好時 (HSY) 2012 Q2 法說會逐字稿

Good morning.

My name is Tabitha and I will be your conference operator today.

At this time I'd like to welcome everyone to The Hershey Company second quarter 2012 results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you.

Mr. Pogharian, you may begin your conference.

Thank you, Tabitha.

Good morning, ladies and gentlemen.

Welcome to The Hershey Company's second quarter 2012 conference c all.

JP 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 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 excluding certain items provides additional information to investors to facilitate the comparison of past and present operations.

We will discuss 2012 second quarter results, excluding net pretax charges of $24.9 million or $0.07 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 Brookside Foods.

With that out of the way let me now turn the call over to JP Bilbrey.

Thanks, Mark.

I want to thank all of you on the phone and the webcast for joining us today.

Today I'm pleased to report that The Hershey Company had another strong quarter with strong marketplace performance.

We achieved market share gains in virtually all classes of trade.

Total Hershey CMG -- that's candy, mint and gum -- retail takeaway for the year-to-date period through June 16, 2012, in channels that account for about 90% of our US retail business, was up 6.1%.

Resulting in a 0.3 point market share gain.

As a reminder, this is xAOC+

C store data consisting of the food, drug, MassX and C-store channels, plus the inclusion of Walmart and partial dollar, club and military channels.

Our results for the second quarter were solid as net sales increased 6.7% and adjusted EPS, diluted, grew 17.9%.

Bert will provide you with all of the financial details, but as it relates to net sales, growth was primarily driven by net price realization.

New products contributed about 2 points to our quarterly sales growth, while everyday core volume was off about 3 points.

In terms of marketplace performance the reported IRI in Nielsen's second quarter, the 12 week period ended June 16, does not encompass the entire Easter season in both the year-ago and current periods.

Therefore, my remarks today will refer to year-to-date marketplace performance for the 24 weeks ended June 16, 2012.

As it relates to Easter, we had good sellthrough and gained Easter market share of 0.9 points in the xAOC universe.

We won Easter for the fourth consecutive year.

And our market share in this key season expanded to about 36%.

Although note that the shorter Easter season in 2012 versus 2011 is a headwind to our overall chocolate market share performance this year.

Now for some further details on our overall year-to-date marketplace performance.

Hershey marketplace performance by segment is progressing as planned.

Recall the year ago period benefited from our major product launches, primarily Reese's Minis and Hershey's Drops that occurred early in the year.

Our more significant 2012 innovation builds in Q2 and beyond.

And we expect this will have a favorable impact on our marketplace performance in the second half of the year.

xAOC+

C C-store CMG year-to-date category growth is up a solid 5.1%.

The combined segments of chocolate, non-chocolate, and mints grew 6.9%, while gum declined about 3.5%.

Growth by channel has varied.

However, the confectionery category is advantaged and ubiquitous.

While we focus on all points of distribution, we've been flexible and focused on our efforts and resources with faster-growing customers and classes of trade.

Specifically, year to date CMG growth in the expanded xAOC universe, which includes Walmart, partial dollar, club and military, increased 7.4%.

Hershey retail takeaway was solid across all of these channels.

For the year-to-date period ended June 16, 2012 xAOC+

C store, chocolate category growth, was up plus 6.1%.

xAOC+

C store chocolate retail takeaway for Hershey was plus 4.3%, with market share off 0.7 points.

As I mentioned earlier and as planned, Hershey's chocolate performance was impacted by a shorter Easter period and the timing of chocolate new product launches, as well as in-store promotions and programming.

We have solid plans in place over the remainder of the year, supporting new products in our core chocolate business, and expect our chocolate marketplace performance to improve sequentially in the second half.

Year-to-date, xAOC+

C store non-chocolate category growth was up 8.5%.

Here we lead the way, and Hershey's non-chocolate xAOC+

C store retail takeaway was up 16.9%, resulting in a market share gain of 1.1 points.

The solid performance was driven by continued Twizzlers momentum, including the Twisted Summers promotion and the new Jolly Rancher Crunch 'N Chew product.

In the C-store class of trade, CMG year-to-date category growth was up 8.8%.

Total Hershey C-store performance was particularly strong, with takeaway up plus 10.6%, resulting in a share gain of 0.5 points.

Hershey C-store performance was balanced with retail takeaway up 9.7%, 16.2%, and 19.4% in chocolate, non-chocolate, and mints.

These gains were driven by pricing, new products, core brand advertising, and merchandising and programming, including our promotional tie-in with the Avengers movie.

Convenience stores will be an important contributor to our marketplace performance in the second half.

But as we lap the price increase, we would expect the growth rate to temper over the remainder of the year.

I'd like to make a note that Nielsen's C-store service in the first half of the year was based on a sample of 12,000 C-stores with a mixture of scan and audit data collections.

Nielsen's C-store service for the second half of the year will increase by 7,000 chain C-stores with all sample stores providing scan data.

Therefore we could see some slight changes in C-store retail trends over the remainder of the year from this improved service that is more focused on additional chain C-stores.

As it relates to our 2012 innovation, recall that it's balance between chocolate and sweets and refreshment.

The launch and rollout of new items, such as Jolly Rancher Crunch 'n Chew, Ice Breakers Duo, Rolo Minis and Hershey's Simple Pleasures are tracking as expected.

And, as I mentioned, were a net positive to the top line.

Although Ice Breakers Duo and Simple Pleasures got on shelf late in Q2, we believe they have yet to have an impact on our marketplace results.

Let me provide you with some additional new product details.

In the non-chocolate segment, Jolly Rancher Crunch 'n Chew year-to-date takeaway in the xAOC+

C store channels is tracking as expected, making this product the largest non-chocolate candy launch this year.

While early Ice Breakers Duo is showing strong end market performance, ACV distribution is building and will close by our target at the end of July.

