The Hershey Company (HSY)
February 20, 2013 4:15 pm ET
John P. Bilbrey - Chief Executive Officer, President and Director
Michele G. Buck - Chief Growth Officer and Senior Vice President
Humberto P. Alfonso - Chief Financial Officer, Chief Administrative Officer and Executive Vice President
Thank you. So on behalf of the CAGNY Board, I want to thank Hershey for presenting at CAGNY again this year and for generously sponsoring what must be the best-attended break I've ever seen. Thank you very much, Hershey. Hershey is one of those companies at CAGNY that inspires love in the hearts of the shareholders who own the stock and fear in the hearts of anyone who is trying to go on a diet heading into the conference.
On the diet today are CEO, J.P. Bilbrey; CFO, Bert Alfonso; and Senior Growth Officer, Michele Buck; and Investor Relations Head, Mark Pogharian. J.P. Bilbrey joined Hershey 10 years ago. And in that time, he and his team have accelerated the company's top and bottom line growth rate by investing in advertising, expanding sales coverage, reducing manufacturing costs and creating a viable platform in emerging markets. Here to kick us off and talk about the 5-year plan to maintain this momentum is J.P. Bilbrey.
John P. Bilbrey
Thanks, Earl [ph]. Well, good afternoon to all of you in the audience and to those of you listening in on the webcast. My name is J.P. Bilbrey, President and CEO of The Hershey Company. My colleagues and I have a very compelling story to tell you. So let's get started.
First, let me remind you that our presentation contains forward-looking statements. So please take a moment now to read through this slide, which is also available in your handouts and on our website. Also, at the end, our handouts and on the website, you'll find reconciliations of the non-GAAP items referred to in our presentation, to the appropriate GAAP measures.
I'm pleased to have the chance to talk about The Hershey Company and our plans for continued predictable, profitable and sustainable results.
And it all starts with the 5 strategies that are on this slide.
Importantly, focus on our core. U.S. business is a top priority and fundamental to our success. We see the U.S. as an attractive growth market. Expanding our footprint into attractive markets and making our targeted global brands broadly available, offers us an attractive approach to meaningful international growth while maintaining financial discipline. And we continuously strive to be a leading knowledge-based organization that executes with excellence.
So I'll start off with an overview of our fundamentally advantaged business model and the predictable and profitable results that it's generating. Michele Buck will demonstrate how we're positioned to leverage our strength in the U.S. and capture the international opportunities which lie ahead for us. And Bert Alfonso will discuss our solid financial position and then wrap it up with some closing remarks.
Our focus on core brands in the U.S. and investments in international markets has resulted in accelerated revenue growth. The initial investments in a few of our core brands in 2008 and 2009 resulted in revenue growth of about 4% a year but has accelerated to 7% from 2010 through 2012, resulting in a 5-year compound annual growth rate of about 6%.
In 2012, outside the U.S. and Canada, our international net sales only increased about 12% due to some stiff FX headwinds. However, in China, Brazil and Mexico, we made solid progress in 2012, with local currency sales up double digits on a percentage basis versus last year.
In 2013, based on current exchange rates, net sales outside the U.S. and Canada are expected to increase 15% to 20%, putting us on a path to reach $1 billion in international net sales by the end of 2014.
Our consistent and sustainable net sales growth and maniacal focus on maintaining or expanding our gross margin has resulted in a double-digit adjusted EPS diluted growth over the last 4 years. Our earnings growth translates into strong cash flow generation. This has always been a hallmark of The Hershey Company. The initiatives implemented in 2009, around working capital improvements, have combined with earnings growth. We should generate operating cash flow in the $900 million to $1 billion range on an annual basis. And we're very committed to our dividend. Historically, our dividend has grown in line with our earnings outlook, and we continue to expect this to be the case going forward.
The appropriate use of cash is a constant board-level discussion. And we continue to target about a 50% payout ratio, and from time to time, will supplement that with share buybacks. Our predictable profitable and sustainable business model is reflected in our return on invested capital.
Looking back, over time, ROIC drops or is flattish during a period of business realignment or reinvestment. But as our shareholders know, Hershey's ROIC has outperformed the S&P food group. With an optimal manufacturing footprint and strong results from business reinvestment, we think ROIC has further room to grow and will continue to correlate with a higher share price.
