simply cut our way to prosperity wouldn't drive a different outcome than we’d delivered before. We also outlined the steps that we're taking to realize this vision, steps like upgrading our capabilities and team, fixing some underperforming businesses, increasing our commitment to advertising and rebuilding the innovation pipeline. And to fund these investments, we've committed to delivering $100 million in cost savings over the next 3 years.

We were also explicit that fiscal 2013 would be a transition year. In fact, we characterized a 3-year plan, fiscal '13, '14 and '15, with the words fix, drive and expand in order to paint a picture of how we expect our plans to unfold over the midterm horizon. Now with the spin behind us, we're aggressively executing against our plans and incredibly energized about the future.

Now let's talk the fourth quarter. Q4 came in where we expected overall. Adjusted net sales for continuing operations were up 3.3% for the quarter and up 4% for the fiscal year, including performance from Aidells. Q4 adjusted operating segment income declined, mainly attributable to challenges in our Foodservice business, which we will detail for you on this call. Frankly, I'm encouraged by the big picture and have even more confidence that our disciplined growth agenda is exactly what's needed for this company. MAP was up again for the quarter as it was for the full year. And while very early days, I'm encouraged to see that spending done the right way and deployed in the right spots can drive the business. I've been in the food and beverage space for over 20 years, and it's clear to me today as it's ever been that a consumer-oriented philosophy, backed by a great team and critical analytics, can drive differential performance.

As we look at the reporting segments, our Retail division clearly performed the best. Specifically, in Q4, net sales and operating income were up 5% and 3.7%, respectively, inclusive of Aidells. Foodservice struggled not only with channel headwinds in dessert, but also with the impact on our sweet baked goods business stemming from our Tarboro, North Carolina plant modifications. The net of all of this was a Q4 in Foodservice that saw net sales down 1.2% and adjusted operating income down nearly 40%. Maria will provide more detail around the drivers of those numbers shortly.

Let me now give you some more texture on the underlying performance of the business and the progress we're making on several of our key focus areas. In the Retail segment, overall volume trends continue to improve as we've intensified our focus on price gap management across categories and we lapped the significant price increases put into place last year. These numbers include the full year F '12 volumes from Aidells.

Our core brands each had solid fourth quarters. Jimmy Dean had strong showing in innovation, which I'll touch on in a bit. Hillshire Farm turned the corner and had positive revenue growth in the quarter. State Fair finished out the year with solid growth in both volume and revenue, and Aidells and Gallo had double-digit growth in both volume and sales.

Ball Park had a strong fourth quarter despite some overall sluggishness in the hotdog category itself. Increased MAP spend, along with effective merchandising, drove strong sales through Memorial Day and leading into the Fourth of July. Specifically, we increased Ball Park volumes by 4% and sales by 5% versus the prior year. And while we're happy with Ball Park's performance in quarter 4, we've got our eye on the category softness as it's indicative of the need for further innovation in the category. Now speaking of innovation, I should also mention that Ball Park's recent innovation, the new flame grilled burgers, are performing well in the marketplace and the early REPE data is encouraging.

Shifting gears to lunchmeat, our lunchmeat trends improved in the quarter. You can see that we struggled in the first 9 months of the year, but we had a relatively strong Q4 after we really focused on improving our price gaps. Now before you get too excite about the magnitude of the point change here, keep in mind that part of the optical strength you're seeing here is easier comps. In the year ago period, we gave little support to the business and the results were quite weak. So while we're encouraged with the progress in the Hillshire or lunchmeat business, we're quite clear that we have more work to do and we are on it.

Now I'll turn to Foodservice. Meats business actually performed well, with volumes benefiting from winds in the c-store channel and stronger performance in national accounts. But bakery, however, was a different story. I've already discussed the impacts felt in the quarter from Tarboro. As the capital investments were made in the back half of the fiscal year, we were offline from a manufacturing perspective, which impacted our volumes. Heading into fiscal '13, I'm happy to report that the capital investments in Tarboro are completed. We're back up and running. Service levels are returning to a steady state. However, we expect to feel some impact into fiscal '13 as lost volume may not return immediately and we'll need to reestablish the relationships with customers whom we were not able to service while undergoing the plant upgrade. Beyond Tarboro, there continue to be weak industry trends on restaurant dessert consumption. Now to counter to this trend, we're continuing to leverage consumer insights and invest in new product innovation, including expanding our very popular line of presliced pies and adding additional value-added products. This is important because with the Foodservice portfolio we have today, dessert has to be solid for mix to be solid.

Now let me shift gears again and share with you some of the emerging progress we're making in a few of our most critical focus areas. My management team is now largely in place. Sally Grimes, our new Chief Innovation Officer, came on board in July and she is responsible for strengthening our innovation practices and replenishing an innovation funnel that, simply put, didn't have enough in it. Sally is a tremendous talent and we're thrilled that she's joined us. Sean Reid will become our new Chief Customer Officer on August 20. Sean brings over 20 years of classic consumer packaged goods sales leadership to our team. He's operated through diverse sales models, including broker, warehouse direct, and he's restructured sales organizations to be more efficient and effective. He's helped with category management discipline as well. We're also happy to welcome Denny Belcastro to the team. Denny has over 30 years experience in the industry and deep relationships across food and beverage. He is responsible for managing customer and industry affairs. And we've also filled the new revenue management role with Curt Balara, who comes from Unilever. Curt and his team will work hand in hand with our marketing and sales organizations to more closely manage trade spend, as well as pricing strategy and execution. We're thrilled to have all of these folks on our team.

