好時 (HSY) 2002 Q1 法說會逐字稿

Good morning. My name is Heather and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Hershey Foods Corporation first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during that time, simply press star, then the number one, on your telephone keypad, and questions will be taken in the order they are received. If you would like to withdraw your question, press star, then the number two. Thank you.

I would now like introduce Mr. James Edris, Vice President of Investor Relations. Mr. Edris, you may begin your conference.

Thank you, Heather, and good morning, ladies and gentlemen. Welcome to Hershey's first quarter conference call. Rick Lenny, Chairman, President and CEO, Frank Cerminara, Senior Vice President and CFO, and I will represent Hershey on this morning's call.

Frank will discuss the financial results for the first quarter, make some comments on the status of the marketplace and then we'll be happy to take your questions. We welcome those of you listening via the Web cast. Let me remind everyone who is listening that today's conference call may contain statements which are forward-looking. These statements are based on current expectations, which are subject to risk and uncertainty. Actual results may vary materially from those contained in the forward-looking statements because of factors such as those listed in this morning's press release and in our 10-K for 2001, filed with the SEC. With that, let me turn the microphone over to Frank Cerminara. Frank?

Thank you, Jim, and good morning, everyone. By now, we assume that all of you have had a chance to read our press release issued earlier this morning. As you know, the reported results included charges for business realignment initiatives totaling $9 million or four cents per share diluted, related primarily to the early retirement program which we previously disclosed.

In addition, goodwill amortization has been eliminated from our 2002 first quarter results, but is still contained in the 2001 first quarter results as we reported them. Therefore, the elimination of the realignment charges from our 2002 first quarter results would yield earnings per share diluted of 67 cents, compared with 59 cents per share diluted in 2001, assuming the elimination of goodwill amortization from 2001's first quarter results. This is an increase of 13.6 percent and was included in the pro forma, which accompanied our press release.

Since this scenario describes our ongoing business, my remaining remarks will be made in this context. Now, let me talk about sales first. I should point out that this year's top line has been affected by the new rules requiring the reclassification of trade promotions. And last year's sales have been restated to reflect this change as well. For the first quarter of 2002, sales growth was positively affected by product mix, the Brazilian acquisition and the improved sales of core brands, offset by product line rationalization and heightened competitive activity.

Hershey's strategy to emphasize key brands as well the more profitable pack types, trade channels and customers is evident the first quarter results. Absent the product line rationalization, that is the divestiture of Luden's and the December of 2000 January of '01 timing our gum and mint acquisition, sales for the first quarter increased by nearly two percent. After stripping out the Brazilian acquisition, base business sales were up about one percent. As was widely reported, competitive activity heightened during the quarter.

Our own response was measured and thoughtful as we introduced new trade and consumer programs to move our product at retail. Importantly, this investment, by all category competitors, did spark improved category growth for the quarter. It should be noted that retail sell through of Valentines was good. The Easter sell through was mixed, although the full results for that season have not been tallied at this point in time.

I would also caution that the IRI data from the last two weeks in March and the first two weeks in April will be somewhat distorted because of the timing of Easter this year versus 2001. This, of course, will smooth out over time.

Now, let's turn our attention to gross margin. We are pleased to report the gross margin during the quarter improved significantly. In fact, by 150 basis points, coming in at 36.9 percent versus 35.4 percent in 2001 on a comparable basis. This year's gross margin was enhanced by improved sales mix, low end grading and packaging costs as well as other supply chain efficiencies. As mentioned that

in February, our expectation of margin enhancements for the full year remains at 80 to 100 basis points.

Absent the realignment charge, selling, marketing and ad min expenses were flat in the quarter, coming in at 20.5 percent of sales for both periods. Selling and marketing expenses did increase somewhat as we continue building our selling infrastructure and marketing capabilities. But they were largely offset by lower administrative costs. For perspective, let me remind you that last year's selling and marketing costs increased substantially, compared with the first quarter of 2000.

In addition, as we have stated several times, the first half of 2002 is dedicated to gathering insights regarding the responsiveness of our brands to various types of selling and marketing activities. As we move through the second half of the year, we'll finalize our earnings and create additional affordability through our cost-saving efforts. And we plan to invest additional resources in the areas of selling and marketing, in order to stimulate further growth in appropriate areas of our business.

EBIT of $162.0 million increased by 9.5 percent compared with the first quarter of 2001. And the EBIT margin was 16.4 percent versus 15.0 percent last year. Interest expense for the first quarter of 2002, was 15.5 million dollars, compared with 17.3 million last year, primarily reflecting lower interest rates and lower borrowing levels. The latter was aided by the strong overall cash flow in our business.

The effective income tax rate in the first quarter of 2002 was 36.7 percent, compared with 37.1 percent in the first quarter of 2001. This is with both years reflecting the elimination of good will amortization. On a pro forma basis, net income of 92.7 million dollars was 12.8 percent higher than the first quarter of 2001 and our net margin was 9.4 percent versus 8.3 percent last year. Weighted average shares outstanding on a diluted basis were essentially unchanged and EPS of 67 cent per share diluted compares with 59 cents per share diluted for the first quarter of 2001 for an increase of 13.6 percent.

Turning now to the balance sheet, as we have stated previously, one of our strategic initiatives is more efficient use of capital. The reduction in raw material inventory in the fourth quarter of 2001 jump started this process and we have continued the momentum.

Regarding net trading capital, when we compare inventory, accounts receivable and payables with the first quarter of 2001, we see that nearly 96 million dollars of additional cash flow was generated through more efficient use of working capital. The strong free cash flow has kept our short term borrowing at a minimum and, as a result, total debt to total capitalization stood at 41.3 percent compared with 43 percent at the end of the first quarter of 2001. With our improved margins in profitability, as well as better balance sheet management, our economic return on invested capital for the 12 month period, for the rolling 12 month period, increased by 120 bases points, from 15.4 percent to 16.6 percent.

Before I conclude, let me shed some additional light on our performance in the market place. First, I would like to remind you that the exclusion of Wal-Mart from the IRI data means that food, drug, and mass without Wal-Mart now accounts for less than 50 percent of our business.

