Hershey Company (The) (HSY)

HSY 
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The Hershey Company (HSY)

Q4 2009 Earnings Call

February 2, 2010 8:30 am ET

Executives

Mark Pogharian – VP Investor Relations

Dave West - President and CEO

Bert Alfonso - Senior Vice President and CFO

Analysts

Eric Katzman – Deutsche Bank

Terry Bivens – JP Morgan

Jonathan Feeney – Janney Montgomery Scott

Vincent Andrews – Morgan Stanley

Robert Moskow – Credit Suisse

David Driscoll – Citi Investments

Eric Serotta – Consumer Edge Research

Alexia Howard – Sanford Bernstein

Judy Hong – Goldman Sachs

Andrew Lazar – Barclays Capital

Chris Growe - Stifel Nicolaus

Bryan Spillane – Bank of America

Ken Zaslow – BMO Capital Markets

Kevin Kedra – Gabelli & Company

David Palmer – UBS

Jon Cox – Kepler

Presentation

Operator

(Operator Instructions) Welcome everyone to The Hershey Company Fourth Quarter 2009 Results Conference Call. Mark Pogharian, you may begin your conference.

Mark Pogharian

Welcome to the Hershey Company Fourth Quarter 2009 conference call. Dave West, 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 2008 filed with the SEC.

If you have not seen the press release, a copy is posted on our corporate website www.Hersheys.com in the investor relations section. Included in the press release are consolidated balance sheets and the summary of consolidated statements of income in accordance with GAAP as well as our pro forma summary of consolidated statement of income quantitatively reconciled to GAAP.

As we’ve said in the press release, 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 our fourth quarter 2009 results, excluding the net pre-tax charges. The majority of these charges in both 2009 and 2008 are associated with the Global Supply Chain Transformation Program. These pre-tax charges were $26.5 million and $79.7 million in the fourth quarters of 2009 and 2008. Our discussion of any future projections will also exclude the impact of net charges related to these business realignment initiatives.

I’ll now turn it over to Dave West.

Dave West

Let me start with a few comment on recent events with respect to Cadbury plc. I assume that everyone on the call has had an opportunity to read our November 18 and January 22 press releases. After a thorough and complete examination, management and the Board of Directors unanimously concluded not to make an offer for Cadbury. Our Board of Directors and management team remain extremely confident in Hershey’s consumer driven strategy and in the company’s ability to execute and deliver long term value for all stock holders.

We will evaluate future acquisition opportunities in the same disciplined manner to ensure appropriate fit within our financial and strategic framework. We’ll continue to follow this disciplined approach and will continue to invest in Hershey’s existing brands and global infrastructure.

With close to a 45% share of the US chocolate market and strong and growing businesses in Canada and Mexico and nearly a 20% compound annual growth rate outside of the US and Canada over the past five years, we continue to be encouraged by our position in the marketplace and confident in continuing future success.

Now for a discussion on our results, I’m very pleased with Hershey’s fourth quarter and full year performance. We finished the year on solid footing and over delivered on our earnings per share objective by growing adjusted earnings per share 15% year over year. We achieved this in an extremely challenging environment that included global economic uncertainty and challenging consumer conditions, commodities spot market price volatility, the implementation and execution of a major price increase, the continued roll out and evolution of our consumer driven approach to core brand investment, as well as the completion of our global supply chain transformation program.

Despite these challenges, we delivered net sales and EPS growth that was significantly greater than the profile we shared with you at this time a year ago. For the full year 2009 net sales increased a bit more than 4% on a constant currency basis up 3.2% reported. Gross and EBIT margins expanded meaningfully and our balance sheet and cash flow were very strong. We made excellent progress in 2009 and we look forward to delivering on our financial targets for a third consecutive year in 2010.

In terms of Hershey’s marketplace performance for the 12 and 52 weeks ending January 2, 2010, using our custom database and this is in channels that account for over 80% of our retail business. Total confections category retail consumer take away was up a strong 6% for the 12 weeks ending January 2 and it was up 7.2% for the year 2009. As a reminder, these channels include food, drug, and mass, and mass here includes Wal-Mart and convenience stores.

This growth rate is higher than the FDMX data that most of you receive from IRI or Nielson on a quad basis. FDMX only captures about half of our retail take away and excludes one of our largest mass customer with whom we have performed well and excludes c-stores, in addition it also excludes value and club format stores.

Within food, drug, and mass, here excluding Wal-Mart and convenience, FDMXC the category also continues to grow. In 2009 the CMG category in FDMXC increased 4.4% greater than historical growth rate which is usually around 3% to 4%. In the fourth quarter the CMG category was up 4% again this is excluding Wal-Mart. As we look to 2010 we would expect historical growth rates to prevail in the category.

Total Hershey FDMXC retail take away of 2.6% in the fourth quarter was less than the category and as we expected, resulted in a market share loss of 0.4 points. The decline was primarily driven by our decision to exit premium chocolates, Cacao Reserves, Starbucks, and online gifting all of which played a role in gifting last year and it was also contributed to by the previously mentioned challenges in the drug class of trade. For the full year 2009 in FDMXC the category grew 4.4%. Hershey retail take away for the year was 4.7% resulting in a share gain for the year 2009 of 0.1 points.

Our marketplace results in measured channels were driven by our success in the food and convenience classes of trade. Our continued growth in these two areas is a result of the targeted investments we’ve made. Our in store sales force remains a competitive advantage and has been a large part of our success. It differentiates us from our competitors.

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