Importantly, Ice Breakers Duo is experiencing good initial trial and extremely strong repeat.

Advertising and sampling started in mid-July, and we think there could be upside to our initial plan.

Rolo Minis launched in late March and is our latest extension in the hand-to-mouth space.

It achieved fast distribution and is tracking ahead of expectations for both trial and repeat.

Additionally, core Rolo brand performance is up versus last year.

And in late July we'll activate TV advertising on this brand for the first time in over 25 years.

Initial distribution of Simple Pleasures is on target.

This FDMx specific product is garnering merchandising and programming at select customers.

Marketing plans are in place including advertising and a high value FSI in mid-August to drive trial and repeat.

In addition to our innovation over the remainder of the year, we have many exciting promotions, programs and merchandising events in place across all of our channels.

Some of the activity we have planned includes S'mores programming that will run throughout the key summer dates and into fall tailgating.

A couple of Twizzlers summer programs.

One is tied into the Spiderman movie and another that will award a lucky consumer a chance to win a new car filled with their favorite Twizzler products.

As well as a summer Reese's and Coca-Cola promotion.

Outside of the US our international business is on track, especially in geographies of China, Mexico, and Brazil.

In China, Hershey continues to be one of the fastest-growing international chocolate companies, as our chocolate growth rate is double the category in the cities where we're focused.

In Mexico we've seen strong growth in the Hershey's and Kisses franchise.

And on sweets and refreshments, our Pelon Pelo Rico net sales are up double digits on a percentage basis driven by the introduction of the Peloneto Lollipop.

In Brazil, we continue to make good progress, and following our distribution gains we will begin advertising in additional cities during 2012.

Given the volatility in the financial markets, we've updated our estimates for the full-year related to the strong US dollar.

In our key international markets, we still expect double-digit reported net sales growth for the full year.

But it is less than our earlier outlook and year ago due to the impact of foreign currency exchange rates.

As we outlined at our investor update last month, we'll continue our disciplined investments in distribution and-go-to market capabilities in these key markets that continue to drive solid local currency and marketplace results.

Now to wrap up.

I'm pleased with the way the confectionery category and Hershey continue to perform in the marketplace.

Macroeconomic challenges still exist.

However, we feel good about the performance of the confectionery category.

Shipments of back-to-school and Halloween essentially had no year-over-year impact in Q2.

To date, retail customer Halloween orders are on track with our outlook.

Similar to Easter, we believe we have the right mix of seasonal specific advertising, couponing and programming.

Over the remainder of the year, we are confident that our innovation, advertising and in-store execution will continue to drive topline growth.

As previously mentioned, advertising will increase low double digits on a percentage basis versus last year, supporting US and international brand-building initiatives.

Our plans are on track and we expect organic volume growth to accelerate in the second half of the year and be up for the full year 2012.

Therefore, including estimated net sales of the Brookside acquisition, about a 1.5 point benefit at current exchange rates, we expect full-year net sales growth of about 7% to 9%, including the impact of foreign currency exchange rates.

Bert will provide further details, but given our gross margin gains and SM&A investments to be made over the remainder of the year, we have increased our full-year adjusted earnings per share diluted outlook, and expect it to increased 12% to 14%.

I'll now turn it over to Bert who will provide some additional detail on our financial results.

Thanks, JP.

And good morning, everyone.

I am pleased to report that Hershey posted another strong quarter.

Consolidated net sales in the second quarter totaled $1.41 billion, up 6.7% versus the prior year.

Adjusted earnings per share diluted of $0.66, up 17.9% versus a year ago, was better than our expectations primarily due to solid gross margin and earlier resolution of certain tax items.

I'll have more on each of these points shortly.

Net price realization primarily in the US increased 6.6 points in the quarter, and slightly better than expectations.

Excluding a 2.4 point benefit from the Brookside acquisition, net volume declined 1.1 points.

Note that in the US, new products contributed about 2 points of growth, while every core was off about 3 points.

While relatively in line with historical volume elasticity Q2 core volume was slightly lower than our assumption when we last spoke.

Finally, foreign currency exchange rates were unfavorable by 1.2 points.

Turning now to gross margins, during the second quarter adjusted gross margin increased 170 basis points, driven by greater-than-expected net price realization, supply chain efficiencies and productivity gains.

Which were partially offset by higher input costs of approximately $25 million.

Commodity spot markets continued to be volatile and we expect that volatility to continue in the coming months.

As previously stated, we have good visibility into our cost structure and there is no material change in our full-year inflation Outlook.

Given our gross margin gains for the first six months of the year, we now expect adjusted gross margin to increase 100 to 120 basis points versus our previous estimate of 90 to 100 basis points.

In the second quarter, adjusted earnings before interest and income taxes, or EBIT, increased about 9%, resulting in adjusted EBIT margin of 17.5%, up about 40 basis points versus last year.

As expected, SM&A excluding advertising increased mid-teens on a percentage basis versus last year.

Over the remainder of the year we expect SM&A expenses excluding advertising to increase 15% to 20% in the third quarter, but lower in the fourth quarter.

These planned investments are primarily concentrated in marketing and go-to-market capabilities in both the US and international markets.

As well as expenses related to our new R&D center in China and other employee-related costs.

Advertising expense in Q2 increased about 10% versus the year-ago period.

For the first six months of 2012 advertising is up about 12% versus 2011, and in line with low double-digit percentage increase forecasted for the full year.

Now let me provide an update of our international businesses.

On a reported basis, net sales in our targeted focus markets, Mexico, China, Brazil and India, were about flat due to the impact of foreign currency exchange rates.

Despite the stronger US dollar on a local currency basis, we're pleased with our overall sales performance in these markets.

Our businesses continue to grow above category growth rates.

And on a percentage basis, local currency net sales were up a solid double digits in China and Mexico, and high single digits in Brazil.