Secondly, as I mentioned earlier, we have increased our focus on Hershey's big brands and on improved product mix, for example, good growth in the highly profitable instant consumables categories. Regarding market place performance for the 12 weeks ended March 24, our food, drug and mass take away was in line with the overall category performance, while share performance was somewhat mixed. Share gains in mass and drug were offset by the decline in food, largely attributed to aggressive competitive activity.

As I also mentioned earlier, our selling and marketing spending was only slightly higher than the first quarter of 2001, recognizing that last year's spending was substantially higher than the previous year. We're still learning about our brands and won't let our spending get out ahead of these insights. This work should be completed by mid-year.

Overall we're comfortable with our results in light of competitive activity and our realignment efforts which have cast new people in new roles as a result of the early retirement program. During the quarter we established new dedicated customer selling teams, consolidated our

with confectionery sales back into our direct selling organization, and accelerated our convenience store efforts.

We expect to realize significant benefits from our selling organization in the long run. A lot of work is still ahead us on the selling and marketing side, but we continue to better position Hershey to accelerate profitable growth and reward shareholders over the long term. Now, we'll be happy to take your questions.

Heather, the first question please.

At this time I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. Please hold for your first question.

Are you there, Heather.

Yes, sir. We are compiling your Q&A. One moment please.

Your first question comes from Eric Katzman.

Hi, good morning, everybody.

Good morning, Eric.

Good morning, Eric.

I guess I've two, two questions. I guess the first one for Rick. I know that it's difficult to comment on M&A, but, obviously, you know, Adams is possibly going to be in the market, so, I guess, to the extent that you're willing to comment just in general about acquisition policies for Hershey now that you're in charge, that would be helpful? And, then second, Jim or Frank, since you've been there longer, can you kind of run through a period in the past where, you know, Mars and Nestle have backed off of kind of the oligopoly and what's that, what, how long has it traditionally lasted and what, what has that meant for your business?

Eric, this is Rick. I'll take that, the first one regarding the, you know, approach around acquisitions. As we stated it at

, obviously, first and foremost for us is get our core branch growing again and start to accelerate profitable organic growth, and we would look at any potential acquisition in the context of does it fit with our overall strategic direction, and is it the right timing, and does it make sense from a financial and strategic standpoint. And, as you said, and you can appreciate, I'm surely not going to comment on any potential speculative business that might or might not come up.

All right, but in terms of, I mean, you know, dilution or period of time in which you would accept that, I mean can you, or I guess, what the view is of the, the school and the trust, is there any comment or corollary you could give there?

None specifically, other than I think we've been asked in the past if it made sense from a strategic and a financial standpoint. If there were any short term dilution, we'd certainly factor that into our thinking, but, I wouldn't say that would be a knockout punch as of this point. But, again, most important is strategically does it fit in with our long term game plan. As I've said before, acquisitions have to fit in to our strategy and be a, a, let's say a multiplier to top line growth, certainly not a substitute for profitable organic growth.

Eric, on your second question relative to Mars and competitive activity, I think you'd, you'd have to go back almost a decade, perhaps to the early nineties, in terms of saying very, very significant whether it's new product activity or lots of other market activity.

But, you have to keep in mind we've continued to gain share each and every year throughout this period and the competitors in the confectionery industry, for the most part, over the long term have really remained quite disciplined, wanting to build brands rather than gain share through severe price discounting. That's been the history certainly.

And, and, to the extent that, that you've changed your, I guess, the vertical integration with cocoa costs, is, are you similar to Mars and Nestle in that regard, and if cocoa costs become a problem, is it true that they become a problem for everybody in the same way?

I, I don't think it has much to do with, frankly, Eric, with the, the way we process cocoa as it does with general price levels and how people are hedged forward. So, the changes that we've made in our processing have nothing to do with how we can protect ourselves going forward. That, that hasn't changed at all.

OK. All right, and as far as you know, it's kind of, that's the same situation for them too?

Yes, it is. It would be.

OK. All right, thank you.

Thanks, Eric.

Your next question comes from George Askew.

Yes, good morning, thanks. My question is regarding the Chocolate Union Workers Local there in Hershey. I know they turned down the second contract proposal earlier this week and they're without a contract now. How has the company prepared for a potential union work stoppage and what would that mean to the company financially?

I'm sorry, I had a little bit - this is Rick Lenny. I had a little bit of trouble understanding your question. I couldn't hear it, but I was - go ahead, please.

Sure. I'm sorry. I'll repeat it. The Chocolate Workers Union is without a contract and I know they voted down a second proposal this week. Can you just tell us how the company is prepared for a potential work stoppage and what that would mean, financially, to the company if the union did call a strike?

Well, there's two things. First off, both sides - and it was reported today in the paper and has, in fact, happened - that the local paper here, both sides have been contacted by the federal mediator. And both sides have, in fact, agreed to meet with the federal mediator next week. In terms of the second part of the question, we're taking the appropriate steps and, obviously have good contingency plans in place and, for obvious reasons, I would not provide any further comments on that.

Right. Are there other union contracts expiring in the next 12 months?

None that are significant. No.

OK. OK. Thanks so much.

Thank you.

Your next question comes from

.

Good morning, guys.

Hey,

.

Good morning,

.

If base sales were up one percent - and I wish you'd put that in the press release since you kind of highlight your three to four percent target. If base sales are up one percent and your target is three to four percent, how do you see that improving to that targeted level throughout the balance of the year?

That's a good question. And that's one of the things that we're working on. I take a step back and say - and Frank touched on it - given the significant amount change that the organization has gone through, appropriately, in the first quarter, as we were getting through the majority of the retirement from our early retirement program and, certainly, getting our new selling organization in place, I feel pretty good about the one percent, particularly in light of the competitive activity.

I'd like to de-couple the competitive activity a bit. Our seasonal performance was reasonably good overall. We did see some very good growth in our instant consumables, in our scale brands and have certainly seen some good growth behind our c store initiatives.

And while the competitive activity was above what we had seen in previous periods, you know, we essentially held our share. Having said that, it also reflects the importance of our strategy. What we had in the first quarter was, essentially, a compaction of the seasons. Super Bowl was late. Easter was early. There's only so many weeks that we can get merchandising activity.