Now let me talk about some of our advantages starting with the category. Our opportunity is big, as confectionary is a huge global category. At over $194 billion worldwide, the category has been growing at a compound annual growth rate of over 5% over the last several years. And as a category, confectionary is fundamentally advantaged. Confections are available almost everywhere. As such, we lead in household penetration and impulse purchases. The category is highly responsive to merchandising, it's one of the most merchandised categories in the store, and it's profitable for both manufacturers and retailers.
The impulse nature of the category translates to a business that responds to merchandising around the perimeter of the store, and also at the front-end, with the #1 check-out conversion rate at the cash register. Hershey is well positioned within the category, versus the competition, with advantages that enable us to be thought leaders in this space with key retailers and it starts with our iconic brands. Our leadership is marked by powerful brands such as Reese's, Hershey's Kisses, Kit Kat, Twizzlers and York, just to name a few. It's a well-balanced portfolio, with solid presence within the growing segments of chocolates, sweets and refreshment. So it's no surprise that we're one of the category leaders with retailers, and they're looking to us for confectionary solutions.
In 2012, Hershey's retail take away outpaced the category and was up 5.7%, resulting in a market share gain of 0.6 points. In fact, we've gained market share in every channel that we compete for 2 consecutive years. We take category leadership seriously. Despite the large M&A combinations of a few years ago, we've increased our CMG market share by about 2 full share points. We have a 30% share of the total U.S. CMG category, and have driven almost half of the category's growth over the last 3 years. Another unique characteristic of The Hershey Company is our dedicated and direct sales force. We're the only confectionary company in the U.S. which has its own national sales force. We believe it's a strategic and competitive advantage and enables us to control and drive execution excellence at headquarters and at retail outlets.
And winning at retail is something that we believe is visible. We believe our organization's passion and professionalism delivers solid merchandising, programming, counter units, end caps, on all of our brands. Our relationships with store managers, who have a lot of autonomy on where things go, enables our discussions and in-store execution to be at the right points of interruption to drive sales. And we've made significant investments here and have increased our in-store calls over the last few years. We have the tools to measure effectiveness and constantly look, and test, the ways that we need to optimize and become more efficient in our coverage. And we keep expanding on the proprietary tools that are enabling our category leadership.
Our proprietary commercialization model starts with the intellectual capital and tools that we believe we possess. This holistic and knowledge-based approach to planning and execution ensures that our brands are helping retailers achieve their goals. One of our IDP application is Hershey's proprietary brand building framework which provides a consistent roadmap to build brands across both categories and geographies. Another example of our IDP application is the customer collaborative planning model, which provides partnership-based interaction that unites Hershey's brands with our retail partners and enables programming to excite and delight shoppers and trigger category demand. And as an example with our innovation capabilities, IDP and the Hershey demand landscape provide a direct line of sight into consumer desires and corresponding economic opportunities which are applied to a disciplined innovation, stage-gate system which is built to fuel lasting and profitable innovation growth.
Now we've talked about some of Hershey's specific capabilities, so let's review how it translates into usage occasion advantages. Our products are widely consumed throughout the year, satisfying many different consumer need states and occasions. About 25% of our U.S. sales are derived from seasonal celebrations which are everyday and consumable businesses, each represent about 37% of our sales. This is a very powerful aspect of the category and why it continues to grow at a 3% to 4% rate on a historical basis. The products are available in multiple locations throughout the store, various pack types and price points that are affordable for the consumer and profitable for our retailers. Our seasonal collaboration with retailers in best-in-class. We bring proven insights to the category, as well as our proprietary seasonal navigator tool, where we assist the retailer in managing and planning the execution of these important events, not only for the Hershey brands, but for the entire category. Seasonal celebrations represent about $4.6 billion in retail sales. Hershey's seasonal retail takeaway continues to outpace the category, and in 2012, our total seasonal share increased by 0.8 points, growing to a 32 share. Our consumer centric approach to brand building, combined with increased in-store hours and visits has enabled us to achieve higher levels of merchandising and programming, which brings excitement to the aisle and our everyday business. These events cover 37 weeks of merchandising during the year and ensure that our brands can be found in key locations throughout the store on a year-round basis.
Now I'm pleased with the success of the company and what we have achieved in the convenience channel as well, as we've gained C-store market share for 4 consecutive years. Our iconic brands and instant consumable packaging is offering alternatives, it's meeting the needs of consumers in this very important, on-the-go environment. Another unique aspect of the category is its ubiquity. With strong presence, not only in traditional channels, such as mass and food, but also in channels that many CPG companies do not meaningfully penetrate, such as convenience stores, drug, wholesale club, dollar stores, specialty channels like food service and even vending.