The investments we've made in these targeted markets are enabling our brands to gain momentum in the marketplace.

We'll continue to make disciplined investments in these markets over the remainder of the year to drive brand awareness and trial.

For the full-year 2012, we expect reported net sales outside of the US and Canada to increase about 15%, in line with our strategic plan, including the negative impact of foreign exchange.

Operating income outside the US and Canada was down in the second quarter, due mostly to the net sales seasonalization of our focus markets.

Moving down the P&L, for the quarter interest expense was in line with expectations, coming in at $24.3 million versus $23.4 million in the prior period.

For the full-year 2012, we continue to expect interest expense to be approximately $95 million to $105 million.

The adjusted tax rate for the second quarter was 32%, lower than a year ago and the outlook we provided in April.

Various tax audits were concluded in the second quarter that we had planned for in the second half of the year.

As a result, we expect the tax rate to be higher in the third quarter and below the annual average in Q4.

For the full year we continue to expect the tax rate to be slightly below 35%.

In the second quarter of 2012 weighted average shares outstanding on a diluted basis were 228.9 million versus 230.3 million in 2011.

Leading to adjusted earnings per share diluted of $0.66, up 17.9% versus a year ago.

Let me now provide a quick recap of the year-to-date adjusted results.

Net sales increased 8.9% in the first half.

Adjusted EBIT increased 19.6%, resulting in an adjusted EBIT margin gain of 180 basis points to 19.6% from 17.8%.

Advertising increased 12% on a year-to-date basis, in line with the low double-digit percentage increase forecasted for the full year.

Year-to-date adjusted gross margin was 44.5%, versus 42.7% last year, or 180 basis points higher, as net price realization and productivity more than offset commodity costs.

Adjusted earnings per share diluted in the first half increased 26% to $1.62 per share.

Turning to the balance sheet and cash flow, at the end of the second quarter, net trading capital increased versus last year's second quarter by $200 million.

Accounts receivable was up $56 million, primarily due to higher June sales year-on-year, in part due to the timing of last year's price increase.

Accounts receivable aging remains extremely current.

Inventory increased $133 million year-over-year, primarily due to production associated with the Project Next Century transition and the timing of strategic purchases of key ingredients.

Over the remainder of the year we expect these items to work through the system, and year-end 2012 inventory will be about at 2011 ending levels.

And finally, accounts payable decreased $11 million, primarily due to lower capital spend levels.

In terms of other specific cash flow items, capital additions, including software, were $56 million in the quarter.

These amounts include Project Next Century capital expenditures of $12 million.

In 2012, we expect ongoing CapEx to be approximately $240 million to $250 million, excluding Project Next Century.

Our total 2012 CapEx estimate of $305 million to $320 million includes Project Next Century capital of approximately $65 million to $70 million.

Depreciation and amortization was $55 million in the second quarter.

This includes accelerated depreciation related to Project Next Century of approximately $6 million.

In 2012 we are forecasting total operating depreciation and amortization of about $195 million to $205 million, consistent with our previous estimates.

Dividends paid during the quarter were $84 million.

We did not acquire any stock in the second quarter related to the current share repurchase program, or replace shares issued in connection with stock option exercises.

Cash on hand at the end of Q2 was $590 million.

And as we exit the second quarter we are well-positioned to support the seasonal working capital needs of the business which peak in the third quarter.

Let me now provide an update on Project Next Century.

We are pleased with the progress we've made at the West Hershey plant expansion.

Construction in line installation are largely complete, and our current focus is on line performance optimization.

The forecast for total pretax GAAP charges and non-recurrent project implementation costs related to the program has been increased from $150 million to $160 million, to $160 million to $180 million due to higher than expected disposition costs of the legacy facility.

The higher projected costs could increase further if severed employee withdrawals from the pension plan in the second half of the year exceed certain accounting threshold levels, which trigger a pension settlement charge.

Importantly, any pension settlement charges would be non-cash.

By 2014, we continue to expect ongoing annual savings to be approximately $65 million to $80 million.

Now let me summarize.

As we enter the third quarter we are well-positioned to deliver on our financial objectives.

As stated earlier, we expect full-year advertising expense to increase low double digits on a percentage basis versus last year.

To support seasons, new product launches and core brands in both the US and international markets.

Our plans are on track and we expect organic volume growth to accelerate in the second half and be up for the full year.

Therefore including an estimated 1.5 point net sales benefit from the Brookside acquisition, we expect 2012 net sales, including the impact of foreign exchange to increase 7% to 9%.

We expect that commodity markets will remain volatile.

However, we have visibility into our cost structure.

While we continue to anticipate higher input costs there is no change in our full-year inflation Outlook.

As previously mentioned, due to greater-than-expected net price realization we now expect adjusted gross margin to increase 100 to 120 basis points.

As stated earlier for the full year 2012 we expect SM&A expenses excluding advertising to increase low double digits on a percentage basis versus last year.

We will continue to make planned investments in marketing and go-to-market capabilities in both the US and international markets.

As a result, we now expect 2012 earnings per share diluted growth of 12% to 14%, greater than our previous estimate of 10% to 12%.

Before we go to Q&A I'd like to provide a recap of the timing of unique items discussed earlier that will impact Q3 and Q4.

So as you work your models, please note the following.

Over the remainder of the year we expect organic net sales contribution from net price realization and volume to be more balanced as we lap the price increase.

Therefore, gross margin gains in the second half of the year will be less than the year-to-date gains.

In the third quarter we expect SM&A expense excluding advertising to increase 15% to 20%.

And we expect the effective tax rate in Q3 to be higher than the annual rate.

As a result of all these moving parts and higher SM&A in Q3 we would expect Q4 to drive EPS in the second half.

We'll now open it up for Q&A.

(Operator Instructions) Ken Goldman, JPMorgan.

How would you describe the overall category innovation environment right now?

Not just from, you but your competitors?