But,

, to answer specifically, we have some good work ahead of us to ensure that we deliver on the commitments we've set, which is profitable organic growth. And I want to underscore the profitable aspect of that. And for this quarter, we certainly - we're not going to go chase unprofitable growth and we responded appropriately in those areas where we needed to. So, we understand this current situation and we have plans in place to begin to improve our growth going forward.

And, on a volume basis, on an internal basis - because, clearly, there was pricing gains in this quarter - what were internal volumes, Frank, excluding acquisitions in the quarter?

The sales increased on a comparable basis,

, and in our view was essentially volume. We didn't get near as much out of the price increase top line as what you may have expected. So, our volumes are at least comparable, but up some. And I'd say most of the one percent increase is volume.

Well, and there's been a lot of talk about pricing in the financial community regarding confections. What it is, basically? You've had to deal back some of your pricing?

Some of that is true. I mean, if - our trade expense went up approximately 70 to 80 basis points for the quarter, but I do want to underscore that trade continues to be a good spin. We're in an impulse driven category. It's highly responsive to merchandising. And all the modeling work we've done shows that the trade promotion, appropriately executed, is a good investment for us.

Now, I think you gave a total marketing number that was relatively flat or you kind of hinted that there wasn't much difference. Does that imply that advertising was down?

No. What I said,

, was that selling, marketing and ad min expense together were flat at 20-and-a-half percent of sales. And that we had invested in selling and marketing infrastructure. But we did that because we reduced the ad min - other ad min spending. So that comment was related to ...

And so, advertising expense in the quarter was ...

Advertising expense for the quarter as down and you're right. But, recognizing that the year before, advertising and consumer promotions together, had growth at a substantial double-digit increase. So, it's well ahead of the 2000 level and slightly behind last year's level.

Great. And Rick, just in terms of getting that base one up to the three to four level, is this, you know, because of the timing of this, you know, Halloween and Christmas, is this kind of a second half expectation rather than a second quarter expectation?

Well, the math works against the full year in the second quarter anyway, by virtue of it being the lowest sales and consumption quarter. So, by definition, it is more third and fourth quarter. You're right,

.

OK. Thanks a lot.

Thank you.

Thank you,

.

Your next question comes from

.

Good morning, everyone.

Hi,

.

Good morning,

.

Could you give a little more color - I mean, you've alluded to many times the competitive activity. But can you - can you really help us understand better what's exactly happening in the marketplace - which type of products, which trade channels, what type of pack types. Is it expanding in terms of geographic breadth or narrowing as we've gone through the year?

Well, I'll give some, but obviously don't want to give away all of our competitive insight. There's other listening. But, importantly, as we've said - and we talked about at

. There was some heightened competitive activity in everyday packaged candy during the quarter and in selected customers and selected markets on instant consumables. Now, taking a step back, the introduction of

as well as the reasonable share gains for the full year 2001, obviously, created some attention in the marketplace.

As I said before, again - or - and as Frank said. Let me reiterate it - food, drug and mass (MX), which excludes Wal-Mart accounts for less than 50 percent of our takeaway. In Wal-mart, we had very strong sales. In fact, our sales exceeded their comp store sales. So, we feel very good about our business within Wal-Mart. Drug and all other mass regained share. The impact on the pricing was primarily in food and we know the specific customers and we're working on the appropriate plans.

Seasons, as I said, we did a reasonably good job on seasons. Valentines was strong. Easter was not as strong. It could be the earlier Easter. It could be the proximity to the other - the other seasons. But our instant consumables and our big brands that we've talked about - focusing on at

- those two were up in the five percent range in terms of internal sales or our sales revenues. So, we feel good about that.

And besides that,

, I really don't want to go too much deeper into what's happening in the marketplace.

OK. And does - Rick, I mean, timing of Easter, does that create some challenging shipment comparisons for the company early in the second quarter of this year?

Yes. Absolutely. And just as I think Frank had mentioned, that we need to look at the broader IRI period to have Easter in and Easter out. In both years, the same type of situation would happen in terms of the early part of the second quarter sales.

OK.

We have - we have, you know, several non-seasonal promotions. We have our limited edition Kisses. We have bonus bags that are all shipping in the mid to end of the second quarter.

OK. Thank you.

Thank you.

Your next question comes from

.

Good morning.

Good morning.

Good morning.

The asset efficiency clearly shows in your net working capital position. Your current ratio is higher than it's been in a number of years. Is this sustainable and, if it is, what, if any, plans do you have for your access liquidity?

Well, first, let me address is it sustainable. We did take out a significant amount of inventory out of our system and we're watching our capital - cap ex, as well. The inventory that we took out of our system is sustainable, but we pretty much have done what we intended to do there. Now, we may, because of the seasonal nature of our business, you'll see our finished good moving up and down throughout - you know, through the year. But it's sort of on a steady state level. We've taken down our inventories. That is sustainable. We can continue to have it there.

The reason why current ratio, of course, is higher than you might have expected it, is not the trading capital, of course, but it's cash and our cash, we have had the benefit of generating good cash flows so, yes it does give us flexibility to use that cash for any variety of things, which we have. Whether it's for new initiatives, capital, dividends, stock buy back and acquisitions and we have used it, I think effectively for all the above.

No argument there. A follow up question, how far out have you fixed Cocoa and what was

for the quarter and

?

You know, for obvious reasons, I can't tell you how far forward we're hedged in Cocoa, but I have made the comment, that, there is no reason to worry certainly relevant to this years comparisons to last years, as a matter of fact, what I said in reviewing the gross margin expansion was that our commodities

in packaging all the materials that are used in our product actually helped our margin somewhat, so I am not too concern, I mean I am obviously am concerned about Cocoa prices rising for the foreseeable future though it's not going to have an impact on our business that would be

.

Right.

Relative to cap ex, that was your question, we still expect it to be in the $165 million plus or minus range for the year.

And D&A for the quarter?

D&A for the quarter was about $45 million, I expect that will be in the, let's say in the 180-185 million for the whole year.

Great, thanks very much.

Thank you.

Your next question comes from David Nelson.

Good morning.

Hi David.

