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Hillshire Brands (HSH)

Q3 2013 Earnings Call

May 02, 2013 10:30 am ET

Executives

Melissa Napier - Senior Vice President of Investor Relations

Sean M. Connolly - Chief Executive Officer, Director, Member of Executive Committee and Chief Executive Officer of North American Retail & Food Service Business

Maria Henry - Chief Financial Officer and Executive Vice President

Analysts

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

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

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

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

Robert Dickerson - Consumer Edge Research, LLC

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Kenneth Perkins - Morningstar Inc., Research Division

Presentation

Operator

Good morning, and welcome to the Third Quarter Fiscal '13 Earnings Conference Call for Hillshire Brands. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Melissa Napier, Treasurer and Senior Vice President of Investor Relations for Hillshire Brands. Thank you, Melissa. You may begin.

Melissa Napier

Thank you. Good morning, everyone, and welcome to our third quarter earnings call. Our third quarter results were released at 6:30 a.m. Central Time this morning. You can find that release, along with the slides that we'll be reviewing today, posted to our website under the Investor Relations section. Our 10-Q will be filed with the SEC later this afternoon.

I'm joined today by Sean Connolly, our CEO; and Maria Henry, our CFO. Sean and Maria will provide their perspectives on the performance of the business during the quarter. We'll take your questions after management's prepared remarks conclude.

[Operator Instructions] I'd now like to refer you to the forward-looking statement currently displayed and remind you that during today's call, we may make forward-looking statements about future operations, financial performance and business conditions. Actual results may differ from those expressed or implied in these statements. Also during this presentation, we may refer to non-GAAP financial measures. Explanations of those non-GAAP financial measures are included in the release.

I'll now turn the call over to Sean.

Sean M. Connolly

Thanks, Melissa. Good morning, everyone, and thanks for joining us this morning. Before we jump into the details of our quarterly results, as I usually do, I want to outline the big picture for everyone. Hillshire Brands is a focused food company that is equally committed to delivering growth and profitability. We believe in a very disciplined approach to brand building and innovation across our core brands. We also believe in reducing costs to fuel our growth agenda. Three quarters of the way into our year, I feel very good about the progress we're making against our plan, and year 1 is on track.

Q3 was a mixed story for Hillshire with earnings coming in better than our expectations, helped by favorable input costs. Revenue declined slightly, driven by declines in Foodservice. That said, we were very pleased to see our brand building and innovation investments continue to strengthen our core brands.

With EPS coming in better than we anticipated, we can now say that we expect full year EPS to be at the high end of our guidance range. A quick word on costs, and I'll ask Maria to elaborate further on this in a few minutes. We continue to make progress on our cost efficiency efforts, and this year is firmly on track. Encouragingly, we have also identified the remaining $35 million of our F '15 cost program, as well as additional savings opportunities, some of which comes beyond fiscal '15. These new initiatives further strengthen our confidence in our F '15 targets, as well as our conviction that we're creating a company built for sustained long-term value creation. Again, more on this in a few minutes from Maria.

As you know, the economic engine of our company is the Retail segment. After 4 consecutive quarters of volume growth, the Retail segment turned in flat volume versus Q3 a year ago. As you can see on this chart and as I’ve pointed out previously, the Q3 comps were far more challenging than what we saw in the first half. In fact, this chart also implies this was the most solid volume quarter yet year-to-date versus fiscal '11, which is a way of looking past last year's lumpiness. But there was a lot going on underneath the flat volume performance in the Retail segment beyond the tougher comps that I want to share, so let me break that down for you.

First, we had strong growth where we increased MAP investment. Second, we planned a decline in Hillshire Farm lunchmeat to enable our supply chain transition to our new package structure. Third, we continue to pull low-margin, low-velocity items out of the market in advance of new innovations. And finally, our frozen bakery business declined more than we forecast, as competition did not follow our post-holiday season price increase. I'll cover most of these points in a bit more detail.

In fiscal '13, we've made good progress on our disciplined plan to increase MAP spend to 5% of revenue by the end of fiscal '15. Recall, our history has been a MAP rate of 3% to 3.5% annually. Year-to-date, we've been at 4.3%, with the increase focused in 2 areas: first, Jimmy Dean, where we have very strong confidence in the ROIs; and second, supporting new item innovation, because you can't generate new item trial without first generating awareness.

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