A meaningful piece of our business comes in what some companies may call alternate channels.
Advertising is an important lever in our brand building. Our increased share of voice and GRPs brings consumers to the category. We use multiple media types, beyond TV, as powerful tools to leverage the impulsivity and accessibility of our category. In key international markets our net sales growth is greater than the category growth. In these markets the chocolate category growth is still developing and advertising is important for both Hershey and the category. As such, given our financial flexibility, in 2013, we're accelerating our advertising in key international markets. Long-term, we expect advertising to be in the range of 1 to 2x of our net sales growth.
At our Analyst Day in June, we told you that we expect the 5 global brands that you see on this slide, to drive our growth and transcend borders around the world. We have confidence in our plans given the success that we've had with our Hershey's Kisses. In our international markets, we've primarily led with and invested in the Hershey's Kisses brand. And as a result, about 1/3 of the total Kisses brand sales are now derived outside the U.S. As we build availability and invest behind our other global brands, we would expect similar results.
Market research is currently underway at many of our geographies. The products you see here are either being tested in the marketplace or will soon be launched if they're not already on the shelf.
And we're doing all of this with a diverse leadership team. My direct reports, on average, have been with The Hershey Company for about 7 years and have approximately 20 years of CPG experience. And many of them have also had broad international assignments. We're developing talent at all levels of the organization, and we're also complementing it when and where needed with external hires. As many of you know, Hershey's heritage of commitment to consumers, communities and children began with the funding and founding of our company, and Milton S. Hershey's commitment to the boarding school that bears his name and benefits children that are in need. Consumers expect companies like Hershey to be a part of the solution in their communities and on issues like sustainability. This slide shows our 2012 CSR initiatives and the external recognition that we've had in making solid progress.
As it relates to cocoa sustainability, we recognize that our company and the industry must continue to focus and collaborate on assuring the long-term supply of sustainable cocoa while enhancing the livelihood of cocoa producers.
In October, we made a pledge to source 100%, certified cocoa by 2020. Hershey's leadership in North America and commitment to sustainability will accelerate the production of certified cocoa around the world. We're working with governments, NGOs and other cocoa and chocolate companies on this complex and long-term challenge. I'm very pleased to announce that we anticipate sourcing approximately 10% of the company's total cocoa needs with certified cocoa in 2013.
Programs like our own CocoaLink, which is already connecting more than 10,000 Guinean farmers to local language SMS messages each week, show that positive change is possible. We are well positioned and focused on the brands and go-to market capabilities that will drive accelerated growth. Based on current exchange rates, we would expect organic revenue growth of around 15% to 20% per year over the next 5 years. This would result in organic net sales of about $1.5 billion to $2 billion outside the U.S. and Canada by the end of 2017 and represent nearly 20% of the company's total net sales. This leaves us well positioned to capture the opportunities that lie ahead and ultimately increasing shareholder value on our aspirational path to $10 billion in net sales by the end of 2017.
Now I'm very pleased to introduce Michele Buck, our Senior Vice President and Chief Global Growth Officer, who will provide you with details on why we feel we're well positioned in the global marketplace. Michele?
Michele G. Buck
Thank you. Good afternoon, and thank you, J.P. I am Michele Buck, Chief Growth Officer of The Hershey Company, and I'm delighted to share with you today our company vision and priorities, business model, and the progress we're making on our business, particularly in the U.S. and China.
We have an advantaged business model and have demonstrated our ability to successfully grow our business as one of the market leaders in an advantaged category. We have a clear vision and disciplined acceleration plan that will deliver sustainable growth. U.S. confectionary is at the core of our business and continues to be an opportunity for us. We're seeing signs of success in expanding our geographic footprint and portfolio, both organically and via M&A. We're supporting growth through investment in marketing and sales, infrastructure and capabilities to enable executional excellence with advantaged knowledge and insight central to driving all we do.
Our category and business model are advantaged. We play in a category that enjoys planned purchases as well as is highly impulsive. Few categories are as ubiquitous across retail formats. Our availability and ability to deliver against multiple consumer usage occasions results in expandable consumption. And as demonstrated over the last few years, the category held up well through a challenging economic climate.
