Charges trim operating profit at Sara Lee Food & Beverage

by Eric Schroeder
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CHICAGO — Operating profits of Sara Lee Food & Beverage in the third quarter ended April 1 were $43 million, down 17% from the third quarter last year, when operating income was $52 million. Sales were $1,056,000,000, up 5%.

Operating profits of the North American Retail Meats business were $46 million, down 32%. Sales were $607 million, up 6%.

Results in meat were adversely affected by a $41 million decrease related to transformation charges, exit activities and other significant items. These partly were offset by the effects of higher unit volumes and lower commodity costs. Sales gains were driven by double-digit volume growth in Jimmy Dean Breakfast Sandwiches, as well as continued volume increases for Jimmy Dean Skillets, Hillshire Farm smoked sausage and Ball Park hot dogs.

The baking group of Sara Lee sustained an operating loss of $3 million in the quarter, compared with a loss of $16 million in the third quarter last year. Sales were $449 million, up 5%.

The $13 million improvement included a decrease of $4 million in restructuring and transformation costs, which was more than offset by increased sales and improved operating efficiencies resulting from prior restructuring activities. Overall, the 5% gain in North American retail bakery segment sales were driven by higher U.S. branded fresh bakery volume, the addition of the recently acquired Butter Krust baking business and increased Senseo volume. Unit volumes for the quarter, excluding acquisitions, were flat, with increases in branded fresh bakery products offset by the exit of certain regional bread businesses in the year-ago period and lower volumes in non-branded and frozen bakery.

Net income of Sara Lee Corp. in the third quarter was $42 million, equal to 6c per share on the common stock, down 77% from $189 million, or 24c per share, in the first quarter last year. Results included 16c per share in charges from the recognition of goodwill impairments, severance and other costs related to the company’s revamping of its business portfolio, offset in part by gains on the sale of the company’s European branded apparel and rice businesses.

Net sales were $3,789 million, down 1% from $3,844 million. Net sales were negatively impacted by changes in foreign currency exchange rates and the effect of dispositions net of acquisitions, partially offset by sales increases at North American meats, retail bakery and food service.

Operating income in the quarter was $137 million, down 9%.

In issuing its quarterly results, Sara Lee provided an update on its transformation plan, first announced in February 2005. The plan, which is built upon three pillars — organizing the business around consumers, customers and geographic markets; achieving operational efficiency to fund growth; and focusing the portfolio — is nearly two-thirds complete, as Sara Lee has restructured its organization and has sold or is in the process of divesting its non-core businesses.

"Moving forward, the primary focus will be on the second pillar of the transformation: achieving operational efficiencies to fund growth," the company said. "Across the entire business, significant progress has been made in the areas of centralized procurement, information systems and process improvement. The new procurement group is delivering value to the corporation through commodity buying strategies, risk management and cost savings initiatives and by entering into long-term relationships with key strategic suppliers."

The company said it expects fourth-quarter earnings between 27c and 32c per share, excluding one-time charges, and full-year earnings of between 98c and $1.03 per share.

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