好時 (HSY) 2002 Q4 法說會逐字稿

Good morning.

My name is Matthew, I will be your conference facilitator today.

I'd like to welcome everyone to the Hershey Foods Corporation 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'd like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.

In order to withdraw your question, press star, then the number 2.

Thank you, I would now like to introduce Mr. James Edris, Vice President of Investor Relations.

You may begin your conference.

Thank you, Matt.

And good morning, ladies and gentlemen.

Welcome to Hershey's fourth 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 business results for the fourth quarter and full year and then we'll be happy to take your questions.

We welcome those of you listening via the webcast.

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 had a chance to read our press release, issued earlier this morning.

As you know, the reported results for the fourth quarter of 2002 included a pretax charge for our business realignment initiatives as disclosed on October 2001, totaling $13.3 million or 6 cents per share diluted.

In addition, goodwill amortization has been eliminated from our 2002 fourth quarter results but is still contained in the 2001 fourth quarter results as reported.

Therefore, the elimination of these items from our 2002 fourth quarter results would yield earnings per share diluted of $1.02 compared with 95 cents per share diluted in 2001, assuming the elimination of goodwill amortization from 2001 fourth quarter results.

This is an increase of 7.4% and was included in the pro forma statement which accompanied our press release.

Since this scenario describes our ongoing business, my remaining remarks will be made in this context.

I should again point out that this year's top line has been affected by the new accounting rules requiring the reclassification of trade promotions and last year's sales have been restated to reflect this change, as well.

During the fourth quarter of 2002, consolidated net sales increased slightly, about 3/10 of a percent, on a reported basis and increased by about 1% after adjusting for continued product line rationalization.

This increase was aided by the customer buy-in related to the price increase announced on December 10, 2002.

Fourth quarter sales were 1 to 2% higher than they would have been absent the buy-in.

This increase was offset somewhat by higher trade promotion expense, lower domestic seasonal sales, weakness in the Canadian market and ongoing customer destocking.

As we have mentioned before, however, Hershey's strategy to emphasize key brands as well as a more profitable pack types and trade channels, continues to be evident in the fourth quarter results.

In fact, sales of instant consumables increased in the mid-single digit range, aided by growth in our most profitable pack type, loose bars.

New products such as the To-Go line and Ice Breakers unleashed.

And the continued success of our convenient store initiative.

Seasonal shipments declined slightly in the quarter.

As we've mentioned before, we are not pushing seasonal sales as hard in the midst of difficult retail environments in an effort to reduce after sales and markdowns.

Store traffic in general has been reported as weak in recent months and the confectionery category has been affected similarly.

Retail performance for the 12 weeks through December 29 for food, drug, mass merchants without Wal-Mart and convenient stores, show the candy, mint and gum category is down 5/10 of a percent in dollar takeaway.

However, Hershey has increased takeaway by 1% with solid gains in the chocolate and mint segments, leading to an overall share gain of .4% in the period.

If we add sales through Wal-Mart to the equation, our retail growth increased approximately 3% for the 12-week period.

Although our nonchocolate and gum brands continued to struggle somewhat, in convenient stores both are experiencing solid consumer takeaway.

Most importantly, we continue to gain momentum in our higher margin instant consumables.

Over the 12-week period, these advantaged items generated about a 6% increase in takeaway.

This growth was the result of strong sales and in-store merchandising activity, in support of everyday items, comprised higher margin pack types, sold through higher margin channels such as convenient stores.

We are pleased to report the gross margin during the quarter continued to show improvement.

In fact, by 60 basis points, coming in at 39.0% versus 38.4% in 2001 on a comparable basis.

This year's gross margin was enhanced by improved product and channel mix and by overall supply chain efficiencies, offset somewhat by higher trade promotion spending.

Selling, marketing administrative expenses were 30 basis points lower in the quarter, coming in at 18.8% of net sales versus 19.1% last year.

Direct marketing expenses were up slightly in the quarter while administrative costs were lower as a result of realignment savings.

For perspective, I might add the total marketing expense, including trade promotions, were up about 7% in the quarter, resulting in the share gains I mentioned a little earlier.

Earnings before interest and taxes of $234.4 million increased by 5.3% compared with the fourth quarter of 2001.

And the even margin was 20.3% versus 19.3% last year.

A 100 basis point improvement.

Interest expense for the quarter of -- for the fourth quarter of 2002 was $15.3 million compared with $16.7 million last year.

Primarily reflecting lower net borrowing levels.

This was aided, of course, by the strong overall cash flow in our business.

