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The Hillshire Brands (HSH)

Q3 2014 Earnings Call

May 06, 2014 10:30 am ET


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


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

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

Farha Aslam - Stephens Inc., Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Robert Dickerson - Consumer Edge Research, LLC

Rachel Nabatian

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

Jason English - Goldman Sachs Group Inc., Research Division

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

Andrew Lazar - Barclays Capital, Research Division

Gregory Hessler - BofA Merrill Lynch, Research Division



Good morning, and welcome to the Third Quarter Fiscal '14 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

Thanks, Candy, and good morning, everyone. Our results were released at 6:30 a.m. Central Time this morning. That release and the slides that we'll be reviewing today are posted on our website under the Investor Relations section, and we expect to file our 10-Q later today.

Sean Connolly, our CEO; and Maria Henry, our CFO, will provide their perspectives on the performance of the business during the quarter and discuss our outlook for the rest of fiscal 2014. 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 displayed and remind you that during today's call, we may make forward-looking statements about future operations, financial performance and business conditions. And our actual results may differ from those expressed or implied in these statements. Explanations of non-GAAP financial measures, that we may also refer to, are included in our release.

I'll now turn the call over to Sean.

Sean M. Connolly

Thanks, Melissa. Good morning, everyone, and thanks for joining us. We've been looking forward to this call as we have a number of positive things to update you on.

Before we jump into the quarterly details, I think it's worth spending a minute on the big picture, which is really all about building a different kind of food company, one that is simultaneously lean and innovative and focused on doing what's necessary to sustain strong value creation over time. Roughly 2 years ago, we hosted many of you in New York at our inaugural Investor Day where we outlined our investment thesis, which basically asserted that this is a terrific branded portfolio and if we could become leaner with stronger skills, we can reinvest in demand drivers and deliver better sales growth and better margins.

And when you include smart balance sheet management, it would all add up to total strong shareholder returns that were excellent. Well, here we are 2 years in, and the progress we've made in strengthening our brands and reducing costs is unmistakable. Our disciplined approach to brand-building and innovation is clearly having the desired effect. And underlying much of our progress is the work we've done to improve our capabilities in key areas like innovation, pricing analytics, marketing and partnering with our customers.

Fueling our growth agenda is our relentless cost and productivity program, which will continue to contribute into the years ahead. All in all, the evidence is clear. We are well positioned to continue to deliver strong returns to our shareholders.

And the strength of our results is evident. This quarter, our sales were up 3.4%, a number that we estimate comes closer to 5% when you factor in the Easter timing shift to Q4. And our operating margins have been quite strong despite an input cost environment that has been acutely inflationary and has worsened continuously over the past few months.

A number of factors have contributed to our profit improvement. The first is the fact that our brands have performed well despite higher prices. Second, our cost containment has been excellent, both in our base productivity program and in our additional belt-tightening. Finally, we did benefit from some onetime favorability in corporate expenses.

The net of that is a very solid story. And as you likely saw in our CAGNY materials, our innovation pipeline has never been stronger, and many of the items we showed at CAGNY are shipping as we speak.

We are also beginning to leverage our strong balance sheet for additional value creation, and our focus here is on smart acquisitions, which we clearly expect to do more of. Overall for the year, we now expect sales to be up in the low single-digits and for EPS to be at the high end of our previous range.

Now while I always welcome a good quarter, what's more important to me is the longer-term view of our performance, specifically how have we done since spin? And here again, the progress is excellent.

Our sales growth has become progressively stronger, and our EPS growth is approaching 30% since we began this journey. And importantly, our margins have improved despite the cost environment that we've had to navigate. This year, through the first 3 quarters, our OI margin has averaged 10.3%. And since spin, it has averaged 9.7%. So excellent progress here against one of our top priorities, margin expansion.

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