Hillshire Brands: Continues Strong Momentum in Third Quarter

Chicago / IL. (hbc) The Hillshire Brands («Sara Lee» frozen bakery and other brands) reported results for the third quarter and first nine months of fiscal year 2014. Third quarter net sales grew 3,4 percent to 955 million USD. Adjusted operating income grew 34,8 percent to 97 million USD; reported operating income grew 18,3 percent to 76 million USD. Adjusted diluted EPS grew 31,4 percent to 0,46 USD; reported diluted EPS stayed unchanged at 0,34 USD. Fiscal 2014 sales growth expected to be in low single digits and adjusted diluted EPS at the high end of the guidance range.

CEO Perspective

«The tremendous progress we have made in strengthening our brands and reducing costs is unmistakable. Despite an unusually inflationary input cost environment, we meaningfully improved our core business fundamentals and have increased our operating margins. Underlying this performance is the work we have done to improve our capabilities in areas like innovation, pricing analytics and marketing, as well as our robust productivity programs», said Sean Connolly, president and CEO of The Hillshire Brands Company. «In addition to our base business momentum, we are beginning to leverage our balance sheet for additional value creation, with a focus on acquisitions. Overall, while I am pleased by another strong quarter, I am most encouraged that we have validated our original investment thesis and are well positioned to deliver strong returns over the long run», added Connolly.

Discussion of Continuing Operations Results

Net sales of 955 million USD were up 3,4 percent versus the prior year´s third quarter as positive price/mix in both the Retail and Foodservice / Other segments more than offset volume declines resulting largely from pricing actions. The company estimates the later timing of Easter negatively impacted net sales growth by approximately 130 basis points. Adjusted operating income of 97 million USD increased 34,8 percent, and reported operating income increased 18,3 percent to 76 million USD primarily behind higher sales and non-input cost favourability. As a percent of net sales, adjusted operating income was 10,1 percent. On a year-to-date basis, net sales of 3,0 billion USD were up 2,1 percent versus the prior-year period as positive price/mix more than offset volume declines. Adjusted operating income of 312 million USD increased 3,9 percent as cost efficiencies and positive mix more than offset under-recovery of input cost inflation via pricing; reported operating income decreased 0,5 percent to 247 million USD. As a percent of net sales, adjusted operating income was 10,3 percent.

Retail

Retail net sales were up 3,2 percent in the quarter versus the prior year as favourable price/mix more than offset volume declines, which were largely the result of pricing actions. Sales growth was supported by a strong MAP rate of 4,2 percent of total company net sales. Operating segment income increased 19,9 percent versus the prior year as increased sales and cost efficiencies more than offset higher input costs. Led by Delights breakfast sandwiches, Jimmy Dean continued to post strong volume and sales growth in the quarter. The acceptance of the new products that extend Jimmy Dean beyond breakfast has also been positive. Hillshire Farm lunchmeat has continued to perform well behind strong advertising and new products. Aidells posted double-digit volume and sales growth as both smoked sausage and meatballs maintained strong momentum.

Foodservice/Other

Net sales increased 4,0 percent as commodity-driven pricing and favourable mix offset volume declines. Excluding commodity meat sales, net sales increased 5,3 percent. Operating segment income increased 9,6 percent versus the prior year behind increased sales and continued cost management. Sales in the convenience store channel grew despite weather-related traffic declines. Bakery products, including the Bistro brand and Luxe Layer pies, continued to gain market share through increased distribution.

Corporate

Excluding significant items, corporate expenses for the quarter totalled five million USD, benefiting from cost favourability, timing of expenses, and one million USD of favourable mark-to-market gains.

Capital Allocation

On April 21, 2014, the Company announced a definitive agreement to acquire Van´s Natural Foods. Van´s is a leading better-for-you food brand that offers multiple product lines in frozen breakfast and snack foods. The company expects the transaction to close in May 2014, pending regulatory clearance, with a total purchase price of 165 million USD in cash.

Outlook

The company now expects full-year sales growth in the low single digits and adjusted diluted EPS to be at the high end of the previously provided range. In the fourth quarter, the company expects margins to be lower than those achieved year to date given sharply higher input costs and planned investments in merchandising to support the important grilling season. Corporate expenses are now expected to be between 40 and 45 million USD, excluding significant items and mark-to-market adjustments. The company continues to expect an adjusted effective tax rate of 35 to 36 percent and continues to expect net interest expense of approximately 40 million USD.

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