We talked about the need to rebuild the innovation pipeline, and those efforts are now gaining traction and several new items are hitting the marketplace. As I mentioned earlier, we launched our new Ball Park flame grilled burgers in the third quarter and supported the overall Ball Park line with MAP in Q4. The burgers have been well received in the marketplace, exceeding initial demand projections, and we're expanding distribution to meet increased customer demand for this product as we speak. The innovation pipeline is also building at Aidells, where our all-natural hotdogs and all-natural antibiotic-free dry salami are now in test market. And you'll see these products rolling out more broadly down the road. On Jimmy Dean, Meat Lover’s Bowl is another innovation that's performed well. In fact, Jimmy Dean had a great fourth quarter and the Jimmy Dean Breakfast Bowls performed very well, with sales up 11.9% versus the prior year, driven largely by the new Meat Lover’s variety.

A few highlights now on what you'll see unfold in the near-term horizon. First, we intend to increase our MAP spend in 2013, and this increased spend will help us further strengthen our core brands as well as support our new innovations. Expanding into alternate channels is another initiative that we're making progress on. In the fourth quarter, our efforts in nontraditional grocery channels continued to pay dividends as we gained some new or expanded distribution in dollar channels, convenience stores and club stores. This is another key piece of our growth strategy, and we will continue to focus on it in fiscal '13 and beyond. Within our iconic Hillshire Farm brand, we have a new marketing team fully on board now and they're making good progress on packaging and product changes. We hired a new advertising agency, Y&R, in the fourth quarter. A new advertising campaign will be on the air in the first half of our fiscal year. The new product and package changes I've talked about will follow later. You should also expect to see new news on our State Fair and Jimmy Dean franchises as we advance our game plan to strengthen our core business.

At this point, I'd like to turn it over to Maria Henry, our CFO, who will walk you through the overall financial results for Hillshire Brands and provide additional insights into the performance drivers in our business segments. Maria will also provide our sales and EPS guidance for fiscal 2013. So Maria.

Maria Henry

Thanks, Sean. Good morning, everyone. Thanks for joining us. For the next few minutes, I'll walk through the fiscal '12 operating segment results for Hillshire Brands' continuing operations, excluding significant items. I will also provide our fiscal '13 guidance and comment on some of the assumptions behind the numbers.

Moving on to the fourth quarter and fiscal '12 results. I'll make some high-level comments before we get into the numbers. We had solid results in the fourth quarter that were dampened by issues in our bakery business. Our volume growth versus last year was positive. Price recovery was positive, and MAP investment increased versus the same quarter last year. For the year, I would say that the business posted good results in a difficult environment. Given the headwind of a $167 million increase in commodity cost and a tremendous amount of internal change, a return on sales from continuing operations of 9.8%, though down from fiscal '11, is a respectable outcome. Adjusted net sales grew with the help of the Aidells acquisition and year-over-year price increases to cover higher commodity cost. Successes in many of our brands have been overshadowed by issues we have been working through in lunchmeat, bakery and with generally difficult food service environmental trends. The significant cost reductions that the business executed in the year, moving to a broker model for a portion of our accounts, major reductions in G&A and manufacturing lean savings, helped to protect the bottom line for fiscal '12. And as Sean just discussed, we gained some traction exiting the year.

Looking at the numbers. On this slide, you see a summary of our fourth quarter and full year results through operating segment income for continuing operations. Adjusted net sales were up 3.3% for the quarter, including 1.2% of organic growth. For the year, our adjusted net sales from continuing operations was up 4%, with 1.2% organic growth. In addition to the acquisition of Aidells, our growth was the result of pricing. I will show you the components of our sales growth in just a moment.

Adjusted gross profit dollars in the fourth quarter were up for the first time this year, driven by our Retail segment behind top line growth. The adjusted gross margin percentage for the fourth quarter of 28.3% was relatively consistent with the gross margin rate achieved throughout the year. For the year, the adjusted gross margin declined by 180 basis points from 30.2% to 28.4%. This is primarily a result of price increases to cover commodity increases, which depresses the gross margin rate by increasing our sales dollars without delivering associated gross margin dollars.

Our MAP spend was up 16% in the quarter versus last year, but that's against a very low spend last year. On a percent to revenue basis, MAP for the fourth quarter was 2.7%, which we consider very low. The major MAP investment in the fourth quarter was the Ball Park "Men. Easier Fed Than Understood" campaign, our first significant media behind this brand in several years. For the year, MAP was up 12.9% to $137 million, which is 3.4% of sales, which is still a low number.

The SG&A in the operating segments for the quarter was up slightly as higher distribution costs offset lower selling and administrative expenses. For the year, SG&A was down as a result of the cost actions taken in the segment. As discussed previously, this included reductions across the board through a comprehensive restructuring program. The benefit of those reductions was partially offset by the absorption of stranded costs and higher distribution cost.

Adjusted operating income for continuing operations for the quarter was $100 million, down 3.1% from last year. For the year, we delivered $396 million of adjusted operating income, which was down 4.7%.

