Hershey Company (The) (HSY)

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Hershe (HSY)

Q4 2010 Earnings Call

February 02, 2011 8:30 am ET

Executives

Humberto Alfonso - Chief Financial Officer and Senior Vice President

David West - Chief Executive Officer, President, Director and President of North American Commercial Group

Mark Pogharian - Director of Investor Relations

Analysts

Judy Hong - Goldman Sachs Group Inc.

Alexia Howard - Bernstein Research

Andrew Lazar - Barclays Capital

Christopher Growe - Stifel, Nicolaus & Co., Inc.

Vincent Andrews - Morgan Stanley

Jonathan Feeney - Janney Montgomery Scott LLC

John Baumgartner

Terry Bivens - JP Morgan Chase & Co

Eric Serotta - Wells Fargo Securities, LLC

Eric Katzman - Deutsche Bank AG

Todd Duvick - Bank of America Corporation

Robert Dickerson - Consumer Edge Research, LLC

Robert Moskow - Crédit Suisse AG

Kenneth Zaslow - BMO Capital Markets U.S.

Bryan Spillane - BofA Merrill Lynch

David Driscoll - Citigroup Inc

David Palmer - UBS Investment Bank

Presentation

Operator

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hershey Company's Fourth Quarter 2010 Results Conference Call. [Operator Instructions] I would now turn the conference over to Mark Pogharian to begin.

Mark Pogharian

Thank you, Kelly. Good morning, ladies and gentlemen. Welcome to The Hershey Company's Fourth 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. Actuals 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.hersheycompany.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 or pro forma reconciliations of select income statement line items quantitatively reconciled to GAAP. As we've said within the note, 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 fourth quarter 2010 results, excluding net pretax charges. 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 $7.9 million in the fourth quarter of 2010 and $26.5 million in the fourth quarter 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 now turn the call over to Dave West.

David West

Thanks, Mark, and good morning, everyone. Hershey's strong fourth quarter financial and marketplace results represent a solid end to the year. We exited 2010 with good momentum and have plans in place that we believe will benefit the category and Hershey in 2011. As has been the case all year, the CMG category, and that's candy, mint and gum, outpaced others snack alternatives. Despite lingering macroeconomic challenges and fragile consumer confidence, for the full year 2010, CMG category growth in channels measured by syndicated data increased 3.4%, solidly eclipsing salty snacks, cookies, crackers and bakery snacks, none of which posted growth greater than 2%.

Overall, the confectionery category continues to grow, driven by a balance of investment in the category in the form of both advertising and innovation by most major manufacturers. The CMG category historically grows at an annual rate of 3% to 4%, and we would expect the same in 2011.

Hershey's marketplace performance accelerated and sequentially improved from the third quarter to the fourth quarter. I'm pleased with our fourth quarter and full year financial and marketplace results. For the full year 2010, organic net sales increased 6.1%, driven primarily by volume and a couple of points of net price realization, which occurred largely in the first quarter of the year. Including the benefit of favorable foreign currency exchange rates, net sales for the year increased 7% with gross and EBIT margin expanding meaningfully and our balance sheet and cash flow very strong. We built on the progress and momentum from last year, and we look forward to, again, delivering on our financial targets.

In terms of Hershey's marketplace performance for the period ending January 1, 2011, per our custom database and channels that account for over 80% of our Retail business, total Hershey CMG retail consumer takeaway was up a strong 6.2% for the latest 12 weeks and 5.3% for the full year, driven primarily by volume. As a reminder, these channels include food, drug, mass, including Wal-Mart, and convenience stores.

Within food, drug, mass and convenience or FDMxC, here excluding Wal-Mart, the CMG category also continues to grow. For the 12 and 52 weeks ending January 1, 2011, the CMG category and FDMxC increased 3.7% and 3.4%, respectively, for the 12 and 52-week periods.

Hershey's FDMxC retail segue for the first quarter and full year was 5.5% and 4.5%, respectively. As a result, our market share increased by 0.5 points in the fourth quarter and 0.3 points for the full year 2010. As we look to 2011, we would expect historical growth rates to prevail in the category.

We're pleased with our marketplace performance in all classes of trade. Market share improvement in almost all of our measured channels drove overall success. The commitment and experience of our customer marketing and sales teams continues to be a valuable asset.

For the full year 2010, in the food class-of-trade, the category grew 5.3%. Hershey retail takeaway for the year was up 5.2%, and our share was therefore flat.

Fourth quarter class-of-trade CMG category growth in food was 4.4%. A portion of this growth was driven by the timing of other major manufacturer's innovation, with launch merchandising concentrated in this channel. Hershey's food class trade retail takeaway in the fourth quarter was up about 3.4%, yet this resulted in a slight market share decline of 0.3 points in food in the quarter. Note that in December, we launched Hershey's Drops and Reese's Minis. Retailers are excited about these products and will reach our ACV distribution targets as we exit the first quarter. Dedicated Hershey's Drops, as well as Reese's Minis advertising, is now on air and should generate consumer excitement and solid retail takeaway in the coming months.

By segment, Hershey Q4 food class-of-trade chocolate takeaway was up 4.1%, again, a bit lower than the category. Our non-chocolate food takeaway declined, as we lapped the initial Twizzlers brand investment that started last year.

For the overall Halloween and holiday seasons, as expected in Q4, total combined seasonal category retail sales were up slightly. Specifically, Hershey Halloween retail takeaway dollar growth was up 3.6%. Hershey FDMx Halloween performance was solid, and we gained 1.7 market share points in Halloween.

Hershey's FDMx holiday sell-through was essentially on target, and our retail takeaway was up slightly. As a reminder, Hershey is the leading holiday manufacturer with a 24 point share of the market, about eight share points greater than the next largest competitor. Better-than-expected performance from the Gifting sub-segment drove total holiday category sales growth of 4.1%.

Turning now to the C-store class-of-trade, where Hershey continues to leverage its outstanding customer relationships and industry-leading in-store sales force. Here, Hershey C-store takeaway was up again in Q4 and is now increased for 11 consecutive quarters. Specifically, for the 12 and 52 weeks ended December 25, 2010, Hershey retail takeaway was up 6.8% and 5%, respectively resulting in a market share gain of 0.7 points in the quarter and 0.6 points for the year.

In Q4, Hershey C-store chocolate and non-chocolate takeaway was up 7.8% and 9.6%, respectively. These gains were driven by core brand advertising, in-store selling and merchandising and solid programming, including an NCAA football tie-in, a co-promotion with Coca-Cola and a Pre-Priced Standard Bar program.

In the drug class-of-trade, we made very good progress in 2010. Our initial IDP, or Insights Driven Performance efforts, were concentrated on this channel, and we made good progress with key customers to jointly identify the areas to improve overall drug channel shopability, driving both category and Hershey growth. As a result, in Q4, drug category growth was 3.8%, with Hershey retail takeaway up 9.4% for a 1.2 point market share gain in drug.

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