Hershey Company (The) (HSY)

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The Hershey Company (HSY)

Q3 2010 Earnings Conference Call

October 21, 2010 8:30 AM ET


Mark Pogharian – Director, IR

Dave West – President and CEO

Bert Alfonso – SVP and CFO


Jonathan Feeney – Janney Montgomery

Terry Bivens – JP Morgan

Alexia Howard – Bernstein

Vincent Andrews – Morgan Stanley

Robert Moskow – Credit Suisse

Ken Zaslow - BMO Capital Markets

Jason English – Goldman Sachs

Andrew Lazar – Barclays Capital

Eric Katzman – Deutsche Bank

David Driscoll – Citi Investments

David Palmer – UBS

Eric Serrano – Wells Fargo Securities

Bryan Spillane – Bank of America



Good morning! My name is Beth and I will be your conference operator for today. At this time I would like to welcome everyone to The Hershey Company Q3 2010 results. (Operator Instructions). Mr. Mark Pogharian, you may begin your conference.

Mark Pogharian

Thank you, Beth. Good morning, ladies and gentlemen. Welcome to The Hershey Company’s Q3 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 10K 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 sheet and a summary of consolidated statements of income prepared in accordance with GAAP. Within the notes section of the press release we have provided adjusted pro forma reconciliations of select income statement line items quantitatively reconciled to GAAP. As we’ve said within the note, a company uses these non-GAAP measures as team efforts 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 Q3 2010 results excluding net pretax charges. The 2010 charges relate to the Project Next Century Program, while the 2009 charges are associated with the global supply chain transformation. These pretax charges were $4.5 million in the Q3 of 2010 and $11 million in the Q3 of 2009. Our discussion of any future projections will also exclude the impact of these net charges.

With that out of the way, let me turn the call over to Dave West.

Dave West

Thanks, Mark, and good morning everyone. I am pleased that despite the macroeconomic challenges that persist, Hershey delivered another strong quarter of operating and marketplace results.

During the Q3, and on a year to date basis, the CMG – that’s the Candy, Mint, and Gum category – continues to grow, outpacing salty snacks, cookies, crackers, and bakery snacks. Our business is solid in all classes of trade and our resale partners value the importance of the confectionary category and the leadership that Hershey provides. During these challenging times, retailers are looking for traffic and profitable solutions, and confectionary is one of the answers to both of these objectives.

Hershey’s Q3 net sales reflected continued momentum of our brands. Net sales increased 4.2%, driven primarily by volume gains in both the US and international markets as we continued to invest and execute in the marketplace. Additionally, as we exited the Q3, the timing of some seasonal shipments dampened Q3 net sales by approximately one point. These shipments have already occurred in early October and will be reflected in our Q4 results.

In terms of Hershey’s marketplace performance, preliminary CMG consumer takeaway for the 12 weeks ending October 2nd and the year-to-date periods, for our custom database and channels that account for over 80% of our retail business, was up about 4% and 5% respectively. As a reminder, these channels include food, drug, mass (including Wal-Mart), and convenience stores. In the Q3 I was particularly pleased with the sequential improvement in resale takeaway trends at one of our larger retail customers and in the drugstore channel.

We do want to note that during the Q3 Nielsen Contact and some of their customers, including Hershey, informed them that they are currently reviewing the projection methodology of their C-store universe for syndicated data. This is a C-store channel-specific issue impacting a number of categories of manufacturers, with the impact limited to Q3 data. We believe the data we have been provided, and that we are sharing with you today is directionally correct, and that any potential adjustment will not materially impact our overall reported market share.

We continue to feel very good about our convenience store business. In Atlanta at the NACS Conference – that’s the National Association of Convenience Stores – two weeks ago, we had the opportunity to meet with our C-store customers. The constant theme was that Hershey and the confectionary category remain solid.

Within FDMXC – that’s Food, Drug, Mass, & Convenience (here we’re excluding Wal-Mart) – preliminary Hershey and category growth for the 12 weeks ending October 2 and year-to-date period for our custom database increased relatively in line with the category’s historical growth rate. Hershey’s preliminary US CMG market share is up 0.2 points for the year-to-date period and was flat in the Q3. The category continues to perform well despite the macroeconomic challenges as confectionary is among the highest with respect to household penetration and impulse purchases. This impulsivity continues to translate to merchandising opportunities, and as we move through the balance of the year the category is a seasonal destination, with our banded products remaining available at reasonable price points.

As a result we expect the category to continue to consistently secure key merchandising and programming space and to grow within the historical 3% to 4% range. The category continues to be driven by mainstream, everyday confections, as its trade-up, gifting, and novelty sub-segments remain soft. Year-to-date, premium and trade-up chocolates on an S-basis, is about flat.

As we stated in July, as expected, there were investments by major manufacturers in the category in the form of innovations and trial-inducing programs during the quarter. Activity varied by channel, and despite this Hershey resale takeaway increased in all channels.

In the Q3, food class of trade category growth was +4.2%. Hershey resale takeaway increased 2.5% in the Q3, resulting in a market share decline of 0.5 points in Q3 in the food class of trade. However, Hershey’s Food Channel market share is still up 0.1 points year-to-date. Q3 results were due to the year-over-year timing of innovation, merchandising, and programs. Marketplace activity can and will vary from quarter to quarter, and our programming for the balance of the year in the food class of trade is solid.

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