I'm asking because your market share gains are impressive across the board.

I'm trying to get a sense of whether you're seeing competitors innovate, as you'd expect them to, or whether we're in a period where maybe some of your competitors are off their game,.

And I don't really know, I'm just curious if, in your opinion, you're beating the best at their best, or whether we should expect a tougher challenge going forward.

I know this requires a subjective answer.

I'm just curious how you see things at the moment in that regard.

Sure, Ken.

First of all, it always feels like we're competing against the best everyday.

But I think the innovation in the category, we're seeing a little bit more of a tick up than we have over the last couple of years.

And just to put things in perspective, I feel really good about the overall category growth.

I think the fundamentals in the category are good.

Our competitors had solid innovation in the first quarter.

Our second-quarter innovation was very much around some of our suites and refreshments brand.

And therefore you had a little bit of a difference between what our innovation looked like versus some of the competitors' innovation.

But I think it's really good for the category.

The final point I would just make, from our standpoint, is that our overall growth algorithm is to have about 1 point of growth from innovation.

We feel good that we're probably going to, this year, be well above that, probably in the 1.5-plus point range.

And we were better than that last year.

So, I think it's a good environment.

We have tough competitors and they're doing well, but I think that's good for everybody.

Okay.

And then one more.

I think last year you had, if memory serves, fewer Halloween products offered.

You didn't do the harvest packaging after Halloween, I think.

Could you address some of those issues?

How should we think about how you're feeling about that season, and correcting maybe some of the problems you had last year?

Yes, we're correcting for those things.

And we feel really good about the visibility we have to Halloween and the holidays for the balance of the year.

Remember, one of the things you don't want to do is win share the week after those holiday events because that's when all of the significant markdowns are.

So, I think we're getting better and better every time at selling what we believe the consumer is looking to consume.

And it continues to work well for retailers.

And we continue to grow well in the seasons and perform how we would like.

Thanks very much.

Andrew Lazar, Barclays.

With much of the EPS upside in the second half that you expect looking to come from continued gross margin-related strength.

I'm just curious, is that still going to be driven by what you saw this quarter, which is a bit better than anticipated pricing coming through?

At least relative to when you had started the whole pricing action last year?

Andrew, I think I would characterize it a little bit different than that.

If you think about, we're looking for sales to come in, again, in that 7% to 9% range.

We're slightly ahead of that at the halfway point.

Mostly because we had a very strong first quarter and we had the pricing on the Easter holiday.

But again, that still calls for good sales performance in the back half.

The pricing will actually play a smaller role in Q3 and Q4 because we've completely lapped it at this stage, other than the Halloween and holiday period.

And so, we've averaged probably about 175 basis points of gross margin in the first half of the year.

We will expect that, obviously given our Outlook of 100 to 120 to be somewhat less, specifically because of pricing playing a smaller role.

The counter to that is we certainly expect volume to start accelerating and be more balanced between price and volume in the back half, which we haven't seen as much year to date.

SM&A, I commented specifically on third quarter.

We actually underspent a bit, as you recall, in the first quarter due to some timing.

We're back to where we thought we'd be.

It's a little higher in the third quarter.

Earnings in the back half, driven by top line, a little bit less gross margin due to lower price realization.

A bit of investment behind the business to give us continued momentum against new products.

And we think fourth-quarter EPS on a comparable basis will sequentially be better than third quarter.

Okay.

The reason I ask is just because, given the nickel raise to the full year, a good part of that comes in the second half, which is still operating upside in the second half of the year.

So, I certainly understand what drove some of the upside in the second quarter, the margin side.

I was just trying to get a better sense for what drives the rest of that upside in the back half.

And I guess it's really just more of a combination of still, obviously, some of the pricing, although less significant than the first half, and then volumes starting to come back into a better balance into growth mode.

Does that make sense?

That's exactly right.

That's exactly the way I would put it.

We continue to get some pricing, but with the volume recovery that we are expecting, despite the additional investment, that gives us the ability to upgrade the EPS outlook for the year.

Got it.

That's helpful.

Thanks a lot.

Chris Growe, Stifel Nicholas.

I just wanted to ask you, you gave a number early on, JP, about when you were discussing the revenue growth for the quarter.

And I think you said a 2% benefit from new products and your core down 3%.

Was that referencing just the US, or was that an overall comment for the Company?

It's really a total number, but it's reflective of the US business.

My only question related to that would be that international should have been a pretty solid contributor to that on a volume basis.

And I just want to understand how international played into it.

You mentioned double-digit reported growth, but closer to maybe flat growth if you include FX in the quarter, if I heard that properly.

Yes.

From a volume perspective, international would have been a net plus.

We specifically broke out the US piece just to be more transparent.

But, Chris, international isn't a big driver in the second quarter.

As much as some of the business is seasonal related.

So, you would probably see international being a bigger driver of quarterly results in the first and the fourth.

Due to holidays and seasonal, I assume?

Correct.

Okay.

And then just another question for you, just to be clear on the SM&A guidance from here.

You've indicated pretty solid growth in SM&A in the third quarter.

I'm sorry if I missed it, but how should we expect the fourth quarter SM&A, ex advertising -- would that be down in the quarter?

It won't be down in the quarter but it will be below the second quarter level.

And we said second quarter was midteens, therefore it was a little higher.

Okay.

That's great.

Thanks for your help.

Three up from two, but four down from two.

Okay, thank you.

Rob Moskow, Credit Suisse.

I wanted to know, as you head into fourth quarter, the guidance, I think, implies a deceleration in EPS growth.

Which I think is totally fine.

But I want to know, are you planning on doing any kind of reinvestment in fourth quarter?

Sometimes that happens when you're heading into a really strong year?

Right now our reinvestment plans are pretty close to plan.

So, I wouldn't say that as a result of a strong first half that we've decided to increase higher-than-planned rates.