Morning David.

One question is on, do you think similar sales growth in chocolate versus non chocolate and the other question is on the trade spending. If the increase in

expenses and other 62-90 million is that a reflection of slotting fees or

spending?

Let me answer the first part, regarding the gross rates, we are seeing better gross rates right now in chocolate verses non chocolate.

Which is again reinforced as the majority of the big brands that we are focusing on fall within the chocolate segment as does seasonal activity.

Could you say how much better what the number was there, was it like two percent and than zero for non chocolate?

Well for the, I'd give you the range for the quarter because the most recent four weeks would obviously be skewed by the earlier Easter and we're looking at the at least about 3 to 4 times higher for chocolate versus non chocolate, but again, that's in a strong seasonal period and

But still good growth in chocolate?

Yes.

unid Excuse me, those were our growth rates not those for the category.

Right.

Thank you.

I would like to know the increase in prepaid expenses on the balance sheet?

Increase in prepaid expenses, you know, your probably comparing it obviously to what we just released the year end, rather than to, than almost no increase at all compared to the same time last year, so there's nothing there.

OK., thank you.

OK.

Your next question comes from Leonard Teitilbaum.

that's close. Good morning.

Good morning Leonard.

And my

can't get it right either. Two things Jim, can you give us the right comparison for Q-2 in both, what did Q-2 last year do in terms of revenue and in terms of earnings? Just so we make sure we are looking at this thing the right way, after you strip out the

.

I believe last year Q-2 on a reported basis.

Reported I got. I just want the adjusted basis.

Yeah, the adjusted is sales 817 million and the earnings per share 38 cents.

OK. Now from what you

talking about now are you suggesting that a quarter could be below that next year since this, because the shipments are off or not?

No.

OK. Second thing.

Len just to make sure we got your answer properly, from a revenue point of view the net sales is they will be restated and than pulled out, you know pulling out trade allowances

is 817 million the income per share diluted as reported was 38 cents, once we make the adjustment for good will

that should, the right comparison should be 40 cents.

OK. 40. And you are saying that we're not going the have a down quarter even though the shipments are going to get screwed up in the second quarter? I wasn't sure when the conversation was going on before whether I had heard correctly or read

or heard incorrectly. You said you were going to have a challenge with shipments, what does that mean for earnings for the second quarter verses last year?

We still have the same guidance on earnings Len, both for the year and as we said earlier, for the year 9-11 percent and we said that's pretty reasonably distributed quarter by quarter.

clarify the comment was relative to the early part of the quarter, because of the shift in Easter not relative to the whole quarter from a shipment stand point.

Thank you. All right, now Rick, you guys are starting the

program I think that was the name of it, just basically by where your strengths are in the market place, etc.

Right.

And I think you said you were going to have that done by June. Does that mean that we should

, I think it was John had asked the question, look if you're talking about 3-4 percent for the year you're going to have to kick some tail to get, you know, to get up to that point. Are you talking about formulating programs that are going to be implemented in Q-2 to take us through important September to December period or are you going to start right away in this quarter? I'm a little concerned as to when the timing of this kicks in.

All right, let me

. Let me see if I can clarify what we've said all along, is we, we anticipated the first half of the year

gather the learning's about the responsiveness to our brands, as we continue to capture the savings from the business realignment initiatives that we implemented beginning fourth quarter of last year. The cost side of our strategy is doing extremely well as evidenced by the gross margin in returns improvements.

It doesn't mean Len that on July first there's going to be a deluge of new funds into the market place, because from the practical stand point we're already selling in back to school and Halloween. What we are going to do is, based on these learning's be more surgical than not in terms of where it makes sense and the back half of the year again to focus on the scale

and if that's where we know that money has the greatest chance of return so this is not, nor has it ever been communicated as there is going to be a big bang in the second half. The other point is, from a practical stand point, we know we have to pick up the growth in the second half to insure we get to the numbers that we talked about. However, let's be reminded it was 3-4 percent on a comparable basis because of the discontinued businesses on a reported basis for the full year 2002 it will be the 2-3 percent range.

Right. OK. Now just as a, one quick follow on if I'm seeing that the share is increasing in the spend is up and the earnings are up the competition, I know, that you are noticing but it sounds like the competition is more of a rifle shot than across the board. See stores like, I take it your share is flat two and I know you want to close it by two percentage points and it sounds like a few selected retail items, retail channels have been impacted. Is that the correct characterization or is it more broad based than that?

I think, it is close to the correct characterization. I think in the first quarter there's a couple of things going on we had very good seasonal performance over all around Valentine's. We started to see a pickup as I mentioned in our instant consumable, both within food, drug,

as well as Wal-Mart and

stores and that's a major part of our strategies going forward. The competitive pricing that we were talking about had primarily been in the early part of the quarter on lose

by the two major competitors and there was some selective price disadvantage on everyday package candy,

food channel so your characterization is a good one, but there is also a lot of puts and takes across all the channels that I just mentioned.

I hope that helps your confusion?

No it does because, I don't want to come away thinking that we are getting hit on all sides here. Because I don't think that is the case.

That is exactly right, we are not.

And OK. Are you going to release what your merchandise, what your gross sales were in the quarter?

We had not planned on it, No.

Why don't you change your plans?

Well,

Go show some flexibility there.

I already said that, our trade

was up about 70 basis points for the quarter.

God, now I've go to divide.

OK. Thank you.

All right thanks.

edris Thanks Len.

Your next question comes from

.

your line is open.

Hi, how are you?

Hi,

.

Hi,

. How about you?

I'm fine. Just as an aside, what's an instant consumable? Is that just like a single piece of candy that you grab or?

I was looking for a more value added name than standard bars, that's exactly what it is. It's our loose bars.

Oh, okay. It just sounded so clinical.

Well, I don't want it to be, it's buy now eat now. Does that help?

Yes. Well, all candy as far as I'm concerned is buy now.

OK.

All right, I just want, I got to go back to the top line components again. I mean you've sort of given us shreds of what's going on there, but can we just put it all together in a kind of clear way?. Base volume, you're saying, is up one. Are you defining base volume as everything excluding what you've rationalized away and excluding what you acquired in Brazil?