Looking at the composition of the sales growth by quarter, I draw your attention to the volume line. You see that we have maintained the volume stability that we achieved in the third quarter and we're slightly up in Q4. Higher commodity sales in the fourth quarter was the contributor to our sales growth and therefore to our negative mix, which you see below.

You can see that the contribution from pricing has diminished as we have lapped many of the list price increases taken last year and we have adjusted certain pricing to manage competitive price gap. For the quarter, commodities were up $8 million versus last year. Our price recovery against this increase for the quarter was positive $6 million. We ended the year with only a $5 million negative recovery of the $167 million of commodity cost increases that we absorbed into our P&L. As you can see on this slide, over the last 2 years, our business has absorbed $385 million of commodity cost increases

Looking at the reporting segments. Our Retail business had a good quarter with volume sales and profit all up versus last year. Our volume growth benefits from the inclusion of Aidells for a full quarter in fiscal '12 versus only a partial quarter in the prior year. Aidells continues to grow its top line at a double-digit rate behind an expansion of their marketing efforts and continued innovation. Organic Retail volume declined 1% in the fourth quarter. This was in part driven by the earlier timing of Easter in fiscal '12 versus fiscal '11. This volume performance is similar to what we saw in Q3 and much better than the first half for the reasons Sean already discussed, largely better management of price gaps and improved execution. Net sales grew for the quarter and for the year from higher pricing to cover commodity increases, as well as the favorable sales mix. In addition to Aidells, Ball Park, Jimmy Dean and Gallo all performed well in this quarter. The Retail adjusted operating margin at 11.6% for the quarter and 10.8% for the year were below the prior year. Consistent with the total company, the lower level of profitability reflects the benefit of lower SG&A costs being offset by pressure on gross margin from higher commodity cost, higher distribution cost and the higher level of investment in MAP.

Moving on to Foodservice. You see that the adjusted operating segment profit for the quarter was down 39% versus last year and down 22% for the year. Clearly, this is a challenging area right now. Foodservice industry conditions remain difficult, and we continue to see pressure on pricing. In addition, out-of-home consumption of pies and cakes continues to be down as many consumers pass on dessert. Our approach to this difficult environment has been to maintain market share and focus on selling differentiated new products, like our presliced pies. Beyond these adverse industry conditions in the fourth quarter, we experienced material product outages and higher costs as we took our Tarboro, North Carolina State production plant offline to make some improvements. These disruptions showed up in the financials as lost sales and higher cost of goods sold. These outages and costs ended up being more significant than we expected. The good news is now we have a significantly upgraded facility that we believe will be an advantage as the new standards from the Food Safety Modernization Act become mandatory.

Overall, our volume was up in Foodservice for the quarter. High commodity sales and an increase in Foodservice meat products more than offset a double-digit decline in bakery. Despite higher volumes in the fourth quarter, Foodservice net sales were lower as negative mix and lower pricing offset the increased volume. This pricing was the combination of the easing of commodity inflation and the ongoing industry pricing pressure. Full year sales increased 2.4% as higher commodity-driven prices more than offset the industry pricing pressure mix and relatively flat volume.

In our Australia Bakery segment, the volume declines you see are in part due to actions to exit unprofitable businesses. Excluding the impact of FX, net sales were flat in the quarter and down 3.5% for the full year. In the quarter, pricing and favorable product and channel mix offset the impact of the volume decline. Operating segment income of $1 million in the quarter and $4 million for the year is up compared to losses in the prior year. The team in Australia has done a nice job, substantially completing its break from the prior Sara Lee international operation and getting set up as a standalone business in a new separate location.

Now let's move on to fiscal year '13 guidance. I'll begin with a few thoughts on how we think about guidance. At this time of the year, it's appropriate to provide a financial outlook for our business. We have recently completed our operating plan for the fiscal year, incorporating what we know at this time. Our teams are signed up for their piece of the plan. As a management team, we're highly committed to deliver our midterm guidance and the important milestones along the way. We will be transparent with our investors as we move through the year. We will keep you abreast of our progress. When we get to CAGNY in February, we will provide an update on how things are evolving for the strategic imperatives that are critical to delivering our midterm financial goals of 4% to 5% sales growth and a 10% operating margin. We do not intend to provide quarterly guidance. We're committed to doing the right thing to execute our strategy and create value over time.

With that said, our guidance for fiscal '13 is net sales relatively consistent with what we achieved in fiscal '12 and adjusted EPS of $1.40 to $1.55. As stated in the press release, we expect adjusted operating segment income to be flat to modestly down from fiscal '12. Our guidance is influenced by a number of factors. Fiscal '13 is a transition year. We will execute the strategy that we've discussed with you: increase our MAP, increase our investment in innovation, fix our troubled areas and deliver this year's portion of our cost savings program. We have some heavy lifting to do this year, and a lot of the benefit for what we expect to get done will show up in the financial results post fiscal '13. Our guidance of relatively flat net sales reflects lower pricing on a year-over-year basis, offsetting the benefit of expected volume growth.

