Hershey Company (The) (HSY)

HSY 
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Hershey (HSY)

Q2 2011 Earnings Call

July 26, 2011 8:30 am ET

Executives

Humberto Alfonso - Chief Financial Officer and Senior Vice President

Mark Pogharian - Director of Investor Relations

John Bilbrey - Chief Executive Officer and President

Analysts

Alexia Howard - Sanford C. Bernstein & Co., Inc.

Andrew Lazar - Barclays Capital

Judy Hong - Goldman Sachs Group Inc.

Jonathan Feeney - Janney Montgomery Scott LLC

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

John Baumgartner

Terry Bivens - JP Morgan Chase & Co

Eric Serotta - Wells Fargo Securities, LLC

Eric Katzman - Deutsche Bank AG

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 Angie, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hershey Company's Second Quarter 2011 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mark Pogharian. Sir, you may begin.

Mark Pogharian

Thank you, Angie. Good morning, ladies and gentlemen. Welcome to The Hershey Company's Second Quarter 2011 Conference Call. J.P. Bilbrey, President and CEO; Bert Alfonso, Senior Vice President and CFO; and I will represent Hershey on this morning's call. We 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 risks and uncertainties. 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 2010 filed with the SEC.

If you have not seen the press release, a copy is posted on our corporate website in the Investor Relations section. Included in the press release is a consolidated balance sheet and 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 Notes, 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 that exclude certain items, provides additional information to investors to facilitate the comparison of past and present operations.

We will discuss our second quarter results excluding net pretax charges. The 2011 charges were associated with the Project Next Century program and the 2010 charges were associated with this program, as well as the non-cash goodwill impairment charge.

In the second quarter of 2011, we recorded a net pretax credit of $1.8 million and in 2010, a pretext charge of $86.2 million. 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 J.P. Bilbrey.

John Bilbrey

Thanks, Mark. I want to thank all of you on the phone line and webcast for joining us today. Before we discuss the details of our second quarter results, I'd like to give a brief overview of why I believe The Hershey Company will continue to be successful into the future. As the 11th CEO of the company, I believe that there's never been a better time to be part of the Hershey team. The decisions we made several years ago in the North American business to invest in the consumer, our brand and organization capabilities has enabled us to provide our retail partners winning consumer and shopper insights.

This approach has provided us with the framework or roadmap for today's success. Our business model and strategy is sound and I feel it's being executed by the best people in the industry. I'm very pleased that we're working as a focused team and fully integrated business. Across the entire company, we have experienced leaders in place who have strong record of success.

Our International business continues to progress ahead of plan and I'm satisfied with the disciplined approach we're taking to relate it to the investments that we're making in our organization capabilities. Our businesses in China, Mexico and Brazil are on plan and we're making progress in India. We like the growth outlook and prospects in these key markets, which are an integral part of our international footprint. Sales growth in these focus markets is solid and we're optimistic about the potential to accelerate our international presence behind our disciplined approach to organic investments, acquisitions or joint ventures.

Our Insights Driven Performance initiative or IDP is delivering results in North America and will be fundamental to our knowledge-based approach. This proprietary process is enabling us to engage with select retail partners to determine a solutions-based method to drive growth for the category and for Hershey.

The collaborative approach is unique within the confectionery space and differentiates Hershey from its peers. We're creating a knowledge-based company based on deep insights. Our intellectual capital brings us together with our retailers to deliver solutions they need to meet consumer demand. We're building a global organization that were equipping with resources and tools to win in the marketplace. The combined investments in our brands, capabilities, international market growth and people will ensure that we remain on track to deliver our financial commitments and build shareholder value.

As it relates to the second quarter, I'm pleased with Hershey's strong operating and marketplace results despite the macroeconomic challenges that continue. Net sales increased 7.5%. Bert will give you the details, but growth was primarily due to volume gains in both the U.S. and the international markets. New products were also a positive, driven by the solid performance of Reese’s Minis and Hershey's Drops. Consumer demand resulted an accelerated distribution and merchandising in the quarter versus our original expectations.

In the U.S., volume also benefited from earlier-than-expected shipments to customers due to a change in the timing of their promotional calendars. This essentially offsets the shift in order patterns discussed last quarter. Therefore, Hershey's marketplace or takeaway performance was relatively in line with shipments or net sales. However, over the remainder of the year, we expect the category to grow in line with the historical 3% to 4% average due to the unpredictability of seasonal sales. Recall, we're honoring previously agreed upon nonseasonal merchandising price points through much of the third quarter and we do not expect seasonal net price realization until Easter of 2012.

Therefore, while we realize some net pricing in the second quarter, we would expect it to temper over the remainder of the year. Following the longer Easter season, which was an opportunity for greater levels of in-store merchandising and program, CMG, candy, mint and gum, category growth has been relatively within the historical 3% to 4% category growth rate.

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