Yes, although not completely everything that we've rationalized away. We've said, you know, specifically Luden's, the sales recognition for the gum and mint business, right, and then aside from that the

acquisition. There's all kind of product line rationalization that continues to take place as we've mentioned on a number of occasions as we keep pulling away the items that are not as profitable in our line. Now, you know, those have detracted from sales, we say that's part of the normal ongoing business.

Exactly. Can we just make it simple? So, acquisition was what in the quarter, and divestiture was what?

We said acquisition was about one percent.

OK.

And, Luden's was not included in this year's numbers.

Right, but it wasn't a year ago.

No. I mean I think we're splitting a little bit,

, I mean, in total apples-to-apples with the acquisition included would've been two percent higher. With the acquisition excluded, it would've been one percent higher.

OK. and

rationalization, I was estimating 25,000,000 negative in the quarter, is that not...

Probably, that's too high but, but we have rationalized...

We're

about 10...

We have rationalized enough other normal items that will hit us for 30 to 40 millions for the entire year, if that helps you.

Yes.

We're just not trying to take, you know, credit for that in terms of we're going to continue to rationalize the line and bring out items that are just not that profitable.

OK.

We'll try to make it up elsewhere.

All right, and on the gross margin expansion, 150 basis points, I think that'll probably impress most people on the up side. It actually come to, it might've surprised you on the up side, as well. But, can you again sort of piece, build us up to that? I know the general areas that were beneficial.

Yes. Yes, let me try and as you said try to keep it clear and simple. I'd attribute about half of it to principally to

and the other half to all other supply chain efficiencies, including commodities, packaging, and distribution, and so on.

OK.

And, manufacturing. So, if you take, take it about half and half,

.

And then, through the rest of the year it sounds very similar to last year. You had very strong gross margin expansion the first half and then your

is that that would sort of tail off at the end of the year. I think I remember that you had a tough

gross margin in the fourth quarter. But, why this year do you see the gross profit margin improvement moderating?

It's, it's for the same reason. Even though we increased a lot in the first quarter of last year, it's still remains our easiest comparison for this year. As we go on through the years, if you check back, second, third, and fourth quarters we have moderate improvements last year but from reasonably higher basis. So, as we go on through the year, you're right, we're not going to see the 150 basis point every quarter. Plus, our best comparison for commodities and raw materials, frankly, is in the first quarter. As we move through the year, that won't give us near as much as the first quarter did. When you take all that combined, that's why we're saying for the entire year 80 to 100 basis points.

OK., and Easter, I know, you gave some, a couple hypotheticals why Easter sale-through was mixed. But, anyhow, you said it hasn't been tallied up. So, do we have any potential for some kind of significant returns to you that might impact second quarter?

No.

OK. And, I guess, overall pitched the early Easter, I think I heard the answer so I just want to confirm, the early Easter did not overall for the quarter enhance your shipments versus a year ago. It was not really added, it was just the earlier part, is that what you're saying?

That's right,

, because by the end of March, even last year, all of the shipments for Easter would have taken place. So, I think if you look at shipments in our first quarter, this year versus last year, for Easter they're essentially the same.

So, it won't have a negative effect in the second quarter?

Not, not the shipments for Easter, no. Now retail off-takers is just the same.

And then,

, one last thing, I'm sorry, can you just remind us where we are on seasonal, I'm sorry, summer promotion? I mean, you know, historically you've always done some things in the summer; I know you've got ET.

ET was in the first quarter and it did very well. It was the first Reese's family promotion. As I said before, we have limited edition Kisses, which come out in the second quarter; we have limited Kit-Kat, which ships in the third quarter; we have a tie-in with Spider-Man in the second quarter; and, importantly, around the summer holidays, Memorial Day, July fourth, we have the Great American Dream Event that ties into the red, blue, and silver Kisses that are going to be as well.

So, those are the major events that we have around the summer months and also, as I've said before, we're shipping bonus bags, which is a great way for use to get increased savings directly to consumers and that happens towards the end of the second quarter as well.

OK. I thought those limited edition Kisses were interesting.

Good. Was that interesting good or just....

No. I missed the sour barnyard smell of the regular ones. Thanks guys.

To each his own.

Exactly.

.

Your next question comes from Christine McCrackin.

Good morning.

Good morning, Christine.

Wondering, Rick, if you could update us on, on Fast Break? It seems like there's still a big marketing effort to get this into the trade. I'm wondering if you could tell us what your expectations are, I guess, for the next year?

Fair enough. Fast Break has a 90 plus percent retail distribution, so we got a very quick distribution deal which has been good, and, so far, the results that we're seeing at retail and through our customers is meeting our expectation. We do have one size coming out for the Halloween season, so, so far Fast Break is off to a good start and we feel good about it.

Seems like you're heavily discounting it to try to get, I guess, to kind of boost sales. I'm wondering...

No, we wouldn't. Just think about it this way: if we're putting out specific promotions that makes sense for "instant consumables" and the trade elects to feature Fast Break for trial and cause it's a new item for them, we are not specifically going out and saying, putting in, excuse me, not specifically going out and putting in any deeper discounts on Fast Break. You have to keep in mind that the trade elects in the context of our overall program how they might choose to promote a certain item, but we're getting very good merchandising behind Fast Break.

I'm wondering, too, are you seeing any

of your core Reese's products?

Not as of yet, and it would be too soon to tell because we're in the trial phase, but our Reese franchise was, was up reasonably well for the quarter and, again, we had the ET promotion which was behind the entire Reese franchise.

Great, and then, secondly, I was wondering, could you speak to where you are on the roll out of this new sales infrastructure, obviously big investment in the quarter, wondering is that kind of the investment phase, is not going to kind of carry over into second and third quarter and maybe through the end of the year or have you really ramped that effort up now?

No. What Frank had mentioned in his comments is that we essentially put in our new dedicated customer selling teams in the first quarter and it was aided by the early retirement that took place at the end of 2001 but there's not going to be a significant same level of investment in subsequent quarters. The most important aspect is we're getting the teams in place, now we need to work on improving the capabilities and that's going to be an ongoing process and we'll expect to see significant improvements over the long term. But, again, it's back to one of the previous questions, there's not any one quarter where there's going to be a big bang

of marketing or selling. It's going to be a gradual implementation which is the appropriate way to build our business.