There is a tax impact, obviously, in the third quarter.

But we're getting that benefit in the second.

Because of just the resolution of a couple of tax audits that we thought would come in the back half of the year.

So, I wouldn't characterize our investments in the back half, while they're stronger than the first half, as being in addition to what we thought we would be doing early in the year.

Okay.

And just a follow-up you have obviously very good visibility into Halloween.

What about convenience stores in the back half?

That's been a huge driver of growth.

Do you have visibility there?

Do you expect the momentum just to continue?

And what are your customers saying?

We have strong programming throughout the balance of the year, certainly, that's C-store focused.

We continue to see strength in the channel, and so we feel really good about what our planning looks like.

And we continue to hear pretty optimistic commentary from our retailers, as well.

Okay.

Great.

Congratulations, John.

Thanks.

Jason English, Goldman Sachs.

I apologize in advance.

Juggling a couple of balls here, so I hope you didn't already comment on this.

But volume this quarter, I think last quarter you were expecting it to be roughly flat.

It's a little bit softer than that.

Not trying to make a mountain of a molehill here, but can you just help me understand where the shortfall was?

Sure.

First of all, I would go back to the earlier comment I made about the category continues to perform well.

We feel good about the fundamentals.

We saw a little bit lower merchandising on our brands in the quarter than we did versus the previous quarter, which confirms for us some of the broad-based success of innovation in the category.

As we look at what we were lapping, what our programming was, we probably came in a little bit different than we did.

Also, remember, when we talk about innovation, even though that's on major brands, and then we talk about the core volume, those are still core brands.

So if you combine those two, it's also really about 1 point there.

FDMx was a little softer for us than was the balance.

But again, we grew.

So, I felt fairly good about that.

And while we would like to grow share in every category in perpetuity, we might not actually be able to do that.

Thanks.

And one quick follow-up.

I really appreciate the increased disclosure in terms of sales growth outside of North America.

Can you add any commentary in terms of where we sit in terms of profit inflection there?

Yes.

In terms of our international business, the second quarter, I think Mark mentioned it, it's our lowest quarter internationally.

You don't have Chinese New Year.

Easter's big in a couple of markets, particularly Brazil, a little bit in Mexico.

And so, the second quarter tends to be our low quarter and we continue to invest at a pretty good pace as we build infrastructure in the selling and what have you.

So, we're actually, outside of US and Canada, operating income net down.

It's different from market to market.

In markets where we've been longer, whether you talk about Mexico or Brazil, we tend to have a little bit more.

In markets like China where we are in a pretty strong reinvest mode, I'd say we're still a little bit further way.

Now, we can flex that as we think is necessary given market conditions, but right now we're seeing great topline growth.

And we think making strong investments now is the right thing to do for the future.

Great.

Thanks a lot, guys.

Jonathan Feeney, Janney Capital Markets.

First of all, I've got to say I can't believe it's been 25 years since that Rolo ad with the sinker, where the statue smiles.

(laughter).

You guys are really making me feel old.

But I wanted to ask about seasonal execution specifically.

Because it seems to me that even last Halloween, but certainly Easter, candy as a whole, and Hershey's specifically, has taken end caps from other categories.

Gotten great display activity.

And that's resulted in not only Hershey share gains, but good holidays overall for the candy industry.

Can you comment on whether those trends are still intact, if that's accelerating or it's the same?

And where do we stand in terms of promotional execution, say, versus this last time next year?

Jonathan, it's interesting.

We have worked really hard on what we call prescriptive selling around holidays and basically our seasonal events.

And I think we're getting much better at how we execute, both in getting it up at the right time and in ensuring that it's selling through at the right time.

So, when we look at these events, we actually could probably sell more than we do in terms of the sell-in.

But as we work with our retailers, one of the things they're learning, too, is they need to get these seasonal events off the floor to get into the next one so that they can also be timely.

And so, getting the sellthrough to occur more at the planned rate is really important.

So, we just feel good about the overall execution.

It leverages our sales organization, which is in there.

It's our seasonal navigator tool, which is proprietary, that we help manage the category.

So, I think if you bundle all of those things together, we're getting better.

We've talked about S'mores, how it's almost become a season.

And then we have had a terrific event with Twizzlers this summer.

So, you're right on when you describe what you're seeing, and it's very much how we challenge our seasonal team to work with retailers to make these things as prescriptive as possible.

Great.

Thank you.

If I could just have one follow-up.

Could you characterize where you stand in terms of shipment, if any, of seasonal activity at this point?

Or where are you going to run in terms of that?

Is that going to run heavier, sooner or in line with last year, or whatever?

What I don't want to do is talk about what those volume targets are.

What I would tell you is there's certainly no disappointments from our side or discussions with retailers that we are not collaborating on what we think the right volumes are.

And so, read that as a positive, not a negative.

The overall comment I'd make, if you look at our take-away and our shipments where we feel really good about, is that we continue to see those running very close.

Which is always a positive sign for the overall supply chain and how products are moving through the total system.

That usually is found money for everybody when you are efficient throughout the entire system.

So, we feel really good about the planning of those events for the second half of the year.

Great.

Thank you very much.

Bryan Spillane, Bank of America.

Forgive me if this was asked.

I missed the first part of the Q&A.

But there's been, as we've gone through earnings season, at least from some of the beverage companies there's been a bit of a controversy about whether or not there's been some slowing in the convenience channel, particularly late in the second quarter and/or maybe the beginning of the third quarter.

And so, just your perspective on consumer behavior in that channel, whether you've noticed any change at all in your categories, or just in general, just the consumer environment in that channel would be helpful.

Bryan, first of all, I'll make a general comment.

I think that it can be dangerous -- and I can't speak to the beverage guys -- but I think it can be dangerous if we get too enamored by some of the short-term swings.

However, in our Business, we continue to see really robust C-store business.