Our business model is advantaged. We have some of the most loved and iconic brands in the industry, that respond extremely well to investment and activation. Since we evolved our business model in 2008, we have invested significantly in consumer and shopper insights in order to build messaging and programs to best meet consumer needs. And today, this understanding of the consumer drives all of our portfolio and investment decisions. We also built a new approach to working with customers, founded on customized insights and powerful collaboration to grow both our business and the category, utilizing our own Hershey's sales force and merchandising team. Activation of our brands with deep consumer insights, and collaboration with our customers, is at the core of the insights-driven performance model that has been critical to our success. This robust model has produced solid results over the last 4 years that we are proud of. We have been able to deliver strong top line growth that has fueled strong bottom line performance. Going forward, we've built an enterprise vision and strategies to enable growth. Our plan builds off the insights-driven consumer centric business approach we built in 2008, but takes it to the next level. This global growth vision and plan, though aggressive, is grounded in discipline. We are committed to continuing to deliver the predictable sustainable growth that you have seen from Hershey over the last few years.
Our vision defies the geographies and categories in which we'll compete, as well as how we will win. North American leadership will continue to be top priority and foundational to our success. We'll strive to be #1 in the category. We're focused on select global markets and will become a top 3 player in those emerging markets where we have chosen to compete. Our focus is on developing markets where the conditions are ripe for strong growth. Highly populous geographies with strong GDP growth, fueled by increasing consumption power which affords opportunity for participation in the discretionary, affordable and accessible indulgence of confectionary.
We'll expand our portfolio to on-trend consumer segments that will drive profitable growth. We continue to place our primary focus against expanding our robust advantaged confection business. We will also choicefully explore opportunities in other on-trend, adjacent consumer segments across the convenient snacking continuum as they offer marketplace opportunities.
And while we may not be the largest scale player in every market, or globally, we have proven that we can still win by playing smarter, focusing on advantaged insights and knowledge that lead to consumer and shopper solutions that benefit The Hershey Company, the category and our retailers. We have concrete aggressive financial goals. We aspire to become a $10 billion company by 2017. This is a watershed mark for us. And while acquisitions are difficult to predict, we will strive for strong organic growth and business development to drive us to this milestone. Our global growth plans will expand our international revenue from 10% to 25% of total company sales. This aggressive, yet achievable target, allows us to capture the high-growth in GDP and the category in emerging markets. And we'll increase gross margins, as we have over the last 5-year period, to enable investment behind a healthy and accelerated top line. I'm personally excited by these ambitious goals that we have set for ourselves.
As J.P. shared with you, 5 strategies translate the company vision to an operating plan. First, we're bullish about opportunities in North America, where the category has proven to be robust. We anticipate continued growth as we drive our advantaged business model through a balanced investment approach. We'll invest to accelerate international growth, leveraging our core strengths and transferable business model. We are making a bet on China, where our brands have resonated strongly with the Chinese consumer. M&A will further our geographic expansion with a priority on assets with route-to-market capability. We'll expand 5 core brands globally, led by our billion-dollar-plus chocolate brands, in Hershey's and Reese's, the iconic Kisses brands, along with our scale sweets and refreshment brands, Jolly Ranchers and Ice Breakers, as we selectively build out our portfolio in other on-trend segments. We will continue to pursue M&A to expand our portfolio just as we did with the Brookside acquisition. We'll build talent and proprietary capabilities to support our strategies and expansion. We are a knowledge-driven organization and we'll continue to leverage IDP in the U.S. while we develop this capability in our other markets.
One of our hallmark strengths embedded in our company culture and business model is executional excellence. Gross margin expansion will fuel the necessary marketing, go-to market and talent investment to enable growth. An expanded sourcing network, especially in Asia, will be necessary to supply our acceleration. And our entire organization is aligned and compensated against delivery of our 5 key strategies.
Today, I'll focus on the first 3 strategies. Let us now take a deeper look starting with the important U.S. We have a scale position in the U.S. confections market and we strive to be the #1 player. We are the #1 chocolate company, while our sweets and refreshments portfolio has seen recent growth. And we are the #1 player in the convenience channel, gaining share for 57 straight quad-weeks. Overall, we have gained total market share each of the past 3 years for a cumulative gain of 2.1 points, in the midst of difficult economic times and consolidation in the confections industry. Our share gains have been balanced as we increased share in each class of trade for 2 consecutive years. Our share gains have been strong in the important C-store channel, one of the largest channels in our category, and a channel comprised primarily of profitable instant consumables.