The only thing I would add to that, Christine, is that you'll recall most of the, much of the infrastructure that we put in place with 300 extra people, for instance, in the sales force to use as a flexible asset, really came in the second half last year. So, we could find, obviously, ourselves in the second quarter that comparison to last year may be that we have higher selling expenses. Those are already in place is what Rick is saying. OK.?

Yes, and too, I was wondering wasn't there a C Store effort, as well, similar kind of in-store promotion team?

Yes, we have a new C store team in place. As I mention earlier in the Q&A I C-store business is improving. But we still not saying that the share growth, that we are anticipate. But our share lost are far more moderated and importantly our take away continues to grow and we are given the new team the right product and promotion to sale. And I feel good about the long term prospect from C-stores.

Great, Thank you

Thank you,

Thanks

Our next questions comes from Adam

Yes, good morning. I had just push the star one, because I thought that none was ringing in, I didn't want to make you feel bad.

Thank you, very much Adam

Thanks

Hi, how are you doing?

Good Thanks

I do actually have a question, quick question. Is it fair to say to that the intensity of the promotion efforts Rick has been Mars bagged candy at grocery's stores. Is that right?

Most so, then not, yes.

Yeah,

Yeah, and they had been selected as I had said, before Adam. Loose bar promotion, and that was on a specific account by account basis.

But it was more bagged candy, you think?

More than the everyday bagged candy. We seen some pricing on that, yes.

Isn't that fair to say, that that is the precisely the share that you want to lose or give up. Is that not what you want to emphasize.

Well, I certainly don't want give up any share. What we are saying ...

Well.

... is that we are going to be more balance in terms

Right.

... of how do we win the year, not just win the season.

Well, that's the lease profitably growth, I guess. That's equaled to the two liter coke for a dollar.

Versus standard bargains for consumable, it is a less profitably, correct.

And then I noticed in Kraft release yesterday, that they were talking about promotional activity in non-chocolate. Did you notice that? Do you have any -- Do you know what they are talking about?

No, I did not see their release, but the way we look at it is chocolate, non-chocolate and then intense mints, which is where we compete. Obviously within the non-chocolate, we have our brands like Twizzler, Jolly Ranch,

Right.

Payday, but they might have been talking about that non-chocolate segment or mint segment.

But have you been, -- or have you seen the competition, price competition in non-chocolate or chocolate?

More so in chocolate.

More so?

Then in the rest of the segment, correct.

So you really don't know what the heck they are talking about?, Kraft guys.

I didn't say that

They don't know what they are talking about any ways, those Kraft guys. You know.

No comment.

And all of their alumni. OK. Thanks a lot.

Thanks Adam.

See you.

Thanks Adam.

Your next questions comes from Art

Good morning

Good morning, Art

Good morning.

Did I understand Frank, that the trade promotional spending relative to sale went up 70 to 80 bases points?

First is a year, yes.

Yes, now that is spending that we don't any longer because it is a reduction off the gross sale. Is that correct.

Yes, that is.

OK., and it looks like if you do some rough calculation that your trade spending in the form of promotion was up maybe 9 percent versus a year ago.

Close to that, yes.

OK., I think it was mention by Rick that the promotional activity didn't have the benefit of raising industry sales trends. And I was just wondering if you could factor out the Easter situation and give us some sense to what the industry sales dynamic might be currently and how that is lifted off what it might have been last year.

We can't back out the Easter, because it is difficult to do so what -- What was in Frank comments, and what I would say, is evening looking at the eight weeks through February 24,which is pre-Easter in either year, the category had started to show a little bit greater grow then it had towards the tail end of last year.

OK., but it might be on the order of one or two percentage points.

Something like that. But again, we all have to be reminded that Wal-mart is excluded and Wal-mart has been growing with a rate greater then total category growth and so that would impacts what you will see in FDMX.

Getting back to the trade promotion question, briefly. It looks like the restatement is a reduction off gross sales of about 8 ½ percent and for a lot of my other companies the reduction off gross sales is so what higher then that. I am just wondering whether the level of trade promo off of gross sales for you is the right number or should it actually be higher with or without this higher competitive activity

I think that is the important point. And as we talk about in terms as we

up our integrated business intelligent or EV capabilities and a lot of the marketing mix modeling. We are looking at does show that the trade is a very good spin for us, obviously up to a point. And it has a lot to do with the expandable consumption nature of category and I am not yet prepared to say what we think quote to what the right number is but we are looking very carefully base on brand and customer. What should the right rate be and what should the right spending profile be. Because a lot of it, is how we spend not, just how much we spend.

So, some of the 9 percent increase that we might have seen in this year first quarter was more related to your long term thinking then it is just to responding to competitive actions.

That would be correct Art.

OK., and do you have any early signs at all that Mars and Nestle might be relenting a bit on their activity. And why would it be so concentrated in food stores areas. Is the just because of the package.

Very much so, and a much greater seasonal emphasizes in total in MAX again, and don't forget that essentially now includes Target and Kmart and Drug and there are larger everyday section in the existing food channels, but again it excludes Wal-Mart, which is a big piece of the puzzle.

Do you see any signs that this is relenting at all?

It is hard to say specifically, because we are obviously looking at it on a customer by customer bases. But I will say in the most recent four week period, which is the information that we just got, that Nestle share was not as robust in the most recent four weeks.

OK.

And I am not going to say that attributed to the what they have done from a trade promotion or not done from a trade promotion.

OK. ,and finally, Share re-purchase. Are you kind-a laying low on that right now.

For the time being says.

And that related to what?

As I said a little earlier we got a variety of opposite for using the cash flow that we are generating and we got to make up our minds to the point here how we are going to spend it. But I think we are remaining flexible right now. We can spend it for shared re-purchase or any of number other initiatives that I have mentioned, Art.

But it's not that it is way down on the list, it just that you are not such of where it should be on the list.

For right now, that is right.

O.K., thank you very much.

Thank you

Thanks, Art

Your next questions comes from Terry Bivens

Good morning everyone.

