Hillshire Brands Co CEO presents at Barclays 2013 Back-to-School Consumer Conference (Transcript)

Sep. 3.13 | About: Hillshire Brands (HSH)

Hillshire Brands Co (NYSE:HSH)

Barclays 2013 Back-to-School Consumer Conference

September 3, 2013 11:14 AM ET


Sean Connolly - CEO

Maria Henry - CFO and EVP


Okay, good morning everybody. We'll kick off our next presentation here. At the initial investor day, a little more than a year ago, Hillshire Brands outlined its vision to be a neat centric packaged foods company focused on growth to the refreshment of its iconic brands and expansion into adjacencies and new mill locations. This strategy started to take hold during fiscal '13, aided by a pronounced and unexpected benefit from the cost inflation that funded reinvestment while still leaving Hillshire to exceed its initial EPS goals. Heading into fiscal '14 however, the Company will have to navigate somewhat more difficult operating conditions related to potential inflation and a heightened competitive environment. Here to discuss Hillshire's expectations for the coming year and progress that's made towards its FY15 goals, are President and CEO, Sean Connolly; and EVP and CFO, Maria Henry. With that, I'll turn it over to you Sean. Thanks for being here.

Sean Connolly

Thank you, Andrew. Good morning, everybody. It's good to see everybody, whether here in the room or those of you turning in by webcast, appreciate your interest in Hillshire Brands. We've been at this for a while now but I recognize that a bunch of the people tuning in today whether here in the room or by webcast or new to our story. So as you'll see, I've included some fundamental background on our Company, so if you are not familiar with us, you'll understand some of our key assets and some of our strategies and how we intend to create value.

Before I jump into it, please take a second and look at this slide on forward-looking statements. All right, let`s get into it. Here is what I want you to take away from our presentation today. First and foremost, we have a fantastic portfolio of market leading brands. Second, we have great categories and we expect to drive growth in those categories through disciplined investment and brand building and innovation that is central to our thesis. But we have an equally rigorous focus on cost management because we recognize we need to pay for our demand drivers and therefore we have strong cost programs and we're focused on delivering those over the next several years.

We will also pursuit targeted M&A as a way to accelerate the growth within our categories and finally, we have a strong belief that we can continue to drive shareholder returns through this great portfolio we've got. And when I talk about the great portfolio, I am talking about a $4 billion company here in North America that is a focused food company. And as you can see from the chart on the left, about three quarters of our revenue base is in the traditional retail segment of trade with about a quarter of our revenue base being in the food service channel.

Importantly, roughly 90% of our portfolio is branded and these are not just ordinary brands, but these are extraordinary brands. When I talk about our branded portfolio, I am talking about a slew of great brands, the top two being Jimmy Dean and Hillshire Farm which are roughly $1 billion in sales and several other terrific brands in our portfolio, but instead of me telling you about our brands, let me play a short video for you that will give you a sense of the heritage of the brands within Hillshire family.

So it’s a strong portfolio of brands and importantly, we have leading share positions in many of our categories and very strong relative market shares. As you can see here, Jimmy Dean, number one in breakfast sausage but also number one in frozen protein breakfast. Hillshire Farm, number one in smoke sausage and number three in lunch meat, Ball Park is the leading hotdog brand in America, State Fair is the leading corn dog brand, Aidells is the leading superpremium sausage and Gallo which is our terrific west coast brand is number three overall in the nation but it's extremely strong in the west coast where it's been around for a number of years, so very strong positions in our core categories.

Now we've got a number of ways that we can grow this portfolio within the category, so let me break this slide down for you. Left or right, you’ve got our categories on the screen here, lunch meat, hotdogs, smoke sausage, breakfast sausage and frozen protein breakfast and the brands which compete within those categories. At the bottom of the page, you can see the size of these categories. These are large categories starting with lunch meat and a leftover 5 billion all the way over to frozen protein breakfast on the right at a 1.5 billion.

And then down at the very bottom you see the growth rates. These are fundamentally growing categories with the exception of hot dogs which I've mentioned before, has been a bit of a sluggish category and need of some innovation.