Our growth is anchored in our iconic brands, highly recognizable across North America, complemented by a broader portfolio of strong power brands that are loved by consumers. A 2012 independent brand equity study by Harris Interactive, involving over 38,000 consumers and ranking over 1,500 brands across 127 product categories, revealed that Kisses ranked #1, Reese's #3 and Hershey's #6. Three top 10 brands among over 1,500 ranked by consumers. Now that is brand power. We're #1 in chocolate in the U.S. with a 43% market share, and since 2009, have been both driving and outpacing the chocolate category, with a 3-year CAGR of 6%.
We have leadership positions in both the sweets and mint segments, and lay claim to the fastest-growing brands in sweets and refreshment. In 2011, we began investing in our sweets and refreshment brands as we had, a few years prior, with our chocolate business. And that investment is paying off, with our brands outpacing the category.
Our adjacency business, which we haven't discussed much, is also performing well, growing at a 7% CAGR over the last 3 years, with Hershey's Syrup holding a 70% market share.
Let's talk about our advantaged insights-driven business model, key to our growth. Insights fuel a deep understanding of consumer segments and the consumer demand landscape and are used to create superior consumer propositions in both existing and new spaces. We then move to shopper demand, and here, too, insights fuel a much deeper understanding of shopper trip missions and the shopper landscape. We build and share these insights with our retail partners to create strong programming. Opportunities are then brought to life through our 5 growth levers: Advertising, innovation, seasonal celebrations, distribution and merchandising. Executional excellence in brand activation and at retail is in our DNA. Activation done well, is a source of marketplace advantage and it's embedded in every one of our teams' work.
Let's now go deeper into each of the 5 activation growth levers. First, advertising. We have activated 14 powerful brands in our portfolio with media support, and each has responded impressively. Let's take a moment to look at some of the U.S. advertising that is fueling the growth of our iconic brands.
Michele G. Buck
Our ads are not only entertaining but they are also validated to perform. Hershey's advertising consistently tests in the very top tier, strongly correlating with market growth. Based on the awareness index score, our Reese's and Kisses ads are amongst the top 3% of the over 2,100 ads in the U.S. Millward Brown database. Our advanced analytical modeling continues to reveal strong advertising lifts over consecutive years. And this model captures only the short-term impact of advertising. We know this advertising drives ongoing base momentum.
Innovation is another growth lever. We focus innovation around our core brands, leveraging insights within the demand landscape to identify consumer needs not currently addressed by our portfolio. This enables us to build strategically grounded, and thus, sustainable, incremental innovation, such as our hand-to-mouth platform which has been a strong performer for us. This knowledge-based approach to innovation has delivered solid results since we began applying it in 2008. Our objective has been to deliver 1 point of growth from innovation, net of cannibalization, each year. And our approach has over-delivered this objective.
Next, seasonal celebrations. A great demonstration of executional excellence. Here, we leverage insights to understand the consumer and their seasonal shopping needs, like gift-giving and stocking stuffers during the holidays or basket-filling and egg hunts at Easter, which drives our portfolio design decisions, as we create a unique and holistic portfolio for every season. Next, we activate our portfolio with season-specific TV advertising. These ads remind consumers to begin thinking about the season and our brand solutions. Our distribution, media, promotions and merchandising schedules are all intricately aligned so that our sales teams, working closely with regional customers, can effectively execute to capture the most out of every season. We've also been successful in creating new celebrations. S'mores has had a healthy 5% CAGR over the last 2 years, and it's on its way to becoming as big as Hershey's Valentine's Day business. In fact, Hershey's Milk 6-pack is the #1 confectionary item during summer, and the #4 selling grocery item when on display in store.
Distribution is our next growth lever. Despite our market leadership position, our strategic innovation, strong velocities of existing items and close customer collaboration, driven by our Hershey's own sales force, enable us to grow distribution. Last year, we added 7 net new everyday items per store, delivering a nearly 6% increase in distribution, with gains across every channel. Displays and signage help consumers find their favorite items and, as well, activate impulse purchase. Our team utilizes shopper insights, input from our retail team and customers, to design merchandising units and signage packages that increase visibility and entertainment value. I believe our intellectual capital is, and will continue to be, a key differentiator. It drives our strategy and helps us realize profitable demand, creating a win-win both for us and our customers. And as a result of our knowledge-based approach and close customer collaboration, we are frequently recognized as a strong vendor partner and are proud to be category adviser to retailers that represent nearly 3/4 of category ACV.