Terry

Yeah, hi Terry

Couple of quick if you look at inventories in the quarter Frank, is it possible to quantify how much you might have build up , you know, around this labor issue. Is it possible to segregate that out.

We whether not comment on that, as Rick said earlier, Terry. We really are in the middle of negotiations. It is probably not appropriate to comment.

OK. If you look at the second quarter, I think there had been some nervous on Q2. Rick to what extend, -- I mean you put out a very nice number on here with your business to Wal-mart and I know you have some plans to kind of make it a less seasonably weak yearly pattern going forward. Is it Wal-mart that gives you, -- Is that a major in give you more comfort on how Q2 is going unfold and kind -of how we track through the summer.

Not necessarily, Terry. What I was saying before, is than -- that everyone knows the second quarter is our lowest absolute quarter in terms of sales and take away and Wal-Mart is one of the customers that we are working very closely with ensure that we start to over time build-up our "no seasonable business" and that why the product initiative around Kisses and Kit Kat are taking place in the second quarter.

OK., I guess for Frank. Why wouldn't share buy back. You know , you talked before about

as I recall up until low to mid 70s if I am remembering correctly. If you look at the share price now, why wouldn't the share suddenly jump to the top of the list.

I don't really further comment. As I said Terry, we are just stay flexible we have a variety of things we spend our cash flow and this point it is a far as I would like to go.

OK. and I guess this piggy back off Art's question, but... I guess if you look at Fastbreak as kind of shot in the engine room in the company like Mars and I guess to a slightly less extend Nestle. Just your feeling there Rick, do you -- Again it all gets back to the question of sustainability. But to you look at this and say, well gees we really came out with the Fastbreak , in an area where they are very concern with. Do you see this, you know a temporary response to that goes away, I guess another way of asking about sustainability of the competition.

Yeah, I think Terry, it is obviously difficult, nor I would not want to speculate on what any competitive activity might be.

OK.

And that is about has far as I can go on that one.

OK., understood. Thanks very much

Thank you

Thank you, Terry

Your next questions comes from John O'Neil

o'neil: Good morning everyone.

Hey John

Good morning, John

o'neil: When are you fellows ever going to get on the queue here? First question, If you are going to be increasing trade spending, which is now noted against net sales, should we expect over the next several quarters that your reported revenue growth will be less than your volume growth?

I think, that yeah, that if we continue to as Rick mentioned spend a little more on the trade promotion, if we keep up that rate, we're not prepared to say that's what we are going to do until we get additional insight into how to best spend it, than what you are saying would be true that the more you spend above the top line, the less growth is likely to show up.

John, one thing, just for clarification, and many times trade promotions or trade deals have a different connotation our programs

trade promotions are all performed as based, and while, it is, from an accounting stand point a reduction from net sales, it not money that is just put out to price this kind of

.

As I've said before, we're in a very responsive category and we have great pass through as again as we highlighted at

we're learning more about how to improve the over all effectiveness of our trade spending, and that is every bit as important, as the over all effectiveness of our advertising and consumer promotion. And so, while it is, yes a deduction from gross sales to net, it is a very powerful tool, that we're going to be a lot smarter about how to use to help build our brands and win with customers.

Thanks.

o'neil: Rick, you know, you mentioned you expect sales to kind of pick up here later in the year, to hit your 3-4 percent, your volume growth target, can you hit that in the current competitive environment, or do you need competitive activity to lessen to hit your goals?

It's hypothetical question and too hard to comment on, because I know what we need to do from our standpoint and what I don't want to do is try to speculate now, what competition might or might not do, obviously, we are very keen on what's happening on a brand by customer basis. But we also know that we have some very good plans

we also know some things we need to do better than we've done in the past and that is again focus on where we make our money and that could be a specific outlets as well as specific brand and

within our line.

OK.

guess, looking at the second quarter and kind of thinking conceptually since there is less seasonal business or major marketing programs in second quarter that suggest that the loose bar business in your big brands, are larger part of your sales mix in the second quarter, and if those are the areas your focusing your resources on and that's where you are getting growth shouldn't we see that

sales growth in the second quarter than we did this quarter?

Not necessarily, because in the absolute sense it is a relatively lower quarter, it is the lowest quarter to begin with and we

we still are committed to doing well in the season, though it is not, you know, we are not swing the pendulum so far from one end to the other, and relatively it is expected to see better growth in the business that you mentioned, but not to such a large extent that we are not being smart about when we want to be aggressive in the market place.

Thanks. Think it was last week, could you just comment on the international business, you know, I know it is small, but is it still growing with the growth rate excluding the acquisition there?

Yeah, we had reasonably good growth in what we call our international rest of the world business, which is Canada, Mexico, and than quote formally name international business which is primarily export with the exception of our Brazilian business, which is doing very well.

o'neil: But the plus one base number that you gave, is that in the U.S. or was that everything?

Yeah, it's everything, but it's comparable international and U.S., when we strip out the Brazilian acquisition, John, and we're doing the same thing there, as we are doing domestically, as Rick, mentioned earlier we really are trying to target the places around the world, where we can be the most affective target our portfolio or flagship brands all of the better items and we have gone through a

rationalization there as well. So, the sales increases absent the Brazilian acquisition around the world are comparable to the U.S. particularly for those regions that I mentioned. We are going after good profitable top line growth and eliminating lots of skews in places where don't make money.

o'neil: Right, have you specifically commented on consensus

for the second quarter? Are you comfortable with that?

Well we have, for the year we've continued to say basically our target is 9-11 percent and when I was asked about that at

quarter by quarter, I said essentially we see that kind of distribution of 9-11 percent, we are close enough to it quarter by quarter.

o'neil: Right. Thank you

.

Sure. Thanks.

Your next question is a follow up question from John Macmillan.

If your sales were up one percent base in the quarter, what do you think take away was, I know this is skewed by Easter and so forth,

March numbers. But, what do you think your take away is?

