The Hershey Management Discusses Q2 2012 Results - Earnings Call Transcript

The Hershey (HSY)

Q2 2012 Earnings Call

July 26, 2012 8:00 am ET

Executives

Mark K. Pogharian - Director of Investor Relations

John P. Bilbrey - Chief Executive Officer, President, Chief Operating Officer and Director

Humberto P. Alfonso - Chief Financial Officer, Chief Administrative Officer and Executive Vice President

Analysts

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Andrew Lazar - Barclays Capital, Research Division

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

David Driscoll - Citigroup Inc, Research Division

David Palmer - UBS Investment Bank, Research Division

Thilo Wrede - Jefferies & Company, Inc., Research Division

Kenneth B. Zaslow - BMO Capital Markets U.S.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Robert Dickerson - Consumer Edge Research, LLC

Presentation

Operator

Good morning. My name is Tabitha, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hershey Company Second Quarter 2012 Results Conference Call. [Operator Instructions]

Thank you. Mr. Pogharian, you may begin your conference.

Mark K. Pogharian

Thank you, Tabitha. Good morning, ladies and gentlemen. Welcome to The Hershey Company Second Quarter 2012 Conference Call. J.P. Bilbrey, President and CEO; Bert Alfonso, Senior Vice President and CFO; and I will represent Hershey on this morning's call. We also 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 2011 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 summary of consolidated statements of income prepared in accordance with GAAP.

Within the Notes section of the press release, we have provided adjusted pro forma reconciliations of select income statement line items quantitatively reconciled to GAAP. As we've 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 and the financial results in accordance with GAAP; [ph] 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 2012 second quarter results excluding net pre-tax charges of $24.9 million, or $0.07 per share-diluted, which are primarily related to the Project Next Century program. Our discussion of any future projections will also exclude the impact of these net charges, non-service-related pension expense, and acquisition and integration costs related to Brookside Foods.

With that out of the way, let me now turn the call over to J.P. Bilbrey.

John P. Bilbrey

Thanks, Mark. I want to thank all of you on the phone and the webcast for joining us today. Today, I'm pleased to report that The Hershey Company had another strong quarter with strong marketplace performance. We achieved market share gains in virtually all classes of trade.

Total Hershey's CMG, that's candy, mint and gum, retail takeaway for the year-to-date period through June 16, 2012, in channels that account for about 90% of our U.S. retail business, was up 6.1%, resulting in a 0.3 point market share again.

As a reminder, this is xAOC+C-store data consisting of the food, drug, mass, x [ph] and C-store channels plus the inclusion of Walmart and partial Dollar, Club and Military channels.

Our result for the second quarter were solid as net sales increased 6.7% and adjusted EPS-diluted grew 17.9%. Bert will provide you with all of the financial details. But as it relates to net sales, growth was primarily driven by net price realization.

New product contributed about 2 points to our quarterly sales growth while everyday, core volume was off about 3 points. In terms of marketplace performance, the reported IRI and Nielsen second quarter, the 12-week period ended June 16, does not encompass the entire Easter season in both the year-ago and current periods. Therefore, my remarks today will refer to year-to-date marketplace performance for the 24 weeks ended June 16, 2012.

As it relates to Easter, we had good sell-through and gained Easter market share of 0.9 points in the xAOC universe. We won Easter for the fourth consecutive year, and our market share in this key season expanded to about 36%. Although, note that the shorter Easter season in 2012 versus 2011 is a headwind for our overall chocolate market share performance this year.

Now for some further details on our overall year-to-date marketplace performance. Hershey marketplace performance by segment is progressing as planned. Recall, the year-ago period benefited from our major product launches, primarily Reese's Minis and Hershey's Drops that occurred early in the year. Our more significant 2012 innovation builds in Q2 and beyond, and we expect this will have a favorable impact on our marketplace performance in the second half of the year.

xAOC+C-store CMG year-to-date category growth is up a solid 5.1%. The combined segments of chocolate, non-chocolate and mints grew 6.9%, while gum declined about 3.5%. Growth by channel has varied. However, the confectionery category is advantaged and ubiquitous. While we focus on all points of distribution, we've been flexible and focused on our efforts and resources with faster growing customers and classes of trade. Specifically, year-to-date CMG growth in the expanded xAOC universe, which includes Walmart, partial Dollar, Club and Military, increased 7.4%. Hershey retail takeaway was solid across all of these channels.

For the year-to-date period ended June 16, 2012,xAOC+C-store chocolate category growth was up plus 6.1%. xAOC+C-store chocolate retail takeaway for Hershey was plus 4.3% with market share of 0.7 points.

As I mentioned earlier and as planned, Hershey's chocolate performance was impacted by a shorter Easter period and the timing of chocolate new product launches as well as in-store promotions and programming. We have solid plans in place over the remainder of the year supporting new products in our core chocolate business and expect our chocolate marketplace performance to improve sequentially in the second half.

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