What you see with the bars is category household penetration. The green bars represent household penetration for the total category; the orange bars represent household penetration for our brand. So whether its fully mature categories like lunch meat or hot dogs where you see the total category is roughly at 80% household penetration or its young categories like frozen protein breakfast where the category only has a household of 38%, but its growing rapidly. We've got a meaningful opportunity for growth. In the fully developed categories, it's going to be by growing our market share, in the developing categories, it's going to be by us being a leader in that category and innovating to continue to drive category growth. No matter where you look, there is room for growth within these categories.

Importantly, private label is low and it has small development within these categories. In the industry on average, we see private label at about 12% of categories in terms of market share, but for a number of our categories, you could see it mid-single digits. So that's a real statement around the power of brands in these categories. And I am often asked, why do I think that's the case and my personal opinions is, if meat is the hero [ph] ingredient in a product, people want me from a quality source, a trusted source and a brand name that know and trust. They don't want mystery meat and that's where our brands come in. this bodes well in terms of our growth agenda.

We are focused squarely on four strategies to drive value creation with this portfolio. First and foremost it starts with strengthening our core business, making sure our fundamentals are right in terms of shelving, pricing, all of the disciplined fundamentals we've got to get to right in the marketplace and then backing our growth with good marketing support and good innovation. We will second look to extend these trademarks into adjacent spaces. We've done that with Jimmy Dean, we've begun to do that with Ball Park. We will do that with other brands.

Third, as you may have seen the news today, we will look to continue to acquire on trend brands, and strengthen our portfolio and leveraging infrastructure we have in place. And finally, to pay for our demand drivers, we have terrific cost efficiency programs in place and we will execute against those programs. These are our four strategies and that's where we work against every single day.

Now obviously brand building and innovation are key to our growth agenda. So what do I mean by brand building? What I mean by brand building starts with positioning our brands properly, I'll talk more about that in just a second. Then we've got to back our brands with world class advertising. If that means it has to be affective and has to have a sufficient level of support.

And finally, category management and this is where we partner with our retail customers to make sure we've got the right assortment on shelf and we're driving maximum impact at the retailer and we are category captains in many, if not most of our categories.

When I am talking about innovation, it starts with getting product improvement and packaging improvement into the marketplace. As I mentioned, over a year ago when we spun many of our brands have been neglected for some time and we needed to refresh them and make them temporary [ph] again and we've done just that. We're adding new line extensions to the category, things like [indiscernible] and flavors and varieties but importantly, we will continue to push the limits of our brand equities in terms of extending them in to adjacent spaces. We've been successful with that in the past; we are having success in the marketplace with that now. We will continue to do that.

Now we will support our business with increased MAP investment. As you may recall, historically we underinvested in this area with 3.5% of our annual revenue was put against MAP support of below the line marketing support. Our goal is to get this number to 5% over time by the time we exit fiscal '15. Last year, we moved that number meaningfully to 4.4% which was aided by the deflation we experienced in the year and we went into the year saying, if we experienced deflation, we won't take all that to the bottom line, we will reinvest some of that back into our businesses. We haven't done that in the past. We believe it’s the right thing to do for the future.

The point here is we expect this number to continue to go up over time. You don't model it out quarterly as I've said. It's just it will move quarterly based on where we are with seasonality in our business, where we are with things like trade spend, new item sliding, it will move around. But you should expect it to continue move north over time. What really matters though is that its working and if you look at last year's case study, we increased MAP against a very small number of brands last year, the majority it was Jimmy Dean, you can see from this chart, the top of the chart, the bulk of our MAP spend increased last year was put against a Jimmy Dean franchise.

At the bottom of the page, you can see the impact of that spend. Now keep in mind Jimmy Dean is about a $1 billion franchise and we grew sales in the high single digits. Growing sales in the high single digits on a $40 million is one thing, but doing it on a $1 billion brand is entirely another thing and shown the impact of our successful MAP programs on Jimmy Dean as well as elsewhere in the portfolio.

Now if you think about innovation at Hillshire Brands, what you should expect from us is that we will continue to look to innovate differentiated value added products. This particular slide is a one way of looking at our portfolio that shows the vast majority of our revenue base is in branded and value added products, specifically branded meal components for many of our legacy product flags but also branded ready meals. In fact, branded ready meals represent not only the highest margin portion of our portfolio, but the fastest growing portion of our portfolio and typically there which also see the lowest elasticity of demand. Things like Jimmy Dean breakfast bowls, Jimmy Dean breakfast sandwiches, you open the box, you eat it, it's ready it go when you are. And I think that reflects that the consumer dynamic is such that consumers are always looking for convenient foods. They don't have a lot of free time; they need convenient food to fit in their life. They don't have a lot of [indiscernible] that's where these products come in. so as you look at our future innovation, it will be in this branded value added space and increasingly it will be in the branded ready meal space and by the way, that's what drives our margin structure.

