Hershey Company (The) (HSY)

HSY 
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The Hershey (HSY)

Q4 2012 Earnings Call

January 31, 2013 8:30 am ET

Executives

Mark K. Pogharian - Director of Investor Relations

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

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

Analysts

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

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

David Palmer - UBS Investment Bank, Research Division

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Andrew Lazar - Barclays Capital, Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

David Driscoll - Citigroup Inc, Research Division

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

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

Presentation

Operator

Good morning. My name is Phyllis, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hershey Company Fourth Quarter 2012 Conference Call. [Operator Instructions] Mr. Mark Pogharian, you may begin your conference.

Mark K. Pogharian

Thank you, Phyllis. Good morning, ladies and gentlemen. Welcome to The Hershey Company's Fourth 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 in on 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 a 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. 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.

As a result, we will discuss 2012 fourth quarter results excluding net pretax charges of $24.3 million or $0.08 per share diluted, primarily related to costs associated with the Project Next Century, non-service-related pension expense and integration costs for the Brookside Foods acquisition. 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 J.P. Bilbrey.

John P. Bilbrey

Thanks, Mark, and good morning to everyone on the phone and webcast. 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 2012 objectives while growing adjusted EPS 14.5%, our fourth consecutive year of double-digit percentage increases. We continue to build and execute our consumer-centric business model and are creating a virtuous cycle that is delivering predictable, profitable and sustainable results. We've accelerated profitable organic sales growth, increased our leadership position in the U.S. marketplace, boosted margins and returns and delivered record profitability. Outside of the U.S. and Canada our businesses continue to grow and, barring any dramatic changes related to foreign currency, we're on a path to achieve net sales of $1 billion in these markets by the end of 2014. We're operating from a position of strength. We believe there are far more opportunities ahead than successes behind us because at The Hershey Company, the future is not where we're headed but what we're creating.

Now for an overview of the U.S. candy, mint and gum category. Growth was solid in 2012 and within the 3% to 4% historical growth rate. As has been the case for the last few years, the gum category has been challenged. Excluding a decline of minus 5.5% for the gum category this year, chocolate, sweets and refreshment grew a combined 5.2% in 2012. This increase outpaced other snack alternatives such as salty snacks, cookies and crackers.

The chocolates, sweets and refreshment categories continue to grow driven by investments in the form of both innovation and advertising. The category is performing well with good brand-building efforts across many brands, creating excitement, trial and emotional connectivity between brands and consumers in our category. As a result, looking forward in 2013, we would expect the CMG category growth to be in the 3.5% to 4.5% range.

For the full year 2012, Hershey's net sales increased 9.3% and were relatively balanced between net price realization and volume, including the Brookside acquisition. In the fourth quarter, net sales, excluding Brookside and FX, increased 9.3%, slightly better than our expectation, driven by volume growth of 7%. As expected with last year's pricing action essentially behind us, core brand volume growth was more than double the contribution from new products.

From a profitability perspective, overall earnings were in line with our expectations, although SG&A spending was a bit higher as our financial flexibility enabled us to make some investments to ensure we ended the year strong and enter 2013 with momentum. This is reflected in our fourth quarter marketplace performance as we gained market share in every segment, that's chocolate, sweets and refreshments, and gum.

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