Hershey Company (The) (HSY)

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The Hershey Company (HSY)

Q1 2010 Earnings Call

April 22, 2010 8:30 am ET

Executives

Mark Pogharian – VP Investor Relations

Dave West - President and CEO

Bert Alfonso - Senior Vice President and CFO

Analysts

David Palmer – UBS

Jonathan Feeney – Janney Montgomery Scott

Vincent Andrews – Morgan Stanley

Eric Katzman – Deutsche Bank

Terry Bivens – JP Morgan

David Driscoll – Citigroup

Alexia Howard – Sanford Bernstein

Ken Zaslow – BMO Capital Markets

Christine McCracken - Cleveland Research

Robert Moskow – Credit Suisse

Bryan Spillane – Bank of America

Presentation

Operator

(Operator Instructions) Welcome everyone to The Hershey Company First Quarter 2010 Results Conference Call. Mark Pogharian, you may begin your conference.

Mark Pogharian

Welcome to the Hershey Company First Quarter 2010 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 2009 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 is a consolidated balance sheets and summary of consolidated statements of income prepared in accordance with GAAP as well as and adjusted consolidated statement of income quantitatively reconciled to GAAP.

With that out of the way I’ll now turn it over to Dave West.

Dave West

Hershey’s first quarter results were strong and reflect the momentum of our core brands in the marketplace. The global investments we have made in marketing and selling capabilities are starting to pay off and we see it in our reported results, retail take away and market share. Following three months into the year this high quality quarter has created the confidence and environment to allow us to deliver on both our financial objectives for 2010 while also making additional investments in our business, we’ll have more on this in a bit.

In the first quarter net sales increased 13.9% driven by a balance of volume gains and price realization. Volume growth was the result of our execution in the marketplace and the ramp up of investments in core brand advertising and selling capabilities made over the last two years. Base business volume increased, especially in channels where we have focused resources; at c-stores, food, and select mass customers. Price realization can carry over seasonal pricing also benefited the top line. Recall that Easter performance also benefited from the previously mentioned shift in seasonal business from Q4 2009 into Q1 2010.

Looking at our retail take away, where we benefited slightly from the timing of an earlier Easter, remember in 2010 Easter occurred on April 4 and in 2009 it was on April 12. Therefore, the reported IRI and Nielsen data as of March 20, excludes the last two weekends in the Easter period. Our custom database and internal estimates of the 12 retail take away figures closer to Easter and not yet released to you, are in line with our first quarter sales performance. We gained market share for the 12 weeks ended March 20th and while results are not yet final, Easter sell through appear solid and we will again gain market share in this key season.

I’m very pleased with Hershey’s marketplace performance. Total CMG (Candy, Mint, Gum) category retail take away for the 12 weeks ending March 20, for our custom database, in channels that account for over 80% of our retail business, so here I’m talking about food, drug, mass including Wal-Mart, and convenience stores. That take away was up 7.5%. Excluding Wal-Mart, Hershey’s FDMXC retail take away was up 6.1%.

Both of these amounts include Easter seasonal sales. If you look at excluding Easter sales, giving the timing changes, so excluded from the current year and the year ago period, Hershey’s FDMXC without Wal-Mart retail take away was up 4%. We gained market share when you include Easter or exclude Easter so both with or without Easter seasonal activity we gained market share. All in, including the seasonal activity, Hershey category market share in FDMXC increased 0.5 points.

Our marketplace results were solid and improved across all channels. We gained market share in all classes of trade except drug which, as expected, was down but did improve versus last quarter. Our marketplace performance was driven by the core brands we have focused on. Specifically, in FDMXC the combined retail take away on Hershey’s, Reese’s, Hershey’s Bliss, Hershey’s Kisses, Twizzlers, and Kit Kat brands, these are the brands where ad spend is ongoing, take away increased about 10%. York, Almond Joy, and Mounds, brands that we just started advertising in January posted FDMXC resale take away up in the teens.

Looking at the category, CMG continues to grow within the historical 3% to 4% range. In FDMXC excluding Wal-Mart the category grew 4.4%. Excluding Easter seasonal activity in the current and year ago periods the category FDMXC was up 3.3%. Other than Valentine’s there’s not a lot of pricing in that number.

Valentine’s was a headwind for the overall category in the quarter. Total category sales for the Valentine’s season, the smallest of the four seasons, were down mid single digits as gifting was particularly soft. The decline was primarily driven by the drug channel where Valentine’s category gifting sales declined double digits. In the food and mass channels, Valentine’s category sales were about flat. Hershey’s overall Valentine’s retail take away was down and resulted in a market share decline of slightly less than one point for the season.

Similar to the last few quarters, our marketplace results in measured channels were driven by our success in the food and convenience channels. The results are a function of the core brand advertising and strong selling, retail execution, and merchandising.

In the food class of trade, category growth was 8.1% including Easter and a robust 7.3% excluding Easter seasonal activity from the current and year ago periods. Hershey retail take away in this channel exceeded the category both with and without Easter seasonal activity. Overall this performance resulted in the 0.5 point market share gain the food channel.

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