The effective income tax rate for the fourth quarter of 2002 was 36.7%, compared with 36.6% in the fourth quarter of 2001.

With both years reflecting the elimination of goodwill amortization.

On a pro forma basis, net income of $138.7 million was 6.3% higher than the fourth quarter of 2001 and our net margin was 12% versus 11.3% last year.

Weighted average shares outstanding a diluted basis for the fourth quarter of 2002 were 136.3 million shares versus 137.5 million shares for the fourth quarter of 2001, leading to an earnings per share of $1.02 per share diluted compared with 95 cents per share diluted for the fourth quarter of 2001.

An increase of 7.4%.

As we mentioned on December 13, we completed our previous share repurchase authorization in November, spending $84.2 million to acquire 1.3 million shares.

In addition, in mid-December, our board authorized a $500 million repurchase program which we expect to complete in 2003 or early 2004.

Let me now quickly recap our full-year results.

Again, excluding one-time items.

Net sales of $4.12 billion were up about 23% on a comparable basis.

Gross margin was 38.0% versus 36.7%, an increase of 130 basis points.

Selling, marketing and administration declined 30 basis points as a percent of sales.

Direct brand expenses were flat but total brand spending, including trade promotion, was up about 5%.

EBIT was $749.5 million, up 9.2%.

EBIT margin of 18.2% increased by 160 basis points.

Net income was $436 million, up 11.4%.

EPS was $3.17, up 11.6%.

And finally, our economic return on much investor capital was 16.9%, up 60 basis points.

Turning now to the balance sheet as we have stated previously, one of our strategic initiatives is the more efficient use of capital.

The reduction of raw material inventory in the fourth quarter of 2001 jump-started this process.

When we look at average and net trading capital utilized throughout the year of 2002, we see a 6% reduction in overall usage.

This has helped improve our cash flow generation and our returns.

During the fourth quarter, as expected, strong cash collections generated substantial cash flow and our cash balances at year-end were almost $300 million.

And this, of course, is after capital additions, dividends, share repurchases and additional pension funding.

Overall, our strong free cash flow eliminated the need for short-term borrowing during all of 2002.

Total debt to total capitalization stood at 39% compared with 44% at the end of the fourth quarter of 2001.

With our improved margins and profitability as well as improved balance sheet management, our economic return on investor capital for 2002, as I mentioned earlier, increased by 60 basis points from 16.3% to 16.9%.

In conclusion, we've made good progress in developing our strategy for balance, sustainable, profitable growth.

Despite numerous challenges in 2002.

We restructured the product portfolio by shedding nonstrategic, low-margin businesses.

We successfully launched products which expend the equities of our advantage brands.

Strengthened our performance in the important convenient store channel.

Significantly lowered logistics expenses.

Expanded gross margin, upgraded key management positions, lowered average net trading capital and delivered strong profitability and improved returns.

We've done a good job of driving profitable, organic sales growth in the areas where we focused.

We also know there needs to be improvement in several other areas and we're setting out to accomplish that in 2003.

We remain confident that our strategy is on target and that Hershey will again deliver solid financial performance for the year 2003.

That concludes my remarks and now we'll be happy to answer your questions.

Matt, the first question, please?

At this time, I'd like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad.

Please hold for your first question.

Your first question comes from John McMillan with Prudential Securities.

Good morning, everybody.

Good morning, John.

Good morning, John.

I guess you're quantifying the retail buy-in benefit at $175 million, if it comes as a mid-point.

What percentage of that buy-in did you ship in calendar 2002?

Yeah, John, I -- I -- the $175 million, I'm not sure where you're coming up that.

You said sales were helped by 1 to 2%.

Right.

So, I took 1.5, being the great analyst that I am, and kind of took the benefit.

Doesn't that come to about 1 -- I guess, 117.

Yeah, about 17.5, I believe.

Shows you I'm not a good analyst!

What was the size of the buy-in -- what percentage of the buy-in did you ship, about?

We shipped a small portion of the total potential buy-in, John.

You remember, the buy-in ended December 20 or the shipments started December 20 through December 30.

Obviously that's a very busy holiday period.

We also had other manufacturers who had announced a price increase as it got buy-in.

So, a small portion, when all is said and done, of the buy-in, was actually shipped in the fourth quarter.

And we put it at between 1 and 2% of sales.

And -- and the total buy-in is probably $100 million plus, is --

It would be in that range, John.

I appreciate that.

And just in terms of the total volume growth for the year, I don't think you reviewed sales numbers for the year in volumes.

Can you just give me a rough idea of what volumes were for the year?