Now last year, we had over $300 million that was derived from products that were introduced within the past three years and you can see these were the sampling here was across the portfolio and Jimmy Dean, clearly the hero last year was our sandwich [indiscernible] business, our Delight business in particular has been growing very nicely and these [indiscernible] were terrific new launch. On Hillshire, we've got great new tall varieties in our lunchmeat business, but we also have a variety of new items that come out in our smoke sausage business that are driving that business as well. Ball Park we launched the lean deep franks in the back half of the year, but importantly, we also extended Ball Park last year to move into space beyond hot dogs. It's no longer just a hot dog. You can now have or selling Ball Park in the frozen section with these Flame Grilled Burgers that are performing very well.

And in our [indiscernible] business, we continue to line extend the superpremium smoke sausage business but we've also extended this business into categories like gourmet meat balls as well salami. So $300 million last year from items in the last three years, we'll continue to push that forward. In fact, as you look in the main screen media, you see a lot of recognition for Hillshire's innovation in the last couple of years and it points out that we are well on our way to achieving our innovation goals. Most recently, progressive growth remains two of our items 2013, hot new hot pics from editor and that was the Jimmy Dean Delight Flat Bread as well as the Ball Park lean hot dog products. So not surprisingly, in the data you're seeing removing the needle towards our long term innovation goals and those are on the right hand side of this chart.

We want to get between 13% and 15% of our annual revenue to be coming from innovations we launched in the past three years. Historically that number was at 9%and you can see from this chart that last year we moved the needle to 11%.

For the first time we also built out a pipeline that we feel confident we can really build the momentum we're looking to here and ultimately get to our long term metrics. As you'll hear in a minute, we've got big news coming in at the back half of this year and then next year's plan looks strong as well.

So overall, as I look back on the first year as Hillshire Brands Company, I feel very good about the progress we made as a team, but we are very clear there is more to do. We knew this was going to be a three year transition to really get this business in fulfilling its potential and we are well on our way. What you see on this chart is the consumption data, the takeaway data from last fiscal year fiscal '13 and how it compares to fiscal '12. And you can see in just about every single one of our businesses, we move the needle in the right direction. Simply put, our strong brands have gotten stronger, and the more challenged businesses within the portfolio have become less challenged and we will continue to work them and continue to make progress against this great portfolio. So overall, good first year.

So what's next? Well, you could argue we're a very consistent story because we're going to continue to stay focused on the strategies we laid out from day one. It starts with strengthening, improving our core branded portfolio, getting the fundamentals right, executing with excellence, continuing the support of brands with MAP, continuing to support them with innovation and we'll do that. But we'll also continue to look to acquire new on-trend brands so that we can build scale on the infrastructure that we have in place and that we can also strengthen our portfolio with new brand equities the way we did with Aidells a couple of years ago.

And finally, the cost efficiency programs we have in place have been identified, we've got a professional P&L managing and we're making real progress. We've got to see them through. They will continue to impact the P&L as we move through this year and into next year.

So how are we going to drive organic growth with our key brands? Well, one of the key is that we will broaden the positioning of this branded portfolio, we reject the notion that these brands have to be limited to the categories where they started, their legacy categories. Jimmy Dean is clearly much more than a raw sausage business. Jimmy Dean today is all about hardy comfort food. Ball Park is proving that it is not a hot dog that is better guy food, for better guy times, Hillshire Farm is really about Farmhouse quality meat, State Fair we believe is more than a Corn Dog, it's about smart and sensible family choices, Aidells is more than a smoked sausage and we are seeing success with our new products in the marketplace already. It's all about authentic ingredient and exceptional taste no matter how it shows up. Whether it’s a smoked sausage or a meatball or a salami. And Gallo is about our [indiscernible] Italian meat.

Broadening the position is really going to be key to unlocking the full potential of these brands. This is what turns Jimmy Dean into a $1 billion brand and it is what will continue to drive our growth. But we will not only broaden the position of our key brands, we'll also broaden the target audiences that we pursue with our brands. For example, the Jimmy Dean business has been enjoyed by our Hispanic consumers now for years, but this year, we're really dialing up our efforts to unlock the potential of the Jimmy Dean business opportunity with the Spanish speaking consumer and we're supporting with Hispanic advertising. Let`s take a look.