Since we last spoke in June, there have been a lot of movement in the commodity markets. The impact of unfavorable weather conditions has contributed to a negative outlook for this year's crop yield. We believe much of the impact of that will be seen in our business toward the end of this fiscal year and more significantly in fiscal '14. In the near term, some of the meat commodities that we are most exposed to have declining prices. So we expect to experience near-term favorability. For this fiscal year, we expect modest commodity deflation versus last year and that's what we've built into our guidance. The timing of exactly how the conditions I discussed a minute ago will flow through the market and affect the basket of commodities we purchase will continue to evolve. We currently expect favorable year-over-year commodities in the first half of the year. If we do experience favorable commodity cost, our Foodservice contracts will require us to pass a large amount of that onto our customers. For some of our categories, we will have a similar dynamic on the Retail side. The expectation for rising commodity cost at the end of this fiscal year and into fiscal '14 places even more importance on our strategy to build our brands, so that we have the brand strength and pricing power to adjust changing input cost. Our SG&A for fiscal '13 is expected to be up versus last year. The benefits from cost-saving initiatives will not fully offset the impact of stranded cost, inflation and certain other cost increases. We have full line of sight to the $40 million of cost savings we have included in our fiscal '13 guidance.

Let me finish with some comments on a few other items. On capital allocation, we announced a quarterly dividend of $0.125 per quarter or $0.50 on an annualized basis, which is in line with the range we previously provided. Along with our adjusted EPS guidance range, this dividend level equates to a dividend payout ratio of 32% to 36%. As previously discussed, our initial level of dividend payout was influenced by the legacy cash obligations we need to fund this year and our desire to maintain flexibility through a transition year. We will evaluate our dividend payout level on an ongoing basis and assess the opportunities in front of us to optimize overall total shareholder return.

We will have a starting cash balance of $235 million, which is much higher than my expectation of $120 million back in early June. The higher opening cash balance is primarily due to 3 things: First, we will have a higher AP balance, which reflects the timing of purchases and payments. There is no sustainable benefit from this; it's just a timing issue. Second is the timing of the payment for certain legacy items. Again, this represents timing and does not give us a sustainable benefit. Finally, higher-than-expected foreign currency hedge gains due to the decline in the euro, leading up to the final spin date. This is a real benefit for us and strengthens our net cash position.

With the movement of some legacy cash items, I am updating our legacy cash obligation from $170 million to $190 million to $190 million to $210 million to complete the restructuring plan and other obligations trailing the spin-off and transition from the prior Sara Lee Corporation. We have a higher starting cash balance to cover these obligations. Another update from what I told you in June is that not all of the legacy cash items were able to be booked into the P&L in fiscal '12. We anticipate approximately $65 million to $75 million or a $0.35 to $0.40 of EPS will be charged to reported EPS this year related to these legacy obligations. These charges will not impact our adjusted operating segment income, which is the basis on which we provide guidance.

Our opening debt balance of $944 million is in line with what we expected.

I'll now turn the call back to Sean for some closing comments. Sean?

Sean M. Connolly

Thanks, Maria, and thank you, all, for joining us on our first quarter call as the new Hillshire Brands Company. In summary, our entire team is on board, aligned and highly focused on providing an attractive total return proposition to our shareholders over the medium and long term. We know this is what our shareholders expect, and it's what we expect of ourselves. We intend to deliver this attractive return by combining a competitive dividend with sales and earnings growth and by the end of fiscal '15, we expect sales to be growing at 4% to 5% and to deliver 200 basis points of operating margin improvement, all supported by a strong balance sheet. I'm confident that by investing in our brands, focusing on innovation and operating efficiently, we will be able to create significant value for all of you in the coming years.

With that, let's open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Ken Zaslow.

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

Ken Zaslow, Bank of Montreal. So my first question or the question I'm looking at is I'm looking back at a past slide. It seems like the sales growth outlook may have been dampened a little bit in 2013. Is that true? Or is -- I'm misreading it? I just want to -- I went back to the old slides, and it looked like you expected volume and sales to be both positive. Now it seems like you're more expecting it to be flat. Can you talk is it just the Foodservice side and the bakery stuff that you’d addressed or is this something different?

Sean M. Connolly

Ken, we have -- we've not given guidance on '13 until today. So as we mentioned back at Investor Day, we were in the process of rolling up the annual operating plan, working with our board and that today will be the first time we unveiled the guidance.

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

Okay. And can you talk a little bit about how the -- is there any change to how you think about 2015 relative to the performance in the 2013 outlook?

Sean M. Connolly

No change at all. As we've said, 2013 is a critical year in terms of teeing up fiscal '15, but in terms of degree of difficulty, if that's what you're getting at, our 2015 outlook we believe is stretching but plausible. And we are entirely focused on the same levers that we're pushing on that we referenced at our Investor Day.

Operator

The next question comes from Andrew Lazar.

Andrew Lazar - Barclays Capital, Research Division

Barclays. First off, I'm curious. The EPS range you've laid out is relatively wide, and even with a lot of the knowns that we have for sort of below the operating line items, it certainly seems like it would take more than, I guess, a modest decline in segment operating income to get to the sort of the lower end of that EPS range. So first off, I'm just trying to get a sense, is that a reasonable assessment? And then more importantly, what is it that we still have, I guess, the least level of comfort or visibility in -- on the operating side as we go through fiscal '13? Is it that – is it the volume piece that's most unknown? The amount of MAP that you're going to need to spend? Is there something on the cost side that's still a little bit less clear? Just trying to get a sense of where you've got sort of the least and the most visibility that would require that sort of low end of the range, which seems a little bit tougher to get to.