We continue to execute well.

We've got good programming.

And the retailers that we talk to in our brands, they're pretty positive, frankly.

And so, while there's a lots of events, I think, and a lot of moving parts today that maybe didn't happen across channels as much over the last several years, for our brands, our category, we continue to see really good trends and we feel good about the planning that we have.

Okay.

That's helpful.

And if I could follow-up, now that we are closer to the end in terms of this last round of price increases, how do you feel about the optics for consumers?

Have they fully adjusted to the price points that they're seeing on the shelf now, both in traditional food channels and also in C-stores?

And how do you feel about, given there's potential for volatility in input costs going forward, how do you feel about the base you have now in terms of consumers' comfort level with the price points they're seeing?

And the ability to basically have that as a base to work with going forward?

Potentially, at some point, if raw material costs increase, to raise prices off of this point?

And also, do you feel comfortable that you don't have to discount back a lot from where you are now?

Bryan, I would say that, given the price realization that we've seen in the first couple of quarters, and by and large, while we were a little bit off on our second-quarter volume call, it isn't anything that concerns us.

We see good continued trends for the back half of the year.

So, I'd say that the consumer has adjusted reasonably well to the pricing.

If we look at Easter as an indicator of how consumers might be feeling around Halloween and holiday, that's a good sign.

I won't comment on timing or anything, other aspects of a price increase.

We did say in New York recently on our analyst day that we felt that costs would actually be down year on year given trends in 2013.

Don't know what will happen beyond that.

So, from our perspective, we think innovation continues to be a driver.

And all of that comes out at the new price points, obviously.

And so, as long as there's news in the category and programming, and those seasons which are traffic draws for the retailer, we think that prices will continue to be well accepted by our consumers.

Okay.

Thank you.

David Driscoll, Citi Research.

I wanted to ask a little bit about the Reese's brand.

JP, I'm sorry, I might have missed it, if you said it earlier.

But how did Reese's do overall?

And then specifically, can you pull that apart a little bit and talk about Reese's Minis?

I'm interested to hear how it does in its second year of launch.

That was such a big product last year.

And want to know if we're seeing any tailing off in that particular brand at this point?

And then maybe if you could talk a little bit about how do you support a new product like that in its second year?

So, let me start with the last part.

If you think about how we are looking innovation today, really the most important thing is around innovation lifecycle versus just around what we knew at one point is a lot of limited editions.

And those have a tendency to run their course and get tired.

So, we're very pleased with the innovation in total, not just on Reese's, but innovation in total that we have.

We continue to advertise into year two, and we continue to go beyond that.

Because we really think that if our innovation is additive to our core business over time, that's obviously a good thing.

If you look at Reese's in total, the Reese's core minus innovation, because of the amount of merchandising that happened in the introductory period of the Reese's minis, you see the core merchandising was off a little bit in the quarter, and that impacted the core business, which was down a little bit more than the innovation was up.

So again, the Reese's business, we continue to feel really good about it.

Reese's continues to grow for us.

It's obviously a hugely important brand.

And we think Minis is going to be around for a long time.

And we hope that the whole hand-to-mouth occasion, not only on Reese's, but across more of our brands, will continue to be a good growth builder for us.

And one follow-up, JP.

One of the things that I think really was so special about Hershey is that, as the advertising spending increased in '08, '09, '10, '11 and now in '12 by such strong rates of increase, we saw that year after year, the places that you were putting the advertising on those increases on, we saw very high rates of growth, almost as if the brands had just not been activated in a long time.

And reminding the consumers was causing high single-digit growth, in most cases, for the brands that you were activating.

The question had been and continues to be, do you still see the same kind of momentum from the advertising campaigns today as you did in Year One and Year Two of the initial increase in the advertising budget?

Hopefully that was reasonably clear.

Yes.

I understand.

I think that when you think about initially activating a brand, and certainly one that hasn't been nourished for a while, you get very good response initially.

What's important in our overall plans is that we've gotten brands that were undernourished to what I would call sustaining levels.

So, you go through growth levels and you get to sustaining levels, and it does sustaining levels, the goal is for those brands to continue to grow.

Which is what we're seeing.

And then as we activate, really, in two different segments, we activate more broadly across our portfolio.

But as you think about some of those brands, like PayDay and York, et cetera, we have those brands that we will rotate through.

So, there's a segment of brands there that we believe we can do some rotation around.

It benefits the brand.

It keeps them current in front of the consumer.

And then the other segment I would talk about, you're seeing as a part of the advertising, is the investment in our international businesses in these core markets.

So, we really, with our spin today, it's not just spending more on the same thing over and over again.

We've really been able to become more efficient in terms of the GRPs we get, expand that across our portfolio, and then further expand that across our geographies.

JP, would you then say that this is the core of the thesis, why you guys are continuing to be optimistic about not just 2012 but about 2013 and beyond that?

Because it's not as if we're just going to reach a plateau and suddenly the benefits from the advertising stall out.

This is how it continues in the future years.

Is that more or less correct?

Yes.

I think that's right.

The real magic in so much of our growth algorithm and in our strategies is that we have these wonderful markets where you have GDP growth.

The category is growing with GDP growth.

And we can participate in those markets, as we talked back in New York.

That's not just a high-cost battle for share.

That's really category growing.

All manufacturers are participating.

Consumers are entering the category.

So, it's very efficient to be able to grow that way.

And then we are very fortunate that we have a significant position in such a great market like North America.

So if I look at the coming five-plus years and our current strategic plan, I'm just really optimistic that we have a sound, disciplined approach to continue to deliver solid business growth.

Thanks for the comments and nice quarter.

David Palmer, UBS.

It does look like Hershey -- getting back to the innovation topic, which we've hit on already -- it does look like Hershey has rolled out fewer new products in terms of the number of new products than its competitors in this year.