Now we love the sun, but we try to keep the speaking part to a minimum there. He's not the best at Spanish. So he plays the role but we don't lean on him as hard as we do in our English advertising.

When it comes to innovation, as you look at this year ahead, we have a robust innovation slate planned. In first half of the year, it will be really about ramping up distribution items we launched, last year, so really getting the distribution up to scale levels, but we will fold in new line extensions in several of our key categories and as you can see in the bottom of this page, we have new items coming in from Jimmy Dean and Delights, we've got new Aidells products coming in to the market place, we have a Sara Lee, angel fruit cake, that just went to the marketplace, terrific product, we rarely talk about food service innovation, but if you get a chance to try one of these products called Chef Pierre Luxe Layers, it’s a double layer pie, terrific product as well as some State Fair stuff. So, we've got new items folding in the first half of the year, additionally, we have a value channel team in place now that is pursuing value channels, dollar and value channel opportunities for us where some of these innovations are specific to the dollar channel.

As we move to the second half of the year, you'll see our innovation program ramp up and you'll see more breakthrough innovations coming to the market place, specifically under ballpark as well as under the Hillshire Farm name in both Lunchmeat and smoked sausage. More details to come on that at a future date, I am going to keep my powder dry on that for now.

All right, M&A. let`s talk about M&A. we had some news today that you might have seen. M&A will complement our organic growth agenda. When it comes to M&A, there we will look for two things. First, is it aligned with our strategic vision, are we pursuing value added categories, are these strong brands, do we see the capabilities we're adding, is it additive or complementary, but ultimately, we're looking to build scale with our customers and with our suppliers. It's also clearly got to generate value creation for our shareholders. So we're looking for topline growth, we're looking for it to be EPS accretive and we're looking for attractive financial returns. So M&A is part of our agenda and it will complement our organic growth. And the way I think about it is, we have a terrific infrastructure in place that is ready to go, ready to be leveraged the M&A, both in terms of capabilities and assets. On the capabilities side, we have terrific consumer insights that we've got developing now and things we've kept from the Sara Lee days, we have clear expertise in frozen as well as in breakfast and as well as simple meals overall, the category captains with virtually all of our Lee customers and many of our categories, we have a terrific R&D capability and great pilot plan, and we have a history of success integrating acquisitions into our portfolio.

From an asset standpoint, it starts with our supply chain. We have a very efficient supply chain and very strong production capabilities. We have an SAT backbone that's up and running smoothly. We have extensive distribution infrastructure and ultimately we've got great brand equity that we believe can do more and travel more. So we've got infrastructure in place that can be leveraged through M&A.

Now the center of this slide is a slide that I showed at our original investor day over a year ago and at that point in time, clearly I declared our interest in the snacking market, but more specifically, around meat snacking, because while snacking is an enormous and growing behavior in North America, consumers are increasingly looking to lower carb higher protein alternatives. In this category, the very attractive category is nearly $2 billion and it's been growing nicely over the last number of years. The Golden Island acquisition that's signed intent to acquire this business that we announced today, provides us an initial entry into what we believe is a very attractive segment. So we had our eye on this category. So the question for you is, what is Golden Island? Well Golden Island is a manufacturer of all natural beef jerky and pork jerky. These are all natural products. They are among the top 10 jerky brands and its truly a differentiated technology that makes it a uniquely good product with a very tender texture to it as well as a unique flavor profile. At the end of the day, these are great products, they are in limited distribution now, and while this deal is small, it really gives us an entry point into an attractive category where we believe we can leverage our capabilities and leverage our assets. So more to come on Golden Island.

And before I turn it to Maria, let me just reiterate that we remain committed to achieving our midterm targets. We believe we can get this portfolio growing at 4% to 5%, that we can support with an appropriate level of map at 5% and that we can deliver the 200 basis points of OI margin expansion versus where we started and get our underlying OI margin at the 10%. So we remain committed to these mid-term targets and that's where we focused our energy on every single day.

So with that, let me turn it over to our CFO, Maria Henry to take you through the rest of the presentation. Then we'll queue up your questions.