Yeah, in total, John, the reported sales were about 4/10 of a percent lower.

On a comparable basis it would be about 3/10 of a percent higher across our full business.

And without pricing last year, that's basically volume?

Yeah, a little bit of pricing in that, but it's mostly a shipped and mix to higher profitability items.

So, volume and -- and price were -- were kind of even.

Is there -- you know, obviously the store traffic -- store traffic is down, you know, Rick has mentioned in the past some of the economic impacts that can influence Hershey.

But just, you know, how is the price increase being received now that we're further along into it?

And, you know, could this be the wrong time for it?

John, in terms of -- as you started off, in terms of store traffic and things of that nature, we, obviously, as all the retailers have reported on the top store sales for the fourth quarter were lower than the third quarter, maybe in line with expectations, but I feel pretty good we were able to generate FDMXC a 1% increase in takeaway and 4/10 of a percent increase.

And when we factor in the Wal-Mart data, we're up to 3% in takeaway.

So, that's good performance.

In terms of how the pricing has been received, as we said back in December, we obviously protected along with we know what competition is doing, protected key promotions through the April period, but in terms of reaction from the trader, they understand the drivers that have resulted in the price increase and we've gotten very little push back on that, but we continue to work with our -- our retail customers because our goal is to continue to drive takeaway and share gains and build on the momentum that we have seen through the fourth quarter.

Now, I know in December you targeted 11 -- or an earnings growth rate closer to the high end.

You still see that, I would imagine?

And to what extent will the timing of Easter have any impact on quarterly trends to the extent you can talk about that?

Yeah, John, the guidance we gave -- you're right,December -- was 9 to 11%, but closer to the upper end of that range.

That's still the guidance that we're giving.

There is no reason to change that.

As Rick said, it is a little premature to try to judge what the impact of the price increase will be.

Your second question, relative to Easter shipments, there could be a little bit of Easter shipments because Easter is a little bit later, that could go into the second quarter.

At this point, though, we would not expect that to be very material.

But as that develops, at the end of the first quarter, we'll let you know how that went.

Okay, thanks a lot.

John, just one quick point, back to that.

I think it's important to underscore where we view seasons and our ability to drive our market share.

In the fourth quarter, you know, our seasonal sales were off slightly across the industry, yet we were still able to have a strong takeaway and share growth.

So, we continue to reinforce that our goal is to maintain the appropriate focus on the seasons, but continue to build our strong brands throughout the year and then seasons can be a -- a good add on top of that.

So, while Frank is absolutely correct, we expect to see some shift in Easter volume from first to second quarter, our goal is how do we continue to build market share quarter in and quarter out.

Okay, thanks a lot.

Your next question comes from David Nelson with Credit Suisse First Boston.

Good morning.

Good morning, David.

Good morning, David.

You've got 3% takeaway with Wal-Mart and you've got sales growth here of .3.

Does it imply the trade "D" stocking is about 3%?

It seems like a high number.

The question is are we shipping to consumption?

We go first FDMXC then add in Wal-Mart.

That accounts for about 70% of our total shipments.

If we take the shipments to that 70%, we're roughly in the -- in the 2-plus percent range.

So, think of shipments to the channels that are accounting for a 3% takeaway, so that's roughly in line.

So in that regard, shipments to take away match up pretty well.

The difference between the 3% takeaway for that 70% and then the basically up .4% shipments.

We said in December that vend is off primarily due to the economy.

We're holding share in vend.

Club stores are off.

We won't be as competitive as we were going forward.

And a reduction in inventory, once again, we had fast break shipping in the fourth quarter of '01 up against that in '02 and modest inventory reductions by the retail trade.

One week would equal 2%.

Okay.

And then did I hear Frank say there was 6% takeaway growth in your core brands?

Yes, that's about right.

Is that still about 60% of the portfolio?

Or is that, you know, materially higher number now?

That 6% is 60% of the takeaway.

It has to be of those measured channels and that's just FDMXC.

And going back to the takeaway, sales ex-the tea takeaway seem to decline a 1 to 2%, but you talked about higher trade promotion.

So, with downed sales and higher trade spending, is that symptomatic of an even more competitive environment.

Are you talking for the year or for the quarter?

I guess -- I thought sales were down 1 to 2% for the quarter, "X" the buy-in.

That's -- that's what Frank said.

Here's a way to think about it.

We have a couple of things that are more one-time in nature by virtue of the fourth quarter.

Think of the shipping pipeline fill on fast break in fourth quarter of '01 and the price increase -- the pull-in of the price increase of fourth quarter of '02, let's take those out so we're talking business to business.