And that's striking, given the fact that the market share gains are there.

It seems like a year of pricing and reinvestment, widening the hit on advertising across more brands.

And allowing this year to be maybe a digestion year from the platforms and supporting year of the platforms that you rolled out the last couple years.

My question is, are you thinking that 2013 might be a year where you are past the digestion phase and the reinforcement phase of those platforms and you can get a little bit more active on the new product news front, maybe with a big platform or two?

Yes, I think, David, we believe innovation is important to the category.

There's no doubt about that.

At the same time, when we are able to make the investments we want to make, execute against the fundamentals, and pace our innovation in a way that we're delivering against what we see as a sound growth algorithm, that's what we're going to continue to do.

And so we feel good about our pipeline.

It's really about pacing.

We believe that the right level of innovation for the category -- and we are seeing more innovation, I think, this year than we have -- that's a good thing.

We want to participate in that, but importantly, we want to ensure that we have sustainable innovation.

And to the earlier question, lifecycle of these is important so that we don't create so much churn in the category that really it's unprofitable for everybody.

And do you feel at this point that we've had enough time lifecycle-wise, as you're saying, where you could see yourselves doing -- and your pipeline is offering you some highly incremental new news, that it may be time?

Yes.

I think as we look forward -- first of all, we have initiatives out there.

We're emphasizing our sweets and refreshments category in a way we never have before.

And we feel as though that's rewarding us well.

Obviously, chocolate is extremely important to us and we have things that we're doing there.

We're coming off of a couple of really big blockbusters with the Minis.

And as we look forward, we expect to continue to introduce things at the right pace, and hopefully that really resonates well with consumers.

So, I think the way you're thinking about it is not inconsistent with how we think about it.

But we probably have been far more disciplined in the way that we've done innovation than we have in the past.

All right.

Thank you very much.

Thilo Wrede, Jefferies.

I just had a quick question on Simple Pleasures.

I know it's early, but what's your impression right now who the consumers for this product.

And where would Simple Pleasures take its market share from?

Simple Pleasures is an indulgent product.

It also has some benefit of lower fat content.

And there's this consumer we call -- let me think here for a second -- but it's more of a permissible indulgence.

Sorry, I had to search my hard drive there in my mind.

It's more of a permissible indulgence type product.

And so we believe that there is some trade up type customers, if you think about those brands that it would source some of its volume from.

And it's a bit different than some of the other.

It has some nice differentiation from some of the other products in the category.

Okay.

And then in the press release you talked about the CMG category continuing to outpace historic growth rates.

Do we have to adjust our assumptions for what the category could grow at?

In other words, is this growth right now sustainable for the category?

We feel as though the category growth has -- I used the word at one point in time, I think earlier around a new normal.

But if you look at the 3% to 4% historical growth rate of where the category's growing today, I think that the key difference that I see, that makes me a believer in continued category growth, at least in the North American mindset, is the investment that continues to be made in the category in terms of advertising.

We've talked a lot this morning about innovation.

And then don't forget, in a tough retail environment, retailers are looking for categories that are good for them.

And our category is good for retailers.

So I think we'll continue to get our fair share as a category of overall merchandising in the store.

And that I think are all positive fundamentals to future growth.

All right.

Thank you.

Ken Zaslow, Bank of Montreal.

I just wanted to round out the conversation on the channel discussion.

I know you said something about C-stores and traditional.

Can you talk about mass and where you think the other growth -- dollar stores, drugs -- can you talk about the distribution of growth that you saw during the quarter?

Just round it out?

I think if I were to just put in two macro comments, we saw FDMx had a bit of a lower growth rate than the balance of some of the things you described.

If you think about Walmart, club, dollar, those collection of the new part of the ex-AOC growth.

So, you saw a little bit greater growth there than you did in the others.

We still saw pretty balanced growth across all of those customers for us and in the category, as well.

So, the consumer seems to be moving around a little bit.

But overall, that's how we see our category responding right now.

And then, of course, we talked convenience earlier and convenience continues to do really well for us.

Are there any channels that you still feel like there is relative market share gains that you can have in terms of penetration that you need to still allocate more resources towards?

I think for us, continuing to be dedicated to growth in our international businesses in the core markets that we've talked about, increasing our capabilities there.

So if you think about expanding our geographical footprint, which is the second thing that we talked about in our strategy, and then expanding our portfolio across those geographies, that's going to keep us pretty busy.

And that's probably where you'll see us (multiple speakers).

There's no channels, there's no retail channels that you still feel like you are under-represented relative to where you want to --.

I think that we're learning a lot about the dollar channel.

And we are trying to do better there.

We want to make sure we do it smart, just versus just putting things out.

So, that's an area.

But if you look at our brands and our coverage, it's pretty ubiquitous.

And my last question is on the commodity outlook.

Obviously, it sounds like you're pretty well hedged through the year.

Is there any concerns at all into 2013 on commodities?

It doesn't look like it for you guys, but just in general if you could just talk about the general outlook for commodities for you guys.

Because it seems like everything seems to be under control.

Milk's probably going up a little bit from year.

But can you just talk to it a little bit?

Yes, we mentioned that we had good visibility to this year.

So, clearly our inflation expectation hasn't changed.

We mentioned in New York that we felt that next year at least the trend feels favorable right now.

You're right to point out, it's not one that's not easily hedged.

And so, we watch that closely, as we do other commodities.

But I wouldn't say that there's anything right now that we are extremely concerned about.

Great.

Appreciate it.

Alexia Howard, Sanford Bernstein.

Most of my questions have been answered.

But just thinking back to the investor day and your strategy over the next two or three years, as maybe the economy starts to recover.

I remember a few years ago, premium was a big growth theme in this category.

And I think you had a couple of false starts in that area.

As you start to think about the longer-term, is that an area that you're going to be focused on?

And how might you prepare for that coming back?

Yes.