Sean M. Connolly

Yes, let me give you my perspective on that, Andrew, and then we'll ask Maria to chime in here. But the first thing I'd point out is that we are absolutely unwaveringly committed to do what's necessary to get this business in a position where it's delivering strong and sustainable results, and that means we're quite clear eyed in terms of the things we've got to do this year to strengthen the business. And what we don't want to do is compromise those things that will deliver sustainable performance over the long term because we're overly focused on the short term. So we are committed to doing what's going to build long-term success. Now that said, I would say to me, as you look at the range and the size of the range, the piece of it that we should really focus on is the gross margin piece because we've got our assumptions on gross margin. But again, keep in mind, this is a transition year so not all of our brands are fully to bright, which means they're not all at the pinnacle of their strength right now. We've got to make sure that we keep the volumes robust. We've got make sure we stay competitive in the marketplace, while we take the actions that are going to strengthen these brands over the long haul. And that's our focus point because ultimately, the margin expansion that we're after over the -- over time is really contingent on improving brand strength so we can have stronger equities and reduce the elasticities, such that as we face commodity headwinds down the road, we've got better pricing power and more strength in our gross margins.

Andrew Lazar - Barclays Capital, Research Division

And then just one other one would be -- and I realized you don't have a quarterly guidance to sort of work with, but given it’s sort of a new entity going forward, I guess, if there were anything even directionally about things we should keep in mind, whether it be when -- what part of the year, certain either launch costs come into play. Obviously, I mean, I think it sounds like a little bit more back half loaded from a more significant innovation standpoint like at Hillshire, just so we can try and get ourselves in the right place from a modeling perspective and expectation standpoint.

Sean M. Connolly

Well, we've got innovation that's going to sprinkle out throughout the marketplace -- into the marketplace throughout the year. I think as important as the innovation that's going to hit the marketplace this year is the rebuilding of the innovation pipeline, and that is exactly why we brought in Sally Grimes and created a fully dedicated team, because while we've got new innovations coming into the marketplace this year, with the old organization we had in the old days, it was basically equipped to get stuff to market but then not also parallel path the stuff that would come next. So that's why I described our innovation pipeline as having not been quite robust enough. So we do have stuff that will flow through the markets from a modeling standpoint. I'd say it flows throughout the year but different things, obviously, coming by quarter. But I think the key piece is that fiscal '14 and '15 will really hinge on the work we're doing right now, and we have lots of good ideas that we're pursuing that we've got to validate that will come to the marketplace later.

Maria Henry

And we do have some seasonality in the business that I think you're used to from the segment reporting with the second quarter and the fourth quarter being stronger quarters.

Operator

The next question comes from Akshay Jagdale.

Rohan M. Patkar - KeyBanc Capital Markets Inc., Research Division

KeyBanc Capital Markets. This is Rohan Patkar on for Akshay. My question is on commodities and your outlook. I know your fiscal '13 outlook assumes modest commodity deflation. Can you provide a breakdown of this overall deflation by commodity like protein versus the other major subsegments of your basket? So what commodities do you expect to be up or down? And if you can provide any color on the order of magnitude, that'd be very helpful.

Sean M. Connolly

We don't get into detail in terms of which commodity is which. I think when we say we expect commodities to be modestly deflationary, we're really talking about commodities there, not total cost. Obviously, below the line costs, we expect to be modestly inflationary as we've already talked. But we don't break it out by piece so that's a level of detail that we won't get into.

Rohan M. Patkar - KeyBanc Capital Markets Inc., Research Division

And just a follow-up, how has your outlook changed over the last month, 1.5 months as a result of the drought in the Midwest?

Sean M. Connolly

Well, I think the key to the drought -- I know it's on everybody's mind right now -- is that the recent drought and the heat events are no doubt going to impact commodity prices over time, but we currently see this as more of a back half fiscal '13 or fiscal '14 issue. And it really has to do with the cycle times associated with raising different livestock species. So we expect the grain prices to roll through the proteins later, not sooner.

Operator

The next question comes from Alexia Howard.

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

Yes, it's Sanford Bernstein. Can I ask about the MAP spending outlook? You mentioned that 3.4% for fiscal '12 was low. I think you talked at the Investor Day about aspirations to increase that. How much do you intend to increase it, ballpark, in fiscal '13? And can you give us an idea of what the long-term percentage of sales might be?

Sean M. Connolly

Well for fiscal '15, we come out of fiscal '15, we talked about a MAP spend target in the ballpark of 5%. That translates to a Retail division MAP spend of about 6%. And as I've said before, I wouldn't go ahead and expect an even spend across our brands. I think the principle we've got with respect to MAP is we've got to be really focused on ROI. It's got to be MAP that has impact. So when I talked before around it's encouraging to see MAP working, it's the right advertising and marketing work in the right spots on the right businesses. So we had Ball Park in Q4 in a position where we were confident that it was ready for MAP spend, and what we saw from that MAP spend in combination with our typical seasonal merchandising was good impact. We've seen the same kind of thing for MAP on Jimmy Dean in the past. And as we've said, we are hard at work now trying to get our other key equities in a position where they are equally ready to take on a MAP spend. Hillshire Farm and Hillshire Farm lunchmeat in particular is the one that we are hustling to work on. In terms of the flow of MAP by brand and the level for -- obviously, for competitive reasons, I don't want to tip my hat there, but you should expect that we will migrate toward that 5%, and when we're confident that we can spend it prudently, we will spend it.

