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HSH carries the day, and looking back on our assessment of Day 1 we see some similarities between KRFT and HSH, so you can see that we are looking at companies that have the ability to effect change on the margin.  That lens does a disservice to a name like HSY that is simply executing very well, but aren’t doing anything “interesting” relative to the recent past.

Kellogg’s (K)


The company is focused on four pillars of growth – global cereal, global snacks, regional frozen foods and emerging markets.  Company believes that cereal can be a growth category, but needs to expand the definition of when cereal is consumed (expand in and out of the bowl).  Keebler plus Pringles can be a leader in global snacking – frozen food is just a regional business at this point.  Supply chain issues that have plagued the company are in the rear view mirror.  5% cost inflation versus 4% savings, very manageable and smallest gap in years actually turns to a tailwind in 2H.  U.S. consumer remains under pressure, but any weakness can be offset with Pringles synergies – good visibility into 2013 numbers.  The Pringles integration is going well – huge global brand, and now the second biggest brand in K portfolio.  Pringles’ top line growth in ’12 exceeded company’s expectations and heavy lifting is behind the company.  Good, solid, if unsexy story.

Philip Morris International (PM)


The company provided a look back at 2012 – a year that saw the company gain share in every region and deliver at the high end of expectations across multiple metrics.  The company sees a “rational excise tax environment” – I am not necessarily sure such a thing exists (Philippines).  The European Union proposal on tobacco products is flawed and not supported by science (according to PM) – while I agree, not sure hoping for rational behavior on the part of national or supra-national entities is a sound strategy.  PM is not hopeful that EU operating environment improves meaningfully in 2013 given some of the conditions it sees as necessary for improvement.  Asia has been a spectacular growth vehicle for the company – Indonesia in particular.  The company is expecting a 20-25% volume decline in the Philippines due to excise tax increase, but limited operating income impact – tough to model that one right now.

Campbell Soup (CPB)


Campbell Soup – it all starts with stabilizing the core and returning soup and simple meals to profitable growth – that is the base that allows the rest of the strategic vision to be executed.  I think citing some recent numbers for the soups and simple meals ignores the fact the segment has a demographic issue (soup skews older) that isn’t quickly corrected, if at all.  I do have to applaud the company for some recent innovations and line extensions – that’s the cost of doing business in packaged food and the company had been trying to avoid that cost for a long time.  North American beverages have now become the problem child – input cost inflation and competitor activity.  The company sees input costs moderating in ’13.  Arnott’s is focusing on improved execution after a difficult year.  Company has in place a new innovation process (not sure it actually had an old process).  Bolthouse Farms is exceeding both top line and bottom line expectations thus far – not sure chopped carrots are the wave of the future for the company.

Nestle (NESN VX)


Presentation focused on Zone Americas – very “informal” presentation (no slides) that probably could have used a little more structure and fewer personal anecdotes.  The size and diversity (and success) of Nestlé’s business didn’t do Chris Johnson (Head of Zone Americas) any favors – he bounced from business to business and geography to geography.  I think the intention was to provide a “clean” overview of a complex business, but it came out as a bit of a hodge-podge, without any clear sense of what makes the company best in class.  Mr. Johnson did highlight the weakness of the frozen category – no real news there.  He also admitted to challenges in ice cream, and has spent more time on what’s wrong (probably in an effort to seem “balanced”) than what is going right (the bulk of the portfolio).   Given the quality of the “source” material, the company could have really “played a blinder” here and instead missed the mark.

Hillshire Brands (HSH)


Hillshire is the old Sara Lee, but only in the sense that the company has some of the brands – company has moved headquarters and is in the process of reinventing itself after years of neglect (sounds a little like KRFT in that regard).  Most impressive slide of presentation – company was shrinking, now it is growing – testament to the fact that brands do respond to marketing.  “Give the brands some attention” could have been the title of the presentation.  The company still has room to grow relative to the household penetration of both its categories and its brands.   The company was one of the leading innovators in the lunch meat category then “took the next few years off”.  Long-term target is increasing MAP (media, advertising and promotional) spending to 5% of sales – used to be 3.5%.  Brands can wither and die if you don’t feed them – advertise.  The company may be limited by the category in which it competes, but management here seems to get it.  I wonder if, after management does the fixer-upper thing, they just don’t sell the house?

Bunge (BG)


From field to food to fuel – getting the crops from where grown to where consumed is what Bunge does, and that is a powerful long-term thesis, in my view.  The company is in a growth business – leveraged to population growth, urbanization and the growth of the global middle class.  All of that combined leads to growth in global agricultural trade – BG is an “expert in managing physical flows”.  BG does sugar ethanol, not corn ethanol (very small) – corn ethanol assets and investments is one of our concerns with respect to ADM.  The world is shifting to South America to meet demand shortfall, which should lead to high utilization of BG’s assets in that region.  “As income grows, diets contain more vegetable oil and more protein” – right in BG’s wheelhouse – soybean meal.  Importantly, trade will increase more rapidly than demand because of a disparity in where the crops are grown versus where the population and demand growth is located.  The company will reach its cost of capital this year, with sugar being below – expect sugar to catch up in ’15.

Hershey’s (HSY)


The company has been about predictable, profitable and sustainable growth, so makes sense that the presentation leads in with those words.  One thing most investors might not know is that HSY is more than just U.S chocolate – after many years of missteps, company is on pace to deliver $1 billion of sales outside the U.S and Canada by 2014.  Global confectionary category has been growing at 5% per year and is fundamentally advantaged.  Impulse nature of category means very high checkout conversion rate so very profitable for retailers and HSY and as category leader, HSY has been driving the category and has outpaced the growth of the category.  Hershey makes it seem easy, but advertising and supporting the base and growing from a position of strength just makes sense.

Coca-Cola Enterprises (CCE)


No big surprises out of CCE – the dominant theme was growing its successful portfolio of iconic brands and returning cash to shareholders on its history of solid, balanced growth. It maintains its long-term growth targets of 4-6% net sales; 6-8% operating income; and high single digit EPS. CCE noted such risks as the macroeconomic environment, commodity cost inflation (COGS at 4% in 2013), changing consumer tastes (towards health), new and existing taxes on products and packaging, and lapping the Olympics. CCE is targeting higher volume growth over pricing in 2013 with an increased marketing spend to drive its core brands and entrance into the discount channel (Lidl and Aldi), albeit with distinctive packaging. Its target of $500MM in share repurchases by the end of 2013 and dividend boost by 25% should continue to attract investors.   

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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Matt Hedrick

Senior Analyst