Collaboration with IDP customers continues to generate strong returns for us and our partners, with sales growth of IDP customers surpassing that of non-IDP customers by 28%. And more impressively, non-promoted or everyday candy sales growth, 70% higher in IDP versus non-IDP customers in 2012.
Let me now demonstrate what activation of the 5-growth levers can look like, through sharing highlights of our Reese's programming including some live footage.
Michele G. Buck
Our business model is working. And I'm confident in our delivery for 2013. As you can see, we've delivered strong and steady sales -- organic sales numbers. Over the years, we have managed the levers of price and volume, to grow the top line predictably while delivering the bottom line. In 2013, we will see top line growth driven by volume, as we have cycled through our last pricing action with the U.S., given its scale, being the driving force. I'd now like to share with you a few of the business drivers of our 2013 U.S. growth.
In 2013, in the U.S., we will continue to drive brand momentum through advertising investment, activating our core innovation, our recent acquisition of Brookside, as well as seasons. The inherent advantages of our category, in terms of impulsivity, expandable consumption and advertising responsiveness, make advertising a particularly impactful growth lever for us. Advertising spending will grow at 2x sales, in line with the CPG industry. And on a percent of net sales basis, is in the midrange amongst our CPG peers. Clearly appropriate, given the responsiveness of our category.
We have exciting new products lined up in innovation. Twizzlers and Jolly Rancher Bites just launched. They will contribute to driving our U.S. sweets and refreshment business to $1 billion at retail. Kit Kat Minis will launch in June, this will drive the powerful Kit Kat franchise past $500 million in retail sales. These innovations further extend the hand-to-mouth platform across our portfolio following the success of Reese's Minis, Hershey's Drops and Rolo Minis in recent years.
We'll expand our seasons business in 2013 as we combine our 3 power summer items into one big summer celebration. Leveraging S'mores around summer barbecues; Twizzlers, a favorite for the beach and summer road trips; and syrup usage that peaks in the summer, moving beyond milk consumption to also include seasonal ice cream usage.
Brookside. Brookside, the company we acquired in 2012, has exceeded expectations, up 24% in 2012. Brookside makes wonderful dark chocolate pieces featuring unique exotic fruit flavors. This is in addition to our portfolio that has significant growth potential. And I understand from all of you that we have only one problem with Brookside: not enough samples at the breakout. So you'll have to see Mark about that. Building on Brookside's strong performance in the Club channel, in 2013 we will further extend the power of this proposition by leveraging our ubiquitous channel strengths to broaden Brookside availability and consumer penetration. We've already doubled capacity at our Brookside plants to meet demand and enable expansion. We believe this brand has global opportunity as well. We have built preliminary phased rollout plans for Brookside across our focus markets.
Here's a look at the advertising we will use to launch Brookside broadly in the U.S. this year.
Michele G. Buck
Our consumer demand landscape suggests, and I think you can see, the Brookside brand takes us to a new consumer space.
Our U.S. momentum and growth fuels expansion. Continued investment in our brands drive scale, ongoing productivity at world-class levels helps fund the investments in knowledge, insights and key capabilities. This virtuous cycle has enabled margin improvements like the over 800 basis points of margin growth we experienced between 2008 and 2012, that fueled our disciplined portfolio and geographic expansion.
Let's talk about international growth. Roles and pacing of expansion are critical to ensure disciplined investment and the focus necessary for executional excellence that leads to profitable growth. China and the contiguous North America, comprising the U.S., Canada and Mexico, are our win-now markets. We will make the investments necessary to drive leadership position, scale and profitability in these markets over the next 5 years.
I'll focus my comments today primarily on our #1 international priority, progress in China. As I mentioned previously, we're placing a big bet in China, and anticipate it will be Hershey's #2 market, behind only the U.S., in the coming 5 years. I am confident we will make this happen. We're employing a density strategy to ensure focus and profitability. This means we'll saturate distribution in a market, follow with media support to create brand awareness, then broaden our portfolio in that same area before expanding distribution and investment to additional markets. This concentrated approach to expansion efficiently leverages scale.
