Sara Lee Corp. reported earnings for the third quarter of fiscal 2011 and announced portfolio changes.

Sara Lee has entered into a definitive agreement to acquire Aidells Sausage Co., a leading premium brand in the dinner sausage category in North America, for $87 million in cash. The deal is expected to close within the next few months, and is subject to customary conditions, including regulatory approval. This acquisition expands the company’s presence into the organic and natural meat segments, while also increasing coverage of fast growing retail channels, such as club stores and organic grocers.

The company's third quarter resulted in a 6% increase in adjusted net sales from continuing operations to $2.2 billion. Reported net sales increased 7%. There was an 11% decline in adjusted operating income from continuing operations. Reported operating income from continuing operations declined 6%.

“We are making great progress toward the creation of two solid, stand-alone companies,” said Jan Bennink, Sara Lee executive chairman. “We are focused on preparing both the Coffee company and the Meat company for strong and vibrant futures. Looking ahead, in North America we are pleased to announce that we signed an agreement to acquire Aidells Sausage Company. Aidells premium, high-potential products will enhance our North American meat portfolio. Also within North America, we will be evaluating our strategic options regarding the North American refrigerated dough business. Within the Coffee business, we are working on the strategic role and options relating to our International Bakery segment. These initial steps are part of the preparatory phase which will give each company the best platform for a strong and independent future.”

In reviewing third quarter results, CEO Marcel Smits commented, “On the operational side, our strategy is to cover commodity inflation through price increases and cost savings, and meanwhile continue to build our brands with superior marketing and innovation. We remain committed to this approach despite some short-term volume risk. Mainly due to this volume risk in our core businesses, as well as intense competition in our International Bakery segment, we are reducing our guidance by six cents.

“That said, we are optimistic about the long term prospects of our businesses,” he added. “In North America, for the first time in four quarters, we were able to offset commodity cost increases through pricing actions and productivity gains. In International Beverage, we are still lagging the rapid increases in commodity cost, but we saw price increases accelerate as the third quarter progressed. In total, on a year-to-date basis, MAP spending is significantly higher, SG&A costs are significantly lower and we are confident in our ability to manage commodity cost inflation over time. In addition, as work on our spin-off progresses, we expect to gain further visibility on additional cost reduction opportunities.”

The North American Retail business remains focused on gross margin recovery through pricing initiatives and productivity gains. Pricing actions and favorable sales mix drove a net sales increase of 1% (on an adjusted and reported basis). Despite higher prices, the Jimmy Dean and Hillshire Farm brands grew volumes in the key strategic categories of breakfast sandwiches and lunch meats. In other categories, volumes were negatively impacted by pricing actions, the rationalization of low-margin promotional programs and the timing of Easter.

The segment continued to show sequential improvement in adjusted operating margin, increasing to 12.8%, up from 11.6% in the second quarter and 9.0% in the first quarter. Reported operating margin for the quarter was 12.6%. Higher commodity costs were, for the first time in four quarters, recovered through pricing actions and cost savings. These positives were more than offset by volume declines and investments in IT systems and the new Kansas City meat slicing facility. These factors drove an adjusted operating segment income decline of 8% versus a very strong year-ago period. Reported operating segment income declined 16%.

For the first time in several quarters, reported and adjusted net sales increased in the North American Foodservice segment, up 5% due to pricing actions and strength in meats, frozen bakery and liquid coffee. This growth was achieved despite the losses of a high-volume, low-margin bakery contract in the second quarter of fiscal 2010 and a low-volume, high-margin liquid coffee contract in the fourth quarter of fiscal 2010.

Adjusted operating segment income increased 27% driven by strength in meats and frozen bakery. Reported operating segment income increased 32%. Adjusted operating margin expanded 130 basis points over the prior year to 7.8% driven by manufacturing efficiencies and favorable sales mix. The reported operating margin increased 150 basis points to 7.4%.

The company expects volume improvement, continued cost savings and the full realization of pricing actions to drive full year sales and profit growth.

Source: Sara Lee Corp.