Maria Henry

Good morning everyone, thanks for joining us. [Indiscernible] the remaining few minutes that we have of our presentation to give you an overview of the financials of our company.

Starting here with our P&L. our company is a fiscal year end June 30, so we just wrapped up our first year as a standalone public company and our financial results for fiscal '13 grew earnings in excess of 18% on a slight increase on the top line.

There is really three things that I wanted to know about our fiscal '13 financial results. Let me start with sales. Our sales growth of 0.4% masked some of the great growth that we saw on some of our strong core brands. You saw this slide on the MAP investment slide that Sean discussed about, but for fiscal '13, Jimmy Dean, Ball Park, Aidells, Gallo, all showed really nice growth. That growth however was somewhat offset by some challenges that we had last year in our [indiscernible] business, particularly in the fourth quarter and also some challenges that we have in our bakery business.

The second thing about our fiscal '13 earnings that you don't see on this slide is fiscal '13 was a very atypical year in terms of the cadence of the quarters and they have. So what I mean by that. Our first quarter earnings growth for fiscal '13 was 88% year-over-year, for the first half, our earnings grew 50% year-over-year. By contrast, in the second half, our earnings declined 15% year-over-year. So it's really a typical in terms of the earnings growth pattern that we saw last year.

The driver of that is that we had significant depletion in input costs in the first part of the year, we also had some one-time favorability in our SG&A costs that benefited our profit numbers in the first half. By contrast, in the second half of last year, our commodity costs began to increase and we actually experienced input costs inflation in the fourth quarter and as we exited the fiscal year. Additionally, as Sean mentioned, we cooked some of the first half profitability that we had and we've reinvested that back into our business in the second half, so we didn’t let it all drop to the bottom line. So the second half of fiscal year '13 was a heavy investment period for us.

And finally, the certain piece was more self-inflicted that we had challenges with our packaging transition on our lunch meat business which effected our profitability in the second half of last year, particularly in the fourth quarter.

The third thing that I'd like you to know is that when we started the year, we were expecting our earnings to be relatively flat for fiscal '13 as we work for our first transition year. So willing our earnings 18.6% last year with an excess of original expectations and the majority of that over delivery came from the unusual commodity deflation that we had last year because of the unprecedented draught that we saw last summer which really affected our cost structure. So the reason I go through all of that is because when I talk about our outlook for fiscal '14 in a few minutes, and as you know, mathematically we are going to have some challenging comps when we look at our comparison to our fiscal '13 year.

One of the core dependence of our strategies is to drive cost efficiencies in our business to fuel our growth strategy. We've got a very defined program to deliver $145 million of savings and efficiencies from fiscal '13 to fiscal '16 and we are well on track to deliver those savings. We delivered $40 million in fiscal '13 and we've got a very defined cross functional programs in place to deliver the remaining $105 million of cost over the next several years.

In addition to the specific cost savings benefit that we get from these programs, many of these programs are designed to fundamentally improve the capabilities of our business in critical areas for sustained profitability going forward. These are programs in areas of trade management, supply chain efficiency and fundamental G&A management. So, the fundamental capabilities that we're putting in place, will really help us drive sustained profitability over the long term.

So last thing I'd like to comment on cost is we really are in the midst of a cultural transformation, those of you that followed us, we've been talking about this hence since, the cultural transformation is really focused on getting its ownership mentality in to our business and we're doing that so that every employee across the company really get that if I am spending a dollar, I better be spending a dollar on something that has a ROI, and is focused on growing our business.

I've dealt with the company for over two years now, and I can tell you there was a dramatic difference in how people spend money and how people think about cost now than there was two years or even a year ago. And all of that should bode well for sustained profitability over time in helping us to continue to fund our growth strategy.

We've got a very strong balance sheet. We ended the fiscal year with $400 million of cash, our leverage is under two times. Additionally our business fundamentally have strong cash flows. We delivered over $500 of EBITDA last year. The combination of that strong balance sheet plus the fundamental cash flow capabilities of our business, that combined really gives us the flexibility that we need to fund the growth agenda that we've been talking to you about today.

The way we think about allocating our capital is that we look to deploy our capital to where it will generate the highest returns and the most value over time. Our top priority is investing in our business and its investing in our business because we have ample opportunity in the area of growth and productivity to invest in and see strong returns over the next several years.