Our U.S. sales grew 1 to 2%.

That's the best way to think about it.

It's the takeaway to sales.

The buy-in for the price increase hasn't shown up at retail and a year ago, the pipeline in fast break hadn't shown up in retail.

Go ahead, sorry.

I apologize, Rick, go ahead.

The way I look at it is one way to think about it.

We know we had 3% takeaway in measured channels.

If I exclude fast break last year and this year, wash that out, and take out the benefit from the price increase, U.S. sales grew 1 to 2%.

Okay.

But then what should I imply from the increase in trade spending?

A couple of things.

We continue to see that trade represents a good spend for us, given the impulse nature of the category.

The relatively high pass throughs that the trade passes onto consumers and good margins for both.

With it being a good spend, we spent appropriately in the fourth quarter to build on our momentum and gain market share.

We wanted to get our share growth in line before, you know, the price increase takes effect at retail.

We wanted to be in a good position from a share standpoint and seem to be making progress.

Thank you very much.

Thank you, David.

Your next question comes from Jaine Mehring with Salomon Smith Barney.

Yeah.

Can you -- I have a bit of a cheese hangover this morning, so, if you said it, I apologize.

Did you say what total marketing spending and total trade spending increases were for the full year?

We said total marketing spending, Jaine, when you take consumer advertising, consumer promotions and trade allowances were up 5% for the year.

Think of it as maybe about 60 basis points of gross sales.

60 -- it was -- trade spending was negative 60 to --

Yeah, trade spending went up about 60 or 70 --

But I want to make sure it's total marketing, including the increase in trade spending, up for the year.

Yes, uh-huh.

Okay.

And for '03, because your fourth quarter rate was higher than your full year rate.

Are you -- have you sort of decided to plow back even more going into '03 than we might have even thought in December?

You mean plow back more into which line item, Jaine?

Sorry, total marking and trade promotion?

No, there are a couple of ways to think about it.

Spending will be up in the first half as we continue to gain traction in the scaled brands.

The way to think about it is the end of '01 and throughout this year, we said the first half of '02 would primarily be devoted to capturing learnings about our brands, where we can get better response and this was customers, et cetera.

Second half, we said we'd begin to apply the learnings and leverage selling capabilities.

The important thing is we're starting to see benefit from that.

First half versus second half performance, three things to keep in mind.

Our total share turned positive.

Our share in "C" stores turned positive and the share of our focus brands, those brands that we wanted to clearly win with, it increased dramatically from where it had in the first half.

So, we're at least starting to see what we learned in the first half, we're beginning to apply in the second half and will keep it up through '03.

Okay.

So -- but you're not going to quantify, sort of for a full year, if all in this was up 5% in '02 --

Jaine, without getting quite that specific, we would expect, as we said back in December, that our total brand support will increase faster than sales next year and we'll do that through expanding margins and watching our GNA expenses and then taking some of that money and plowing it back into our brands.

Rick, I know you said earlier in your comments, or in response to a question it was too early to still really assess the full impact of the price increase on consumption?

Yes.

For the year.

But at least you are, you know, another six weeks into it, you've seen what the buy-in is.

I mean there's some -- you must have some incremental information versus what we were able to talk, you know, 24 hours after the announcement of the price increase.

Yeah, Jaine, in terms of what's really happened, the buy-in has been largely what we thought it would be.

Okay.

And what we haven't yet seen is what's going to happen to retail prices.

Right.

Later on in the quarter.

And that's the big wild card.

So, we know what type of promotion activity we have scheduled with our customers and I wouldn't reveal that.

And then there's a -- a bit of wait and see that's going to happen after some of those play through.

Again, our goal is we're going to protect the promotions that have been announced and be smart in terms of which brands are winning and what we need to do to continue to gain market share.

It is too early to say -- to expect this type of price increase to be at retail in this particular week.

And then just finally, coming back to the one basic number again, if you -- let's leave out the "noise" related to the price increase, but just your core volume growth, you know, sustainable for Hershey as you see it -- or let's not say sustainable, but for '03.

And you can either include SKU rationalization on there or not.

Well, what we had stated in --

Let's see if your thinking is --

Consistent with what we said last month, which is 2 to 3% top line sales growth, a little bit slower in the first half, based on the factors that we talked about faster in the second half.

That's consistent --

I'm sorry, not sales growth, but volume growth.

Obviously you have a price increase in there.

But, right, yes, no, I'm just trying to isolate the volume growth.

Jaine, volume growth should be pretty flat.