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

Great. And just a quick follow-up on the sales growth, building on Ken's question. You've mentioned that the sales are likely to be flat this year. What does that mean for organic sales growth? Is it because of the timing of the dispositions in Foodservice, and you do expect to see some organic sales growth? And are we expecting to see positive volume and maybe price flat to down? Or how will that play out this year?

Maria Henry

Yes, we expect our volumes to be up slightly, and in terms of organic growth, we had the impact of the Aidells acquisition in fiscal '12, and that's where we get the difference on the organic side. We have not built any acquisitions into our guidance for fiscal '13 so the comments would all be organic.

Sean M. Connolly

I'd just add, underlying the volume Maria talks about, keep in mind as we've talked before, we have some businesses that are clicking along quite nicely. We have other businesses that we know we've got some challenges on. Those businesses, we don't expect to be growing volumes right out of the gate. Those are the ones that we've got product work to do, packaging work to do. We will flow those through, through the course of the year so we can rely on stronger volumes into the future.

Operator

The next question comes from Ken Goldman.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

JPMorgan. I'm still not 100% sure how to make the math work on your guidance. If you're putting the segment EBIT at similar or down slightly year-on-year, and if you're still expecting similar corporate expense year-on-year, then why would your EPS be down at the low end of your guidance so much? Maybe it's stranded costs. But if it's that, won't stranded costs be in the corporate expense line, right? Won’t higher MAP be either in each individual segment or in the corporate expense line? I'm just hoping for a little clarification on some of the costs next year and how you get from that similar EBIT number to down EPS, which is not down by an insignificant amount, perhaps.

Maria Henry

We have a number of things. You mentioned stranded costs. Stranded costs are in the operating segment. Those show up in the P&L both in cost of goods and also in SG&A, and so that affects our fiscal '13 guidance as we had discussed. We have -- there's a few other puts and takes for fiscal '13 versus fiscal '12 related to some onetime favorability that we had in fiscal '12 that won't repeat -- that we don't plan to repeat in fiscal '13. With the spin, we had some changes in the way that our compensation worked that will increase our compensation expense for fiscal '13 that we didn't have in fiscal '12. So there's some miscellaneous year-over-year cost items that will hit us in SG&A in addition to the regular inflation in the business and the stranded cost that we will be absorbing in fiscal '13 versus fiscal '12.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Okay, I'll follow up with that offline, but then one follow-up. I'm still a little confused also about what was your total company EBIT margin in 2012 versus what you expect it to be in 2013, not just segments, but including everything, corporate expense, credit costs, everything you just mentioned? If I assume $70 million corporate expense last year, $70 million next year, I'm getting about an 8.1% EBIT margin last year in a range of about 7.3% to 7.8% next year. Is that accurate, first of all? And if so, you previously guided total company EBIT in '13 to being a lot like it was in '12, so I'm curious if there was a change there or whether maybe I didn't hear that right the first time.

Maria Henry

Sure. On the fiscal '12 numbers, when we file our K, you'll have all the information; and at that point I'll be happy to talk through what you see in the K and reconcile that back to the basis that we're providing today so that I can speak completely to those numbers. The comment that I made at Investor Day, while I noted we were not providing guidance because we still had a few months until we got to a point where we were providing official guidance, I did say that the expectation at that point was that fiscal '13 would look a lot like fiscal '12 in terms of the bottom line. So a number of factors have evolved. We're smarter on what we think will be happening in the commodity market. And the other point is on the range, and this goes back to an earlier question of having a $0.15 range. We are providing ourselves some room and flexibility to ensure that we can remain focused on doing the right things for building value in the long term and also some flex as commodity markets and our opportunities for investment evolve throughout the year.

Sean M. Connolly

And I’d just add a little bit of color to that as well. Again, we are squarely focused on where we need this business to be in '15 so that it can deliver sustainable shareholder return. What we don't want to do is give our shareholders a Pyrrhic victory where we come in at the high end of the range, but we've not taken the steps necessary so that we can sustain that performance year in, year out. So as there -- we are, again, very committed that there are certain things we must do to the business this year in the area of R&D, in the area of innovation, in the area of brand building that are going to be essential to future performance. We need to give ourselves the flexibility to see those things through regardless of what comes at our way because that will be critical to going forward. And as Maria said, we've -- we intentionally didn't give specific guidance back on Investor Day because a lot was moving around then. We are much clearer in terms of where things are settling out now. On the year, again, commodities are mildly deflationary, but the magnitude of that favorability has diminished somewhat since we were at Investor Day. So again, keeping our commitment to the mid-term guidance really is top priority and knowing the actions we need to take, we believe that this range is the right range when you think about what's necessary for long-term success.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

And Sean, really that makes sense, and I do appreciate that. I just want to make sure I'm hearing Maria correctly. So the guidance that was previously said '12 would look a lot like '13, you are backing off that a little bit and saying that the guidance look a little bit lighter on the EBIT margin side next year than what you previously thought. Is that right?

Maria Henry

The guidance that I've given today is that it will be flat to down slightly.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

But the margin side is no longer a lot like, correct?

Sean M. Connolly

That applies to margin.

Maria Henry

Yes. It's flat to down slightly.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

You previously said the margin will look a lot like it did last year. That's no longer, I think, a fair statement. Is that right?

