Hershe (HSY)

Q2 2010 Earnings Call

July 22, 2010 8:30 am ET

Executives

Humberto Alfonso - Chief Financial Officer and Senior Vice President

Mark Pogharian -

David West - Chief Executive Officer, President, Director and President of North American Commercial Group

Analysts

Andrew Lazar - Barclays Capital

Judy Hong - Goldman Sachs Group Inc.

Vincent Andrews - Morgan Stanley

James Targett

Robert Dickerson

Terry Bivens - JP Morgan Chase & Co

Eric Katzman - Deutsche Bank AG

Robert Moskow - Crédit Suisse AG

Kenneth Zaslow - BMO Capital Markets U.S.

Bryan Spillane - BofA Merrill Lynch

David Driscoll - Citigroup Inc

David Palmer - UBS Investment Bank

Presentation

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hershey's (sic) [Hershey] Company Second Quarter 2010 Results. [Operator Instructions] Thank you, Mark Pogharian, you may begin your conference.

Mark Pogharian

Thank you, Crissy. Good morning, ladies and gentlemen. Welcome to The Hershey Company's Second Quarter 2010 Conference Call. Dave West, President and CEO; Bert Alfonso, Senior Vice President and CFO; and I, will represent Hershey on this morning's call. We welcome those of you listening via the webcast. Let me remind everyone listening that today's conference call may contain statements which are forward looking. These statements are based on current expectations, which are subject to risk and uncertainty.

Actual results may vary materially from those contained in the forward-looking statements because of factors such as those listed in this morning's press release and in our 10-K for 2009 filed with the SEC. If you have not seen the press release, a copy is posted on the corporate website, www.hersheys.com, in the Investor Relations section.

Included in the press release is a consolidated balance sheet and summary of consolidated statements of income prepared in accordance with GAAP, within the note section of the press release, we have provided adjusted pro forma reconciliations of select income statement line items quantitatively reconciled to GAAP.

As we said within the notes, the company uses these non-GAAP measures as key metrics for evaluating performance internally. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP, rather, the company believes the presentation of earnings, excluding certain items, provides additional information to investors to facilitate the comparison of past and present operations.

We will discuss our second quarter 2010 results excluding pretax charges. The 2010 charges related to the Project Next Century and the Godrej Hershey goodwill impairment charge, while the 2009 charges are associated with the Global Supply Chain Transformation program. These pretax charges were $86.2 million in the second quarter of 2010 and $42.7 million in the second quarter of 2009. Our discussion of any future projections will also exclude the impact of these net charges. With that out of the way, let me turn the call over to Dave West.

David West

Thanks, Mark, and good morning, everyone. Results for the second quarter were solid. Net sales increased a strong 5.3% and adjusted earnings per share grew 18.6% as core brand continue to perform well in the marketplace. These high-quality results are driven primarily by volume, regained U.S. market share in the second quarter and are pleased with how our brands continue to respond to the investments we made.

Overall, the Confectionary category remains healthy, increasing at the high end of its historical growth rate. Investments in the category in the form of advertising and/or innovation are present from most major manufacturers. Given the high household penetration and the impulsivity of the category, as well as affordable price points, we believe retailers will continue to value the Confectionary category. As a result, we would expect the category to continue to consistently secure key merchandising space and programming.

As reported in the IRI and Nielsen's syndicate data, our U.S. retail takeaway and market share performance for the most part has been balanced across channels. Growth has predominantly been driven by volume gains as consumers have migrated to higher retail price points. This is allowing us to continue to be efficient with our trade promotion dollars, as trade promotion rate was about flat versus year ago during the quarter. Similar to Q1, this is better than our initial expectations. This is noteworthy in the context of the volume gains we've achieved in 2010.

Now let's take a look at retail takeaway. The IRI and Nielsen data in the second quarter encompasses the period from March 21 to June 12. In 2010, Easter occurred on April 4, and in 2009, on April 12. While the first quarter of this year benefited slightly from an earlier Easter, the timing did not materially impact our second quarter marketplace performance. In fact, we gained share in both the first and second quarters. My remarks related to marketplace performance include seasonal data in all periods.

We're pleased with Hershey's marketplace progress. Total U.S. CMG, that's candy, mint and gum, or total category retail takeaway for the year-to-date period through June 12, for the custom database in channels that account for over 80% of our Retail business, so here, I'm talking about food, drug and mass, including Wal-Mart and convenient stores, so on a year-to-date basis, was up 5.6%. Excluding Wal-Mart, Hershey's year-to-date FDMxC retail takeaway is up 5.1%.

Hershey's second quarter retail takeaway for the 12 weeks ending June in FDM, including Wal-Mart and convenience, was up 4%. Excluding Wal-Mart, Hershey's FDMxC retail takeaway was up 4.1% in the 12 weeks.

The launch and rollout of new items such as Pieces is progressing nicely. And in the second quarter, again, new products were a net positive to the top line, about a one point contribution to our overall net sales growth. We gain market share on all classes of trade, except drug, which, as expected, was down but sequentially improved for the second quarter in a row.

Hershey's seasonal Easter retail takeaway increased, up 6.7% and sell-through was solid, as we gain Easter market share of 1.3 points. Our market share in the ski season expanded to over 37%.

Similar to the last few quarters, our performance was driven by the core brands upon which we are focused. Specifically, in FDMxC, the combined retail takeaway in Hershey's, Reese's, Hershey's Bliss and Hershey's Kisses, Twizzlers and Kit Kat brands increased mid-single digits. York, Almond Joy and Mounds, brands that we have just started advertising in January, posted FDMxC retail takeaway up in the low-double digits, excluding the Pieces' new products.

Now for some further details. In the food class of trade, confection category growth was 5.4% in the second quarter. Hershey's retail takeaway in this channel exceeded the category, driven by chocolate, up 7.7% and non-chocolate, up 5.9%, resulting in a total market share gain of 0.5 points in the food channel.

In the convenience store class of trade, the CMG category growth rate accelerated in the second quarter, as the category grew 3.3% versus 2.3% in the first quarter. In the second quarter, Hershey's Easter takeaway increased for the ninth consecutive quarter and was up 5.4%, resulting in a market share gain of 0.5 points.

In the second quarter, Hershey's C Store chocolate and non-chocolate takeaway was up 8% and 4.5% respectively, driven by volume and mix as both standard, loose and king-size pack types perform nicely. Strong in-store merchandising and programming, driven by the Ironman movie tie-in and the Coca-Cola and Reese's joint promotion, drove balanced growth across core brands.

We believe the category will continue to grow in C Stores. Category dynamics, as well as investments by CMG category participants, continues to drive variety, news and excitement and thus, category growth.

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