We talk about premium.

And if you look at the category today -- and these numbers are probably some that you're perfectly familiar with but I'll say them -- premium and trade up represent about 12% of the total category today.

If you look at what's happened over the last several years, premium had declined some and it's now recovering some.

Trade up is declining some.

So that percentage of the business, which has been relatively constant over time, is one that we have not, I would just say, succeeded at.

Now, we feel very good about the fact that we concentrate in where the bulk of the category is today.

We do well there.

But we talk about and have projects in place around how to think about premium.

We think there's potentially a couple share points there in the total category that, if we were to sort that out, we could benefit from.

One of the issues for us is that we haven't convinced ourselves that we can do that more profitably than some of the other things that we're doing.

And so solving for it within that context, because I don't want to chase share that could be less profitable for us than not.

But I recognize your question, and it's one that we, too, think about.

Great.

Thank you very much.

I'll pass it on.

Eric Katzman, Deutsche Bank.

A quick one.

On the strategic inventory purchase, that you mentioned, Bert, is that the non-fat, dry, powdered milk?

Because, I think as Ken asked, that has hurt you in the past.

And I understand that there is an excess supply of that at the moment.

Yes, I really can't, or won't, comment on specifically what inventories we've made strategic purchases in.

You're right to point out that there is good supply of that in the marketplace.

But that's really all I'll say, Eric.

Okay.

And then maybe more importantly, I got a little bit confused, JP, with all the numbers and acronyms and stuff around the market share.

But just let me try to frame it this way.

So, in the first three months, the market share was flat.

In the second quarter, your market share was up.

So, you obviously accelerated your share sequentially as the year has gone on.

But it sounds like most of that is coming in seasonal, because every day your shipments are actually down a couple of cents.

So, one, is that accurate?

And, two, what does that say about the everyday category?

Did you gain share in everyday volume and therefore the category is even worse based on the elasticity?

I think, Eric, what we may want to do to get into a lot of the detail, is we can probably take some of that off-line and Mark can help us go through each of those numbers.

What I would tell you is, across each pieces of the Business, we continue to feel pretty good about the progress that we're making.

With the exception that we were disappointed, just that we have a goal for ourselves to grow share across all of our businesses.

So, chocolate was off a little bit.

The everyday would have been impacted by the innovation that we were seeing.

But fundamentally, I don't think that I would describe any of those events as causing us concern around what our overall plans are for the year.

Our seasonal performance has been good.

We did very good at Easter as we described earlier.

The instant consumables business is doing well.

Convenience continues to do very well.

Front-end has continued to do well.

And so I think, as you describe it, those are the places where it's a bit softer for us than maybe we would have liked.

But I think we understand what's happening in the category, so it doesn't cause alarm bells.

We're still going through a period of time where we said volume would be back to 100% by the end of the year.

So, as we look at that on a period-to-period basis, we always see some fluctuation there.

Again, I'm more than happy off-line to get into some further detail to help you understand that.

Eric, it's Mark.

It's not an apples to apples because I think the flat share you're referring to in the first quarter was FDMxC.

And now were talking about the ex-AOC plus C universe.

And you know, I think, from our remarks --.

Now I'm more confused.

(laughter) Because I just worry -- obviously, you guys are doing well in seasonal, but I wonder about the category's health.

Because, to Chris Growe's question, your volume is down 3% in everyday.

That includes some benefit, maybe not all that material, but some benefit from international.

And so, is the category's elasticity better than that?

Worse?

So we can go over it, Mark, a little later.

Yes.

The only thing I would say, the minus 3% doesn't include the international benefit.

We specifically spoke about US to just be more transparent.

Okay.

Yes.

Look forward to talking to you, Eric, off-line.

Okay.

Thank you.

Rob Dickerson, Consumer Edge.

Again, a follow-up from Chris's question and Eric's question.

Can we just ask it and say, if we look at what we saw at the analyst day, what we're seeing in our data is just there is, obviously, a deceleration within the C-store channel, at least as it pertains to confection.

A lot of it is price-driven.

You're seeing 3% down in core.

So does this all relate, then, as to why there is the next stage of growth should be coming from international?

The core is, obviously, about one-third of your business, it sounds like.

And if we see a deceleration continue as pricing is rolled off in C-stores, and then we also saw some volume share pick up from Mars in Q2 within C-stores, then as we think about '13, it would just seem as if there is a deceleration in the core.

And then what we would expect to have happen is that advertising would be going up even further and continued into '13 to really drive the international part.

First, I would start by saying I don't think we believe there's a broad deceleration in the C-store business.

And, we continue to be, as we've talked about how we are looking at the balance of the year, we see sequential improvement in shares, specifically in chocolate.

And so, again, I would come back to what we have visibility to across the balance of the year.

We've had as a category very successful innovations in the first half.

And the things I would tell you is that that innovation has been not from a single manufacturer, but from multiple manufacturers.

That's good for the category.

And so, I think the context is not as you may be describing it.

Okay.

Perfect.

And then last question, easy one.

The tax rate, I think in your prepared remarks you said that it was still 35%.

On the call you said it would be slightly below.

For Q2 you said tax would be slightly below year-over-year.

It was over 400 basis points below.

So just to clarify, should we be expecting a tax rate that's 34% to 35% now, for the full year?

No.

We already said the tax rate for the full year --

Yes, closer to 35%

Would be just a little below the 35% level.

And that's consistent with what we've said all year.

The only thing that occurred in the second quarter was that we closed a couple of tax audits, which we had in the plan for the second year.

So, it's really more timing during the year.

The tax rate is the same as what we anticipated early in the year.

Okay.

Cool.

Thank you.

Thank you very much for joining us for today's conference call.

Matt Miller and myself will be available to answer any follow-up questions that you may have.

Thank you and enjoy your day.

That does conclude today's conference call.

You may now disconnect.