Hershey (HSY) Q4 2011 Earnings Call February 01, 2012 8:30 am ET Executives Mark K. Pogharian - Director of Investor Relations John P. Bilbrey - Chief Executive Officer and President Humberto P. Alfonso - Chief Financial Officer, Chief Administrative Officer and Executive Vice President Analysts Jason English - Goldman Sachs Group Inc., Research Division Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division Eric R. Katzman - Deutsche Bank AG, Research Division Robert Moskow - Crédit Suisse AG, Research Division David Driscoll - Citigroup Inc, Research Division Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division Kenneth B. Zaslow - BMO Capital Markets U.S. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division Thilo Wrede - Jefferies & Company, Inc., Research Division David Palmer - UBS Investment Bank, Research Division Andrew Lazar - Barclays Capital, Research Division Bryan D. Spillane - BofA Merrill Lynch, Research Division Robert Dickerson - Consumer Edge Research, LLC Presentation Operator
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 2010 filed with the SEC.If you have not seen the press release, a copy is posted on our corporate website in the Investor Relations section. Included in the press release is a consolidated balance sheet and a summary of consolidated statements of income prepared in accordance with GAAP. Within the Notes section of the press release, we have provided adjusted reconciliations of select income statement line items quantitatively reconciled to GAAP. As we said within the Note, 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 fourth quarter results excluding net pretax charges of $27.7 million, which are primarily related to Project Next Century. Our discussion of 2011 full-year results exclude net pretax charges of $32.1 million primarily associated with Project Next Century and a gain on sale of non-core trademark licensing rights recorded in the third quarter. Our discussion of any future projections will also exclude the impact of these net charges and non-service-related pension expenses. With that out of the way, let me turn the call over to J.P. John P. Bilbrey Thanks, Mark. I'm pleased with Hershey's fourth quarter and full-year financial and marketplace results, which represent a solid end to another good year. We accomplished our 2011 objectives while growing adjusted EPS 10.6%, our third consecutive year of a double-digit percentage increase. We achieved this in what was again a very challenging environment that included global economic uncertainty and difficult consumer conditions, commodities spot market price increases and volatility and the implementation and execution of a major price increase. The implementation of our March 30 price increase continues. We're analyzing conversion closely. And on the portion of the business where the shelf price reflects the increase were tracking as expected.
The speed of conversion varies by channel and is consistent with what we've experienced historically and versus our modeling. Net volume elasticity on these pack types is in line with our expectations and better than the historical staples group average.As we look to Easter, the first season where price points will be higher, as expected, retailers are working collaboratively with our headquarter and in-store sales associates. The seasons, Easter, Halloween and holiday are important to Hershey, as well as retailers, as it brings consumers into the store. We believe we have the right mix of seasonal-specific advertising, coupons and programming lined up to help consumers adjust to the new price points. As had been the case all year in channels measured by syndicated data, the CMG category, that's candy, mint and gum, outpaced the historical 3% to 4% category growth rate, increasing 4.5%. CMG also outpaced other snack alternatives in 2011 again such as salty snacks, cookies and crackers, which all grew less than 3%. Overall, confectionery continues to grow, driven by a balance of pricing and investment in the category in the form of both innovation and advertising. As a result, in 2012, we would expect CMG category growth will be above the historical annual growth rate of 3% to 4%. For the full-year 2011, net sales increased 7.2% and was balanced between volume and net price realization. In the fourth quarter, net sales were primarily driven by pricing. We're especially pleased that the volume sequentially improved from last quarter, slightly greater than our expectations and increased about 0.4 points. In terms of Hershey's marketplace performance, for the 12 and 52 weeks ending December 31, 2011, per our custom database in channels that account for over 80% of our retail business, total Hershey's CMG retail consumer takeaway was up a solid 6.5% and 7.8%. As a reminder, these channels include food, drug, mass, including Wal-Mart and convenience stores.
Within food, drug, mass and convenience or FDMxC, here, excluding Wal-Mart, the CMG category also continues to grow. For the 12 and 52 weeks ending December 31, 2011, the CMG category increased 4.4% and 4.5%. Hershey's FDMxC retail takeaway for the fourth quarter and full year was 6% and 7.5%, respectively. As a result, our market share increased by 0.4 points in the fourth quarter and 0.8 points for the full-year 2011.For the overall Halloween and holiday seasons, as expected in Q4, FDMx total combined seasonal category retail sales were up. Specifically, Q4 seasonal category sales increased 4.2%. Hershey Q4 seasonal retail takeaway was up 5.8%, resulting in a 0.5-point market share gain. For the full-year 2011, in the food class-of-trade, the CMG category grew 3.2%. Hershey retail takeaway for the year was up 4%, generating a share gain in this channel of 0.2 points. Fourth quarter food class-of-trade CMG category growth was 2.5%, less than the category's historical growth rate. This was primarily due to continued weakness in the gum category, which was down 5.1% in this channel. Hershey food channel CMG retail takeaway in the fourth quarter was up 3.1%, driven by solid non-chocolate candies. Read the rest of this transcript for free on seekingalpha.com