In August, we announced that we were taking our dividends agenda by 40%. That puts our dividend payout ratio in the low 40s, and an expected yield of roughly 2%. We're looking to allocate approximately $200 million of capital over the next two years to share repurchases. We're going to do those share repurchases opportunistically, so we're not going to speculate on the exact timing of when that will happen.

As Sean discussed, we're very committed to M&A as a way to create value through leveraging the assets and capabilities that we have as a business and we announced as you saw and we discussed, that we signed the agreement on Golden Island which gets us into very exciting beef jerky space. That's a small acquisition for us. We've got lots of opportunities in the M&A area of various sizes that we are actively looking at, but as you know, we don't control the timing of that or the actionability of that, but with our strong balance sheet and good cash flow, I'm happy that we've got the flexibility to act quickly should the write opportunities arrive.

And finally given the low level of leverage we're not planning to pay down debt anytime in the near term.

For fiscal '14, we provided guidance in August that we expect our sales to be up slightly for the year and we expect our adjusted, diluted EPS to be flat to down mid-single digits. Let me give you some perspective on our guidance and how we go there. Starting with sales. We're currently making some investments in certain categories to defend against from competitive dynamics in the near term through pricing. Those actions will depress our sales growth, particularly in the first half of this fiscal year. By contrast, our innovation agenda and our innovation schedule for rollouts this year will benefit the second half of our fiscal year. So we expect to have sales growth and sales momentum exiting the year and into fiscal ’14 but when you look at the total year we’re expecting our sales to be up slightly. In terms of profitability and our EPS guidance of EPS flat to down single digits, let me give you some prospective on that. For fiscal ’14 we have got some headwinds on earnings and let me kind of walk through what that looks like, we’re expecting input cost inflation for fiscal ’14 we’re expecting input cost inflation for the whole year but we expect it to be particularly acute in the current first quarter and in the first half.

Despite that inflation we also expect to continue investing in our strategy behind brand building and innovation for growth. So we got the inflation, we have got the continued investment and as I just talked about when I was describing sales we’re making some near term investments in pricing to defend in a intensified competitive environment in certain categories. So all of that is putting pressure on the year-over-year earnings growth for fiscal ’14.

I talked earlier about the atypical nature of the quarter’s and half in fiscal ’13. So when you look at our fiscal ‘14 and as it unfolds we will have to let the strong profitability that we had from commodity deflation last year and the first half and then we will have an easier comps in the fourth quarter as our earnings were unusually depressed because of the lunchmeat transition that I spoke about.

If I step back on all of that for fiscal ‘14 the way that I think about it and that I look at it is ‘13 has some unusual benefits that we won't see in ‘14 but if I compare what we expect for fiscal ‘14 to our baseline year of fiscal ’12 we’re making fundamental progress on our three year plan that we have had laid out right when we originally fund so I would encourage you to look at our progress for that 200 basis point fundamental improvement in the profitability level of our business and I will see things that you would see that were on track to the those mid-term targets that Sean talked about a moment ago.

So let me wrap it up really where we started, we thought a great portfolio of iconic brands, our categories are attractive, we have got a clear strategy for growth, we’re funding that growth through disciplined cost management and cost and productive programs. We got strong assets and capabilities that we believe that we can significantly leverage augmented by M&A and the entire management team is really focused on creating value over the long term and delivering significant shareholder returns. So with that let me open it up to take questions.

Question-and-Answer Session

Unidentified Analyst

I think we have got about five minutes for questions I’m right Angelo? And then we can go across the hall for those of you who don’t get your questions answered.

Unidentified Analyst

So kind of a one year, looking for a one year looking for a one year retrospective a little bit. This point is a little over year since the separation, maybe you can reflect a little bit on the first year as a company and maybe touch upon some of the things that have been a little more difficult or challenging than you would thought at the outset and conversely some of the things that have exceeded your expectations, maybe input cost aside because they shut them around one way or the other, if you give some perspective.

Sean Connolly

It was the first year was tremendous change, anybody who knows our story well knows how much we took on as we spun from Sara Lee and tried to create a whole new culture and a whole new strategy in terms of how to create value in business and clearly we have made tremendous progress in our first year so overall I feel very good about the progress we made. As the world always goes things unfold differently than you plan so all the best laid plans, things unfold differently. In the first half of our first year we had a huge deflationary wind fall that helped us to get behind the business and do things that we didn’t envision. As we got into the back half of the year we saw that turn the other way and we had a Hillshire farm business that have been making tremendous progress and our lunchmeat business through the first half and we had an execution challenge we move to the second half. Clearly we don’t anticipate those things.