John, in fairness, it really is so skewed by Easter when you take it out through you know the data that we all have right now through 04/24/2002 it is difficult to comment until we do a lot more of the diagnostics I mean we only got the data just recently as you all have gotten it. So, that is what I was saying about the data being a little distorted for the quarter, we'll have a lot better picture of it in the next month. Right now it takes a lot more diagnostics

top line that shows up relative the total movement, how much of it is all seasonal related, Easter related, how much is everyday ? We need to piece that together better, but it differently was up more that what our own shipments were.

But the

would measure some of the promotional sales that get deleted under the new accounting, correct!

But

just measures retail sales, it doesn't care how we account

Yeah, even if you give it away?

Right.

What ever the cash register prints out is what IRI will pick up.

Even, if you strip out, because IRI has some non seasonal, you can kind of strip out the seasons and see a little bit better trends and plus one in sales.

Right.

And, I just wondered whether the difference is these promotions, or whatever? Well whether you think there is just no, there's been no retail inventory declined to speak of?

I'll give you one example that would be

to everybody which is Kmart.

Oh yeah.

Our first quarter sales would be well down in Kmart internal sales, but our take away would be up in Kmart.

That makes sense.

I do not have Kmart specifics, but in terms of our take away being up in mass so that is just one of the disconnects, but as Frank said, obviously you are looking at IRI, which is 43 percent of at least

and but overall our take away would be up better than our sales event.

What was that all about in terms of, did you go IRI, and ask them to restate or did you just, what caused that restatement by IRI?

When the data came in and our folks in marketing research looked at it, they know that there were items that had not been included, because they didn't jive with some other weekly data that we had, and we asked them to go back and obviously, what IRI typically does is they add new items in the fourth week of the quad week period, and there was just a mix up in terms of them not including the items. Than when they reran it and then issued it to all of you it match, we get both sets that matched very closely with our own custom data base.

OK. Isn't what Nestle's

, I know you are reluctant to talk about competitors, but from my stand point Nestle's doing a little bit what you want to do. They are trying to pick their big brands, and they probably have two maybe three of them and just market the Hell out of them. Their just kind of picking the big brands. Is that correct?

I think, we have to start with the just the relative share differential between what our current share position is versus what a Nestle's share position is. And I don't want comment, specifically, on what their doing, but in terms of responding to what was taking place around them they have chosen to get, at least, in the near term, in the first quarter more competitive on certain items within their line.

OK. Thanks again.

OK. Thank you.

Thanks John.

Your next question, is a follow up question from Leonard Teitilbaum.

Questions been asked and answered was John's I was trying, trying to get take away versus shipments, but I think you have gone through that. Thank you very much.

OK., Len.

Your next question is a follow up question from

Mehring.

No. I'm all set, thanks.

And your final question is a follow up question from

.

None of us know how to hit the button that gets us out of line?

Nor, do we.

I just want to be clear on the sales thing, I think what you are saying is that you expect reported sales for the year to be up two to three percent not three or four percent.

That's right.

OK., because I think there's an impression out there that you're having to gun from one up to three, four, when you're really gunning for one up to two, three. And the difference is purely your internal SKU rationalization. Is that right?

Well, we didn't use that very much, but yes there is a lot of internal SKU rationalization, both domestically and in our international business and you know we've just said look that's part of the normal business ...

Well what then is the difference between the normal three to four and the two to three?

Yeah, that includes all our SKU rationalizations, the sale of Luden's and then other things that we may be selling as we rationalize our portfolio.

OK. But the job is not as hard you just have to get the two to three versus three to four.

I think you're right

.

I just wanted to make sure I understood that. Thank you very much.

Thank you

Your next question is a follow-up question from

Mehring.

Sorry, now I do have a question. Thanks

.

consumables.

Yeah,

consumables. I thought the one percent you were up first quarter was base business before or excluding SKU rationalization?

It's base business. And as I said, it excludes the Luden's business right?

Right.

we pooled out the Brazilian acquisitions

right

And in spite of that it's up one percent even without the SKU rationalizations that were going through. We just haven't computed what I told you a little while ago, was that the SKU rationalization could be another $30 to $40 million for the year. This is normal SKU rationalization. What portion of that took place in the first quarter I just didn't hazard a guess.

No, I know, I'm sorry, but I thought you -- I though you said that your base business was up one person and that base did not include things in the year ago base that you had rationalized?

That's partly correct. I said that we excluded certain things rather than get into every SKU that we rationalize out of line. We limited it basically to Luden's and the gum and mint business that we had bought, right?

right.

... along with the Brazilian acquisition. If we had gone through additional SKU rationalization, which we're doing, our base business actually would have been up a little bit more. All saying I don't have an exact estimate for that.

But the three to four for the full year that you're talking about, is comparable to what you've done in the first quarter one percent, or no, because that's the question that

was just asking. Maybe we can follow up off-line, I don't know.

Yeah. Yeah, I think what you said is right

as long as we pull out all that SKUs that we rationalized because we're trying to get higher quality top line sales by going after the more profitable items and the more profitable brands, so maybe we can explain it a little better off-line.

because we wind up on our side -- anybody's side trying to split half a percentage point which -- we aren't doing our job which is continuing to implement our strategy get good

organic growth and we didn't grow with the rate in the first quarter for the reasons we stipulated, which aren't excuse. We know we have some work ahead of us. We didn't grow at the rate A, we're know we're capable of and what we need to do.

no I'm not being critical I think what you're doing in terms of rationalizing top line and stuff is healthy for the business, I'm just trying to get the quarter on the same basis as how we're supposed to be think about the whole year.

But you just took Frank's number of one and said well maybe we didn't exclude some things that we should've, so maybe it goes to one and a half or one and a quarter , we still fell below on an apples to apples, the on going and long term, what we have been talking about long term, not necessarily quarter in and quarter out three to four percent on a organic basis. And the two to three percent report for full year 2002 were reflect the loss to vestage and other business rationalize as well as on going SKU rationalize

OK.

Hopefully that helps.

That's helps.

Thank you

Thank Jane

At this time there are not further questions. Do you have any closing remarks.

Yes, thank you Heather. Hearing no more questions. We will concluded today's session.

and I will now be available to answer any additional questions you may have. As a reminder, our second quarter sales and earning release and conference call will be July 23. Thank you for your interests and good day.

Thank you for participating in today's conference call. You may now disconnect.