Hershey Company (The) (HSY)

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The Hershey (HSY)

Q3 2012 Earnings Call

October 25, 2012 8:30 am ET

Executives

Mark K. Pogharian - Director of Investor Relations

John P. Bilbrey - Chief Executive Officer, President and Director

Humberto P. Alfonso - Chief Financial Officer, Chief Administrative Officer and Executive Vice President

Analysts

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

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

David Palmer - UBS Investment Bank, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Matthew C. Grainger - Morgan Stanley, Research Division

Daniel Stephen - Stifel, Nicolaus & Co., Inc., Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

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

Andrew Lazar - Barclays Capital, Research Division

David Driscoll - Citigroup Inc, Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Presentation

Operator

Good morning. My name is Lisa, and I will be your conference operator today.

At this time, I would like to welcome everyone to The Hershey Company Third Quarter 2012 Results Conference Call. [Operator Instructions]

Thank you. I would now like to turn the call over to Mr. Mark Pogharian. Please go ahead, sir.

Mark K. Pogharian

Thank you, Lisa. Good morning, ladies and gentlemen. Welcome to The Hershey Company Third Quarter 2012 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 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 2011 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 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, 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 2012 third quarter results excluding net pretax charges of $34.9 million, or $0.10 per share diluted, which are primarily related to the Project Next Century program. Our discussion of any future projections will also exclude the impact of these net charges, non-service-related pension expense and acquisition and integration costs related to the Brookside Foods.

With that out of the way, let me turn the call over to J.P. Bilbrey.

John P. Bilbrey

Thanks, Mark. I want to thank all of you on the phone and webcast for joining us today. I'm pleased with Hershey's third quarter results. As we anticipated, Hershey's U.S. marketplace performance accelerated in the third quarter.

Hershey chocolate, non-chocolate, mint and gum retail takeaway was up in the measured channel universe of xAOC+C-stores, resulting in market share gains across all segments. Retail and core brand net sales volume trends continued to sequentially improve. This growth is driven by the faster growing channels like convenience and dollar, which are pacing ahead of the more traditional classes of trade.

Before we get into the details, I'd like to give you an update on a couple of announcements we've had since our last conference call. On September 28, we acquired the remaining 49% stake in the Hershey Godrej joint venture. We're very excited about the opportunities that exist in India.

The Mahalacto and Nutrine candy brands and the Jumpin juice and soy-based beverage brands are good businesses and in growing categories.

Similar to what we've done in other international markets, we'll make disciplined brand building investments and improve upon selling capabilities and expand distribution. We'll focus on expanding margins via aggressive cost control and margin enhancing innovation while also evaluating the global Hershey portfolio to determine the best products for the India consumer and marketplace.

We've learned a lot over the last 5 years and have gained valuable consumer insights that will serve us well. We believe we have the right brands, products and people to give us the ability to grow in the marketplace as we fully control our future.

Moving on to sustainable cocoa. Earlier this year, we announced that Hershey's Bliss chocolates will be Rainforest Alliance certified and available to consumers by year-end. Bliss joined Hershey's Dagoba organic chocolate, which is already 100% Rainforest Alliance certified, and Scharffen Berger, which will source 100% certified cocoa by the end of 2013.

Currently, certified cocoa accounts for less than 5% of the world's cocoa supply. Earlier in the month, we announced that we'll source 100% certified cocoa for our global chocolate product lines by 2020. Hershey and its cocoa suppliers, as well as African governments, will work together to increase farmer knowledge, improve incomes and help cocoa communities increase the volumes of certified cocoa.

No company or single organization can solve this complex and long-term issue. That's why Hershey will continue to work effectively with numerous public and private partners on a precompetitive collaborative basis as we strive towards our 2020 goal.

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