China has performed as a growth engine, with an 84% top line CAGR over the last 6 years. We've applied our advantaged and transferable business model in China. It starts with an insights-based approach that allows us to leverage common consumer needs around the globe, as well as customize for local unique preferences. For example, we evolved our Kisses packaging to better suit the expectations and needs of the China consumer; expanded our gifting offerings especially for the Chinese New Year; and created a new chocolate opportunity, leveraging the special attributes of Kisses, to participate in the wedding channel business that is highly unique to this market. This strong portfolio, sound advertising and density distribution approach is working. As a result, the Kisses brand has been growing strong, driving China growth to date.
Now we're applying the same learnings to the Hershey's franchise, with bars and products tailored to the Chinese consumer. We just began activating the Hershey's brand in 2012, and as a result, our brand velocities are 67% higher than those prior year. Let's look at Hershey's advertising in China.
Michele G. Buck
In April 2012, we launched another of our 5 global brands, Ice Breakers mints, in Shanghai and Chengdu. With flavors to suit the Chinese palate and in-store activation, we are seeing solid performance, with half of the line performing in the top 25% of the mint segment in terms of velocity. The mint category, though small, is growing even faster than chocolate in China. Our plans are to build on this foundation, expanding Ice Breakers to more cities over the next few years. Following the success of Ice Breakers we have further portfolio expansion plans in place. We will be broadening our line in refreshments, gifting with a new Kisses deluxe item, and bringing our successful hand-to-mouth platform to China, all in 2013.
We're building distribution, deepening store penetration and expanding to surrounding cities. We have appropriately invested to build a sales team to enable strong distribution and merchandising. As we further expand our portfolio and build scale, we'll begin to see leverage on this investment. We are advancing our insights, go-to-market, category management and other capabilities on a systematic basis, transferring knowledge from the core U.S. to move each of our capabilities in China up the maturity curve, to work toward the leadership levels we enjoy in the U.S.
We opened our state-of-the-art Asia innovation center in October. We have recruited some of the very best local talent. This will allow us to gain deeper insights into the local consumer and establish strong partnerships with local universities and vendors, creating new capabilities and innovation opportunities, both in Asia, as well as reverse innovation across the rest of our markets.
Our expanded growth in China and throughout Asia makes increased local sourcing in Asia necessary. We will complement our existing manufacturing joint venture arrangement in China with additional manufacturing capability in the region, allowing for more dedicated support behind our priority market. As a result of our focused and disciplined efforts globally, we expect an increasing proportion of our growth over the next 5 years to be driven by geographic expansion.
In addition to the growth in China I shared with you, we are growing other focus markets via expansion of our global brands. We believe in the global power of our brands because we have seen them work. For example, in 2012, our Kisses business grew high-double digits across key Asian markets and Latin America, with almost 1/3 of the Kisses sales now outside the U.S. The Hershey brand also delivered, with strong double-digit growth in the emerging markets. Almost 20% of our Hershey brand sales are now outside the U.S. And we'll continue to apply our insights-based capabilities to grow and extend our portfolio of 5 global brands across focus countries.
We will also actively pursue M&A to bolster growth. In international markets, this will help us build infrastructure, scale and capabilities such as route-to market. In the U.S., M&A will allow us to leverage our assets. In both geographies, this will provide access to new portfolios that meet on-trend consumer needs. We anticipate that 40% of our headcount will be located outside the U.S. We have built our international talent base ahead of the business, to be able to appropriately prepare for and execute our growth agenda. And our go forward plan includes the continued investment needed to enable growth. We will create leverage behind these organizational investments. We believe the outlined strategy will ensure that Hershey continues to deliver predictable growth based on our strong North America foundation, a replicable business model and aggressive yet disciplined expansion. Strong top line results, coupled with ongoing cost management, will deliver bottom line performance. I'm optimistic about our future and the value to be created as we continue to unleash our company's full potential.
I'll now turn it over to Bert for our financial outlook. Thank you.
Humberto P. Alfonso
Well, thank you, Michele, and good afternoon, everyone. Let me now give you an overview of our strong financial position and the outlook for our business. J.P. and Michele have provided a compelling business case, supporting why we believe our commercial and financial goals are achievable.
In terms of focus areas for financial performance, it all starts with industry-leading margins. Over the last couple of years, we have expanded adjusted gross margin and adjusted EBIT margin, while at the same time, investing in our business. From 2008 through 2012, we expanded adjusted gross margin by 870 basis points. And we expect to continue to enhance gross margin. Although not at the same rate as recently achieved. We have a clear line of sight regarding incremental productivity, and also expect SG&A leverage as we get beyond the next couple of years.