Maria Henry

The only thing I provided guidance on today is the operating margin, and I'll be happy to reconcile it for you when I've got the 10-K out, to what it was on a comparable basis for last year.

Operator

The next question comes from Tim Ramey.

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

It's D.A. Davidson. I'm just wondering about you seem to be confident that you can file the K at the end of the month, which is great, but some other restatement situations that we've been through, we've had to wait a little bit longer for filings. What is it that makes you comfortable that you will be relatively or exactly on time with the filings?

Maria Henry

The investigation that is ongoing by D.E MASTER BLENDERS is well underway, and our ability to file on time is dependent on us getting the financial results from D.E MASTER BLENDERS so that we can incorporate that into our filings as discontinued operations. And so while we don't control the investigation, at this point, it is our understanding that the investigation will be completed and in enough time to allow D.E MASTER BLENDERS to provide us with its financial information that we need to include in our 10-K. Obviously, that is -- nothing's definitive until the investigation is complete and D.E has had the opportunity to understand all of those financial impacts to get the financials done.

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

Is there -- and I assume the auditors are going to take some time to review that as well as review the previous financial statements. Is there a full-on forensic audit being launched here? I assume so, since there was apparent fraud or misstatements.

Maria Henry

As I'm sure you can appreciate, I am not going to comment on the D.E MASTER BLENDERS investigation. I would encourage you to direct any questions to the D.E MASTER BLENDERS team.

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

Sure, yes. I just was concerned about your ability to file. The -- I know you're not specifically wanting to discuss specific commodities. But I can understand why sows might go down a bit, and that's important to the Jimmy Dean product line. But wouldn't most of the rest of your product line be more sensitive to products that will be hitting a little higher rather than a little lower? Can you just maybe flesh that out a bit?

Sean M. Connolly

Well, it's -- obviously, the drought is having an impact on a lot of things, but what ends up happening is you end up seeing animals getting taken to market, and that can actually increase supply in the short term and then it has a lag effect in terms of the supply being light down the road. So that's essentially -- and that's also true of beef where you see pastureland is quite stressed right now. So that's the dynamic that you tend to see where it might seem counterintuitive, but you've got grain issues and corn issues in the short term but you've got supply being increased because you're seeing the -- more animals are liquidated.

Operator

Question comes from Amanda English (sic) [Jason English].

Jason English - Goldman Sachs Group Inc., Research Division

This is not Amanda. This is Jason. So geez, I guess like Ken, I'm confused on how you make that guidance math work, but it feels like we've beaten that pretty good. I’d like to ask some questions on innovation. Ball Park, when you guys host your Analyst Day, I think you mentioned that you're pushing the frozen, was very much in test market phase right now. Can you update us on the progress of that test market and where you stand in terms of national rollout or when we can expect national rollout?

Sean M. Connolly

We've got a variety of Ball Park items that are in market right now on a bit of a limited distribution basis, and that's intentional because it speaks to our philosophy around really making sure we have in empirical evidence on our innovations before we put big dollars behind them and scale them up. The burger launch that I referred to in my comments earlier is farther along, and it gained traction quickly, and it began to roll out into increasing distribution, as we were moving through Q4. So we will -- we've got evidence on that now that says we're confident. We will continue to work that, and we're currently working through increasing our supply so we can get that to market. Our other products that we shared at Investor Day on Ball Park are very early days, too early for me to comment on prudently and try to inspire a lot of confidence. But suffice it to say, I like what I see so far, and that's just the beginning of our overall innovation agenda.

Jason English - Goldman Sachs Group Inc., Research Division

And sticking with innovation. Hillshire Brands or the Hillshire brands specifically in sliced lunchmeat, you didn't have a lot of innovation ready at the Analyst Day. We're still not seeing any today. Any updates in terms of when we can expect to see what's next for that brand, in sliced lunch meat?

Sean M. Connolly

Yes, it's a multi-phased action plan that we're executing in our lunch meat business, Jason. As we saw in quarter 4, the first step was to really get our price gaps right. So to give you an example, our large family size lunch meat at the beginning of last fiscal year was at about a $0.50 gap to Oscar Mayer, who is the closest branded competitor. That gap nowadays is closer to $0.15; and therefore, you start to see the volume stabilize because the products are very competitive. Step 2 is really around product quality and packaging. And while I don't want to tip my hand to competition as to exactly when it's going to hit the marketplace, it will be toward the back half of the year.

Operator

[Operator Instructions] The next question comes from Robert Moskow.

Robert Moskow - Crédit Suisse AG, Research Division

It's Crédit Suisse. Maria, I think you said that you raised your estimate for onetime payments related to the split-up of the company. You raised it about $20 million. I don't think I heard you say why. And is that $20 million pretty much consistent with the extra cash that you said is related to the -- I think, it was currency? Or is it different?

Maria Henry

Sure. I'll -- 2 parts of that question. On the legacy items, I took it up by $20 million, and that is because not all of the items got paid out in fiscal '12 that I expected to be paid out in fiscal '12 so some of them spill over into fiscal '13. And so that affects those things, the higher legacy cash obligations that we started out with but also the -- that is part of the higher cash balance that we're starting out with.