Most of that increase -- we're doing two things in terms of price realization.

The price increase will obviously take down the volume a little bit, but aside from that, we're trying to shift the mix to better performing items, higher gross margin items.

Right.

So, from a price realization point of view is where most of the volume will come from.

I will follow-up offline.

I'm trying to understand excluding the issue of the negative volume impact of the price increase, just sort of excluding that, what your volume inflection would be in '03.

I will follow-up with you offline.

Okay.

Your next question --

Jaine?

I'll keep going.

No, I'm done.

I thought you said you'll follow-up offline.

Thank you, Jaine.

Your next question comes from Christine McCracken with Midwest Research.

Good morning.

Christine, good morning, how are you.

Good morning, Christine.

I'm fine!

Did I hear you correctly that convenient store trends are actually pretty soft?

No, not at all.

So, you are seeing actually a pickup there, because a lot of the data that we're seeing out of the trade press, et cetera, is -- has been suggesting that -- that things are actually getting a little weaker there.

I will tell you what our takeaway is in convenient stores, it's up 9% for the latest 12 weeks and up fractionly higher than 9% on a year to date basis.

Is it fair to say you might be taking share?

We're definitely gaining share.

Share turned positive in the second half of the year, but most important, that's very good takeaway for the channel.

All right.

And second: You had mentioned, I think, Rick that, you're starting to gain some traction on a number of the promotions that you've been running on your core brands.

Can you give us an idea, given the fact that we're seeing 3 and 4 candy bars for a dollar, if, in fact, that's a -- a practice that you're going to continue?

Is this something that's working for you?

And in fact we should see it going forward.

Christine, we're starting to see traction across our marking investment on the areas where we focused upon, which were scale brands, instant consumables, think of it primarily loose bars, and the chocolate segment and convenient stores.

So, within all of that, it hasn't been heavy discounting that it's has given us the advantage.

It's been quite the contrary.

The close end line, limited additions Kisses, the limited edition Kit Katz, those have been successful with the Kiss brand up 11% for the year.

And also with new advertising behind the Hershey brand and Reese's brand as well as the full year Fast Break.

That's where we've seen the growth, much more so than simply responding to the competitive initiatives of 3, 4 and 5 for a dollar.

Where we've needed to be competitive, we have been and been successful.

We gained share in the chocolate segment and our takeaway is up.

But that's just one piece of the strategy in terms of building our brands.

You had mentioned in a number of these special additions, you are contributing heavily.

Can you give us an idea of how much you expect those to contribute in 2003?

We have some additional varieties of limited addition Kisses for next year but the -- probably the most exciting news is we have several under the Reese's franchise.

You think about Reese's being the largest brand, close to $1 billion in retail including licensing.

We have several limited items for them, Kit-Kat Bites, the sugar-free launch, too.

So, we have quite a few limited editions as well as new items behind our big brands.

Can you give us an idea of what new products are going to contribute this year?

No, I'd prefer not to do that.

All right.

Thanks.

Thank you.

Your next question comes from Terry Bivens with Bear Stearns.

Hey, good morning, everyone.

Good morning, Terry.

Just a couple of quick ones.

From a legal standpoint, when can you go back into the market and resume the share repurchase?

Well, we'll have to wait until after this earnings release, of course, and generally, Terry, our view, takes about two days, for all of the information to be widely disseminated that might have an influence on our price.

I would expect we will lift our blackout in the next several days, let's say.

Okay.

In terms of -- I know there have been questions on volume, but it seems to me like we do have a number of moving parts here in the first half.

Frank, I understood you to say that a very modest portion of the buy-in was actually shipped in Q4 and will be shipped, presumably in the first quarter.

Is that correct?

That's correct.

We said it's a small portion of the total that was shipped in the fourth quarter.

Okay.

And presumably we have the launch of the sugar-free in Q1.

We've got a little bit of timing thing with Easter.

Am I too assume, then, the way to look at volumes, I think it's useful just to group the first two quarters together given Easter.

Is it useful to think of the first half as being basically a flat volume kind of proposition?

Is that what you're looking at?

As Rick said a few moments ago, Terry, we're -- looking at a 2 to 3% sort of full-year, we would expect the first half to be a little below that.

So, if the first half gets any of the price increase, then volumes themselves are likely to be flattish.

Okay.

If that was what your question was.

I think so.

I think I have a handle on that.

And in terms of, you know, you've given us earnings guidance for the year.

How do you feel about first quarter?

I guess the last time I checked, consensus was 73 cents.

Is that a number that strikes you as a reasonable way to look at the quarter?