In terms of productivity, our manufacturing overhead and distribution comprise about 40% of our cost of goods. This is where we derive 3% to 4% or $40 million to $50 million in annual productivity. We expect to continue delivering similar levels of annual productivity from this area of our business. In the past several years, with additional contributions from projects that transformed our North American manufacturing, we generated annual productivity of $70 million to $90 million annually. Today, with Project Next Century largely behind us, we're now focusing on other parts of our business. And as a result, we expect to generate annual productivity gains in the $50 million to $70 million range between 2014 and 2017.
Our focus on gross margin expansion, while supporting a strong investment in selling and marketing capabilities has led to a solid EBITDA growth rate and a strong operating cash flow. Over the last 5 years, including business realignment charges, to optimize our manufacturing footprint, the company has generated over $4 billion of operating cash flow. We have a strong process in place to manage our working capital, and expect to generate predictable operating cash flow, averaging $900 million to $1 billion annually.
Our cash flow priorities remain consistent with what we discussed at our analyst meeting last June. However, let me provide some context around our disciplined deployment of cash. As we think about M&A targets, we're particularly interested in companies with accelerating revenue growth, that offer strong regional or local brands and a strong go-to market capability. We are focused primarily on confection and snacking categories in the key markets where we compete. Our preference is for bolt-on acquisitions that would be EPS accretive in year 2, although we would consider EPS accretion in year 3 for the right strategic acquisition.
Historically, our dividend has grown about in line with our earnings outlook, and we continue to expect this going forward. We are targeting a 50% payout ratio to ensure that we remain competitive around the peer median. In 2012, based on projected strong cash flow, we increased our dividend twice to ensure the payout was in line with our target.
Our business plans call for higher volumes going forward. As a result, we continue to have a disciplined capital expenditure investment philosophy. Over the last few years, the industry average for CapEx, as a percentage of sales, has been about 4%. To meet the expected CapEx needs, related to our regional manufacturing capacity requirements, we are projecting our capital spending, on average, to be slightly below 4% over the next several years.
Today, our debt to adjusted EBITDA is about 1.3x, and is at the low end of our targeted range. Ideally, we would prefer to be 1.5 to 2x, to benefit from slightly greater leverage. That range provides us the ability to consider value for any M&A while still maintaining an A credit rating. For the right strategic acquisition, we would consider adjusted debt to EBITDA at 2 to 2.5x, however, we are committed to our A rating over the long-term. In the event that M&A opportunities do not present themselves, we would favor share repurchases and debt reduction as alternative uses of cash.
As we project our business going forward, we believe our long-term financial targets are achievable. We expect to grow our top line in the range of 5% to 7% annually. We believe our investment in commercial capabilities, innovation and international portfolio expansion can enable us to capture our fair share of a growing category. And we are confident of our ability to grow long-term adjusted EBIT, diluted, by 8% to 10%, while giving us the flexibility to make the necessary investments in brands and capabilities, in both the U.S. and key international markets. Overall, 2013 is off to a good start. And we are confident about our prospects. Our xAOC+C retail takeaway for the 4 weeks ended January 26, 2013, was up a solid 6%, resulting in a market share gain of 1.7 points.
As we stated a couple of weeks ago, in 2013 we expect full year net sales growth of 5% to 7%, adjusted gross margin expansion of 180 to 200 basis points and adjusted earnings per share, diluted, to increase by 10% to 12%. We have the financial flexibility, given the strength of our U.S. business, and we continue to invest in U.S. brand building initiatives that generate solid top line growth. This is a virtuous cycle that gives us the fuel to reinvest across our business, especially in key international markets where we are making great progress. Importantly, the international investment choices we are making today should lead to international scale over this planning cycle and a path to greater profitability.
In summary, we have a strong business model and a category that is fundamentally advantaged. We are well positioned to capture the opportunities ahead that will generate consistent top line growth in the U.S. and accelerated sales in international markets. And we have a solid balance sheet and strong cash flow that will enable us to achieve our goals and reward our shareholders.
I thank you for your time today. And I'll now turn it over to Mark to help us through the Q&A.
I see Rob on the stage, so I'm not sure how much time we have left here. So we'll follow you, Rob.
Okay, we're going to take questions in the breakout room. Thank you very much to Hershey for sponsoring and for presenting today.
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