And the other thing that I change is we (inaudible) what I would describe as a fairly benign competitive environment when we started in through the first half of the year and as the consumer became a little bit more sluggish in the back half of our last fiscal year you saw some of these categories get more intense. Our reaction to that is to do what any good brand builder should do which is you get behind your brands, you protect and you defend them because it's always more efficient to do that in the moment and to try to win your consumer back later.

So by and large I feel great about the year, I feel great about the progress we have made. We have a fundamentally stronger team in place today than when we started, we have got a better culture in place and that we’re not only focused on growth we have an ownership mentality around how we pay for that growth by being lean and mean but ultimately we’re also very result oriented and we recognize work has been done. So things unfold a little bit differently but overall I think I feel very good about the progress in the first year.

Unidentified Analyst

You talked about some of the promotional dynamics that you’re responding to at least early in this fiscal year I guess more importantly has anything that you’ve seen in that regard have you changed your longer term expectation of being able to price to recover inflation over time in this space?

Sean Connolly

No it really hasn’t changed the outlook. I think things may change quarter to quarter depending upon current dynamics but our typical approach is that we will fully recover any inflation via pricing overtime and it may not be in any given quarter, it may not be in any given year but as you look at rolling two years it tends to wash out and we tend historically to fully recover.

If you get granular within our portfolio where we basically recover as we go, it's where we’re furthest along on our brand building and innovation agenda where we have got the fundamentals in place in the marketplace in terms of pack size, pricing, shelving then we get behind these brands with advertising and with innovation. We have very strong growth and we have low elasticity of demand and when we see inflation we can take price and full recover. Not surprisingly where we have brands that had been neglected overtime and we’re not nearly as far along in terms of the innovation and the brand building agenda, we don’t yet have the position so strengthen the marketplace where we can price to fully recover in the moment.

The solution to that is to get these great brand equities to be where they were once where to continue to innovate them and support them and that’s what we will do.

Unidentified Analyst

You’ve indicated overall MAP spending will be up year-over-year I know that includes slotting expenses and trade spend and things of that nature, innovation investment, so in terms of what we consider advertising spend if you will, to the extent that’s like it will somewhat be lower year-over-year just given all the other spending you’re doing and I don’t know if that’s the case necessarily. I just want to make sure how is that consistent with obviously a lot of the new products and things you’re bringing to market in the fiscal second half of the year?

Sean Connolly

We don’t guide on that which is below the line marketing spending, what we call MAP below the line marketing spend in any given year. What we have done is given guidance in mid-term that we want to get that number from about 3.5% to 5%. I fully expect total marketing which is all and everything you’ve got from new item innovations, slotting fees to couponing to advertising will be up. How we toggle that in any given quarter depends upon seasonality, it depends upon competitive dynamics. If you see a competitive flair up we may turn to be more promotional in any given window. But clearly overtime we expect to continue to see our MAP spend line item continue to go up and that is what we did last year on Jimmy Dean, we got terrific results. There is other brands get further along in terms of their positioning and innovating agenda we will support them as well.

So as we move through this year you will see our innovation really the more meaningful breakthrough innovation, come in to the marketplace in the back half of the year and certainly we anticipate we will continue to support that with MAP but we don’t anticipate MAP going back to the levels at any point we were a few years ago, we got to continue to support these brands with sufficient level of support, challenging times, good times aside.

Unidentified Analyst

Last one from me, I guess you’re two months in the quarter now but just as you’ve gotten some of the maybe a little early but as you have gotten some of the price points adjusted via promotion the way you want to in some of those areas like lunchmeat what have you, have you been seeing the kind of response in your data that you would hope for and look for?

Sean Connolly

Well I think Melissa would tell me if I made a comment on the current quarter here because I don’t want to give any indication of how we’re performing in the lieu of our first quarterly call but what I can say is we knew going into this year that we have very responsive brands and when we need to take action to sharpen price points on brands and promote them historically we have seen response and as you look at the marketplace, the scanner data that Andrew that you provide to our investors I think you will see the kinds of response that we will be expecting in that data.

Unidentified Analyst

Okay if not why don’t we take it across to the breakout room and thank you again for being here.

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