You know, our goal, Terry, is essentially to try to stay within that guideline of 9 to 11% and to do it very consistently and hopefully for the year to be the at the upper end of that range.

Okay.

So, with regard to the first quarter, then --

No specific number on the first quarter.

But within the range.

Okay.

Okay.

And lastly, what was DNA in the quarter?

For the full year, Terry, DNA ended up being $178 million --

178.

You know, roughly, divide that by four and you got it. $45 million.

Okay.

Okay.

That's it from me.

Thank you.

All right, Terry, thank you.

Thanks, Terry.

Your next question comes from Eric Katzman with Deutsche Bank.

Hello.

Good morning, Eric.

Hi, Eric.

Most of my questions have already been asked, but I guess one, Rick, if everything kind of falls into place for '03, can you tell me what percentage of your business you think will be loose versus bagged?

And what was it at the end of '02?

I don't have the specific numbers because we're not talking about the total shift in mix, but a couple of things, Eric, to think about.

We saw a pretty decent-sized swing.

I don't want to get into the specific numbers, obviously for competitive reasons, on a year to date basis from IRI between seasonal and everyday.

Think of everyday as the loose bars and consumables and also between loose bars and takeaway, which are primarily the packaged candy.

So, we're seeing a good snift mix, but don't want to cite the specific numbers.

Okay.

And one quick thing point out, that's on a takeaway basis, that's absolutely not impacted by the price increase.

I see.

And then, obviously, we all read the reports about problems unfortunately in the Ivory Coast.

And your competitors, you know, raised prices because they're being squeezed because they're not hedged enough or hedged at all.

I guess to what extent with your knowledge of what's going on there, you know, to what extent do you still see cocoa margin pressures on your competition and how do you think that may affect pricing in bag products as the year progresses?

If we continue to have problems.

Your -- you're quite right about -- there still continues to be civil unrest in the Ivory Coast.

The cocoa market has responded and stayed up.

I will reiterate that our own cover, and I think you know, is we've stated previously we're real covered through '03, I really don't care to comment on where we think our competitors are priced or what that might force them to do in the market.

I think for obvious reasons.

So, I would rather stick with who well we are covered and the impact on our own statements rather than talking about our competitors.

Okay.

And then, last, Rick, obviously Kraft, you know, you saw the announcement, one of the areas they blamed being a problem where they have to reinvest more spending was in their confection business in the U.S. which is primarily a sugar confection business.

Right.

You mentioned that your sugar confection business was not as strong as you'd like.

Can you talk about the competitive dynamics on that side of the business?

And what that means for the category and for your strategy?

Yeah, in our nonchocolate confectionery business, we're number one in nonchocolate.

We've seen good takeaways in convenient stores.

Our issue is in selected food, drug and mass x customers we need to work on.

One of the key areas of emphasis for us this coming year is a couple of brands, which I prefer not to go into specifically, as to which they are nonchocolate, but in terms of it being a trade promotion aspect, that's not it.

We have new products coming out, certainly with the gum business and Jolly Rancher.

That's going to help us.

That's as far as I want to go with that.

Okay.

Last question, to follow up on, you know, everybody's kind of got questions about the impact of the price increase on consumption.

When do you think, obviously first quarter; it like an April/May timeframe?

May/June, that you think we will have a better sense of how consumption is affected?

I think that's a good way to think about it, later on in early to mid-spring, but the reason why it's too early is that the customers are playing it very close to the best in terms of when they're going to move or not move their retail prices.

Right.

That's why it's more difficult for us to have visibility into that.

Okay.

Thank you much.

Thank you.

Your next question comes from Andrew Lazar with Lehman Brothers.

Good morning.

Good morning, Andrew.

You've talked even back in December about how you've got some, you know, higher return type of opportunities around trade spending, perhaps relative to a lot your peers and mentioned some of that played through on a bit of a drag on the top line in the fourth quarter.

When you talk about your sales growth goals, specifically for '03, it's obviously I'm assuming building in or inclusive of some of the additional trade spending opportunities that you have.

First of all, is that a correct assumption?

It's correct but it's not a dramatic ramp-up in trade spending for '02 -- I'm sorry, for '03.

For '03.

But it's also recognition that we obviously have the higher list price and we're going to spend where we need to spend to continue to support our brands and build share.

Right.

So, then, just so I'm clear, in the fourth quarter then, there was additional spending beyond just the strategic part around trade spending that was a drag on the top line.

And what was that specifically for again?

I'm -- I'm not -- we said there was an additional spending.

I think think Frank hit the numbers on the fourth quarter.