Robert Moskow - Crédit Suisse AG, Research Division

Okay, and a follow-up, as you look to fiscal '14, you said your dividend payout ratio is starting out at a low level because of the legacy payments. If fiscal '13 pretty much gets delivered the way you think it's going to be delivered, does that still open up the door for fiscal '14 for a payout hike? And to what extent does commodities and working capital requirements play into that decision?

Sean M. Connolly

Well, it's clearly an option as we've talked before. We are -- we've got -- we have no desire to build a cash war chest on this business. We've got several good options that we believe can drive shareholder return, including increasing the dividend over time. And as soon as we've got some clarity in terms of which of those choices we’ve aligned with the board on, we will be back and we will share it with our investors.

Operator

Our last question comes from Bryan Spillane.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

It's Bryan Spillane from Bank of America Merrill Lynch. Just, Sean, wanted to get a perspective on what you're assuming for the competitive environment, just the market over the next year and maybe even to 2014. And I guess, if there's a potential that there's going to be some near-term commodity protein cost disinflation and then potentially re-inflation, let's say, a year out, is there a chance if the market gets price competitive in the near term to try to take advantage of some of those lower input costs? And if so, how are your -- how is your plan -- does your plan at all anticipate that, that's a potential scenario for this year? And I guess, tied to that, just given the prospect for more inflation in the future, do you think that will moderate some of the competitive behavior in the near term?

Sean M. Connolly

Well, we are trying to build a culture here that is -- increasingly has a, what I will describe, is a productive paranoia, which means we're always trying to anticipate what our competition is going to do. Unfortunately, they don't tell us what they're going to do so we never bet a thousand on that one. But it wouldn't surprise me at all if we see certain competitors in certain categories taking a more aggressive stance than other competitors in other categories. We've got to be prepared for that. The way I think about it, and it's come up a couple times on the call, the range of the guidance we've given is that the higher end of the range of the guidance we've given is -- puts us at a profitability that is very close to where we were last year. We want to preserve some flexibility to respond to competition. We want to preserve flexibility to continue to make the MAP investments we need to make. And we want to preserve some flexibility to make the innovation investment we need to make because the ultimate return on those investments, measured in the fullness of time, will be significantly greater than not taking those actions and trying to force -- shoehorn ourselves into the top end of the range should certain curve balls come our way. That's the simplest way I can describe how I think about the range, and I think it speaks back to your question around trying to anticipate competitive action.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

That's very helpful. And do you feel like today, you've got the organization in a position to be more on your front foot if the competitive environment does change versus maybe what's occurred historically?

Sean M. Connolly

I absolutely do. I feel extremely good about the caliber of my team overall and the way we’ve put together this team with some of the best people in the industry and the level of managers below them. I feel excellent about the caliber of the talent. And in particular, I talked at Investor Day about a new revenue management team we put in place, and that team really has 2 responsibilities. One is to help us manage this very large trade spend budget more efficiently, and we're well on our way there. The other piece of it is to -- we always have a clear visibility to commodities but where we've had some trouble in the past is being flat-footed in pricing against those commodities and not fully taking into account category, pack size, channel, price points, thresholds, price gaps, all of that stuff. It's a highly analytical process. And the key is you've got to act quickly, and you've got to be ahead of it. You can't be sluggish and then overreact because that's not good for our business. So the new revenue management team and this fellow we've brought in, Curt Balara, who will be joining us shortly, will be on that team. So he's -- the balance of his team that he's inheriting is now in place, and I feel very good about what that team's going to do for us.

Operator

And we have a follow-up question from Ken Goldman, and there are no further questions at this time.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Interested in your comments about based on your contracts, having to pass on some of your cost deflation at not just the Foodservice but also to Retail? That surprised me a bit because I was under the impression, I still am, that you're much more of a branded food manufacturer than a protein company. But passing on cost deflation is something protein companies do, right now packaged food companies. So can you help me from -- maybe understand a little bit better what percent of your Retail business is more of this price-through model, which is somewhat less attractive? And maybe what percent will have more sustainable pricing no matter what the underlying commodities do?

Sean M. Connolly

Well, as we broke out for you at Investor Day, there are really 3 buckets that you can break our portfolio into. They’re -- out of the $4 billion revenue base, there's about $600 million that's more or less on branded, more commoditized. There's a big bucket that we call branded meal components that is somewhere in about the 30-ish gross margin range. That's about $2.7 billion. We've got about another $7 billion worth of business that are what we call branded ready meals. That's into the mid 30s there. What we're talking about here, Ken, is that you never can anticipate what competition is going to do. We have lots of branded competitors. On occasion, they, too, like to seize the moment and try to pursue volume so they can get the operating leverage out of their plants. We've got to be in a position to defend our business. We also get tremendous operating leverage out of our plants. And by the way, it varies by categories so it's not -- within the Retail business, there will be a difference between categories -- some categories than others. I won't specifically talk to specific competitors or specific categories. But we've got to be fleet of foot. Overall, we unmistakably have a branded portfolio, and we will continue to drive the migration to the higher margin, more branded end of the spectrum as we innovate.

All right, I think that's it. Now Melissa, you want to wrap it up?

Melissa Napier

So thank you, everyone. As always, investor relations is available today to address any follow-up questions that you may have. Thanks.

Sean M. Connolly

Thank you.

Maria Henry

Thank you.

Operator

Thank you. That concludes today's conference. All lines may disconnect. Thank you for your participation.

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