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The Hershey Company (HSY)
February 20, 2013 4:15 pm ET
John P. Bilbrey - Chief Executive Officer, President and Director
Michele G. Buck - Chief Growth Officer and Senior Vice President
Humberto P. Alfonso - Chief Financial Officer, Chief Administrative Officer and Executive Vice President
Previous Statements by HSY
» The Hershey Management Discusses Q4 2012 Results - Earnings Call Transcript
» The Hershey Management Discusses Q3 2012 Results - Earnings Call Transcript
» The Hershey Management Discusses Q2 2012 Results - Earnings Call Transcript
On the diet today are CEO, J.P. Bilbrey; CFO, Bert Alfonso; and Senior Growth Officer, Michele Buck; and Investor Relations Head, Mark Pogharian. J.P. Bilbrey joined Hershey 10 years ago. And in that time, he and his team have accelerated the company's top and bottom line growth rate by investing in advertising, expanding sales coverage, reducing manufacturing costs and creating a viable platform in emerging markets. Here to kick us off and talk about the 5-year plan to maintain this momentum is J.P. Bilbrey.
John P. Bilbrey
Thanks, Earl [ph]. Well, good afternoon to all of you in the audience and to those of you listening in on the webcast. My name is J.P. Bilbrey, President and CEO of The Hershey Company. My colleagues and I have a very compelling story to tell you. So let's get started.
First, let me remind you that our presentation contains forward-looking statements. So please take a moment now to read through this slide, which is also available in your handouts and on our website. Also, at the end, our handouts and on the website, you'll find reconciliations of the non-GAAP items referred to in our presentation, to the appropriate GAAP measures.
I'm pleased to have the chance to talk about The Hershey Company and our plans for continued predictable, profitable and sustainable results.
And it all starts with the 5 strategies that are on this slide.
Importantly, focus on our core. U.S. business is a top priority and fundamental to our success. We see the U.S. as an attractive growth market. Expanding our footprint into attractive markets and making our targeted global brands broadly available, offers us an attractive approach to meaningful international growth while maintaining financial discipline. And we continuously strive to be a leading knowledge-based organization that executes with excellence.
So I'll start off with an overview of our fundamentally advantaged business model and the predictable and profitable results that it's generating. Michele Buck will demonstrate how we're positioned to leverage our strength in the U.S. and capture the international opportunities which lie ahead for us. And Bert Alfonso will discuss our solid financial position and then wrap it up with some closing remarks.
Our focus on core brands in the U.S. and investments in international markets has resulted in accelerated revenue growth. The initial investments in a few of our core brands in 2008 and 2009 resulted in revenue growth of about 4% a year but has accelerated to 7% from 2010 through 2012, resulting in a 5-year compound annual growth rate of about 6%.
In 2012, outside the U.S. and Canada, our international net sales only increased about 12% due to some stiff FX headwinds. However, in China, Brazil and Mexico, we made solid progress in 2012, with local currency sales up double digits on a percentage basis versus last year.
In 2013, based on current exchange rates, net sales outside the U.S. and Canada are expected to increase 15% to 20%, putting us on a path to reach $1 billion in international net sales by the end of 2014.
Our consistent and sustainable net sales growth and maniacal focus on maintaining or expanding our gross margin has resulted in a double-digit adjusted EPS diluted growth over the last 4 years. Our earnings growth translates into strong cash flow generation. This has always been a hallmark of The Hershey Company. The initiatives implemented in 2009, around working capital improvements, have combined with earnings growth. We should generate operating cash flow in the $900 million to $1 billion range on an annual basis. And we're very committed to our dividend. Historically, our dividend has grown in line with our earnings outlook, and we continue to expect this to be the case going forward.
The appropriate use of cash is a constant board-level discussion. And we continue to target about a 50% payout ratio, and from time to time, will supplement that with share buybacks. Our predictable profitable and sustainable business model is reflected in our return on invested capital.
Looking back, over time, ROIC drops or is flattish during a period of business realignment or reinvestment. But as our shareholders know, Hershey's ROIC has outperformed the S&P food group. With an optimal manufacturing footprint and strong results from business reinvestment, we think ROIC has further room to grow and will continue to correlate with a higher share price.
Now let me talk about some of our advantages starting with the category. Our opportunity is big, as confectionary is a huge global category. At over $194 billion worldwide, the category has been growing at a compound annual growth rate of over 5% over the last several years. And as a category, confectionary is fundamentally advantaged. Confections are available almost everywhere. As such, we lead in household penetration and impulse purchases. The category is highly responsive to merchandising, it's one of the most merchandised categories in the store, and it's profitable for both manufacturers and retailers.