Was some of the trade spending that was a drag on the top line in the fourth quarter above and beyond this, you know, sort of strategic change towards, you know, more trade spending?

No it was in line with what we've been doing, mostly through the year.

It was -- I think it was up slightly.

Okay.

And then last thing, you talked also in December about how you're going to focus a lot more on, you know, even aside from more profitable channels and brands, more profitable customers.

And those customers that are going to be, you know, more focused on growing your business in better ways are going to get a bigger piece of the pie that you're distributing in terms of marketing spending.

Correct.

Is there a way you can give us a sense of how much of that's been communicated to your trade partners as of this point?

And, you know, what some of the reaction has been.

Clearly that means some folks are going to, you know, getting a bigger piece of it and some less.

That's a much less democratic way to approach it.

The way to think about it strategically is just as we have our brand portfolio.

We understand which brands are more responsive than others.

Which have higher profitability.

We're doing the same type of portfolio matrix on our customers.

So, from that standpoint, we say where do we want to invest our funds, but the majority -- or all of the differential payment is for differential performance in terms of paying for growth.

So, it's really associated with the growth prospects and so each customer does know what it's growth target is or what we'd like to achieve with them next year and has the appropriate funding to deliver that.

Thank you.

I don't know if that answers your question or not.

It does, I appreciate it.

Your next question comes from Art Cecil with T Roe Price.

Art?

Hello?

Still there, Art?

Matt, perhaps we should go on to the next question.

Okay, one moment.

Again, if you would like to ask a question, press star, then the number 1 on your telephone keypad.

Your next question comes from Leonard Teitelbaum with Merrill Lynch.

Matt, it appears we're having a technical problem here.

I have a feeling that there must be an issue on your end.

Matt?

Hold one moment, sir.

Leonard, your line is open.

Thank you, good morning.

Good morning, Len.

Good morning!

The seasonal or lower seasonal goods that you mentioned, is that also because the retailer has said they don't want to make more space for it?

Or is that 100% your decision?

It's a little bit of both.

We've seen broadly that retailers are being a lot smarter about what type of inventory positions they're taking and that can have an impact on the seasons, as well, but it's also a reflection of what we've said many times before, Leonard, that we're not going to chase unprofitable seasonal sales.

We want to maintain our share, but won't chase sales that won't be profitable for us.

It seems to be playing into your hand better than the competitors' hands.

So, I'd like to -- can you give us guidance on what your interest expense is going to be in '03, Frank?

Well, it obviously should go up, Leonard, but that depends on some extent on how fast we're able to achieve our share repurchase.

So, I -- for the time being, let's say it should go up 5 to $7 million --

For the year, but -- through the year, then?

Probably more in the second half than in the first half given that we're starting the year with almost $300 million worth of cash.

Okay.

Clearly Kraft has issues with their pension and how they're going to use stock-based compensation.

Is stock-based compensation under discussion at Hershey now and could you just remind us again, I think we've talked about this in the past, about whether or not we're going to have any major adjustments to funding of the pension plan?

I thought you were going to make a voluntary contribution, but don't know what the impact of that will be on the tax rate or the plan itself.

Can you bring us up to date there?

Yeah, Leonard, let me talk about the pension plan funding and Rick will address your other question.

Relative to pension plans, we announced in mid-December we were making an additional contribution of $150 million and then like many others, we took down our assets return assumption down to 8.5% and then our liability, the discount rate on our liability assumption down to 6.25.

When you take those factors, where the market has been and where it is, along with that contribution, our pension costs in 2003 are not going to be very dissimilar from 2002.

For all practical purposes, I would assume that there's no difference, maybe a slight decrease in '03 versus '02, but not very meaningful.

Does that get it for you?

It does.

And there's no tax implication on the contribution, correct?

Well, we -- we contributed up to just about the level that we could.

We contributed $150 million, we could have gone up a few more million than that, but not very much.

Thank you.

Len, regarding -- the first part of your question, Frank answered the second part, was any discussions around I think executive compensation or compensation plans; that correct?

Yes, what are you going to use stock-based compensation as bonuses?

Well, we have an option plan in place, obviously, and any changes to future compensation plans is clearly up to the -- the board of directors, but I can't envision a dramatic change from prior practices going forward.

Thank you.

Your next question comes from Art Cecil with T Roe Price.

Hello?

Hi, Art.

We got you this time.

I thought maybe Lenny had blocked me out to shove ahead of me in line there!

That would be the other Lenny, right?

Yeah!

Actually, the other Lenny there, I guess you got out of Nabisco just in time, huh?

I was curious if I could go with the cocoa situation again, I guess, and just wondering what is it that allows you to avoid the kinds of problems that -- that Nabisco seems to be having with respect to recognizing cocoa costs?

Yeah, I -- I -- once again, I'm not going to comment on what our competitors are doing.

First, I don't know what they're doing and second, I wouldn't in any case.

Our own practices through the year are basically to look at the cocoa market like all other commodities in the market and not be afraid to step up to the plate when we see good fundamental value in the market. 18 months ago we were, you might recall, we were at 27-year lows in that market and obviously we were not shy about getting ourselves forward price covered.

Uh-huh.

When prices are that low.

And that obviously has helped us a lot.

But I'm not sure I can comment on -- on how others did their own cocoa buying or what impact it's having on them.

All right.

Aside from the buying strategy or the covering strategy, if you will, I was wondering if there were differences in terms of geography and type of product or type of cocoa that would -- would explain some of this or -- or might it simply be you're covered and they're not?

You know, from a geography point of view, West Africa still produces about 70% of the cocoa crop.

So, everyone to some extent or other is using either beans directly from West Africa.

Uh-huh.

Or some of the products that come from beans, cocoa butter and cocoa powder.

Right.

So, I don't think, frankly, that that has much to do with it.

I think it's one's length of cover and when they put it on and at what price levels.

Okay.

What happens when your covers for '03 expire?

Does it mean you to go into the higher-priced market suddenly?

Or is it not that dramatic.

Well, the way I would answer that, Art, is everyone's costs are going up, obviously for cocoa, because prices have doubled and almost tripled from -- from those lows.

What I can tell you is we didn't necessarily stop our price cover forward at December 31 of 2003.

Right.

Having said that.

I'd also want to acknowledge that our cocoa costs will go up in 2004.

We just don't expect them to go up as dramatically as you've seen the market go up.

Uh-huh.

And then, you know, you have to balance that with all the other commodities we buy, where we've said, even in December, we have good forward price cover for sugar, almonds, our energy needs.

We will have to manage through those costs, but our cost increase -- they will be there, but not as dramatic as you're looking at the market today and seeing the run-up that has occurred.

Capital spending for '02 and '03, did you give that -- those numbers?

Yeah, capital spending for '02 came in a little under $145 million in total.

So, it's a little less than our long-term guidance has been between $150 and $160 million.

Yeah.

For '03, we expect that to bounce up a little bit.

We had some delay in some projects, obviously, during all of the challenges that we had last year.

So, the guidance I would give right now for next year is closer to $170 to $180 million.

I shouldn't say next year, for '03.

170 to 180.

Right.

Okay, now you have three -- as far as this $150 million pension contribution, was that done after December 31?

No, it was done even before the meeting that we held here on December 13.

Okay, so the $300 million in cash and equivalents at year-end is unfeathered.

That's right.

That's after having paid, you know, contributed to the pension plan and -- and paid our dividends and so on.

Okay, and free cash flow this year, '02, was probably $250 -- over--well over $250 million or something it looks like and I guess it would go up again next year.

So, you're looking at it being able to easily accommodate the share repurchases this calendar year.

And I -- I assume that that would be the dedicated purpose of all of this money.

Is that fair?

That's probably fair.

As we mentioned in December, Art, we expected to finance it all out of our own free cash flows and potentially use the commercial paper market depending on the time of year we do it and what our seasonal buildup of inventories is like.

But for all practical purposes, I think the cash we have on hand and the cash we're likely to generate in '03 will, for the most part, take care of the share repurchase.

Stay out of Latin America and good luck.

Thank you, Art.

Your next question comes from David Adelman with Morgan Stanley.

Good morning, everyone.

Good morning, David.

Just a quick question, with the higher costs for cocoa in the marketplace, do you -- do you sense that's being reflected in any change of competitive behavior absent the price increase?

In other words, are you seeing your competitors at all back down?

Through the end of the fourth quarter and early first quarter as we've said, we have protected the promotions we have place and we have reason to believe that a majority of competitors have done likewise.

And last question, Rick, what's the situation in Canada that you're eluding to?

What's changed there?

The competitive, the marketplace?

Both of those.

It is a very competitive marketplace and quite frankly we haven't had as effective of marketing and selling programs and execution that we need to and we're focused on that this year.

Okay, thank you.

Thank you.

Your next question comes from John McMillan with Prudential Securities.

Hello again.

Hi, John!

What was advertising -- what was the advertising change in 2002?

I know it's gone up in '03, but what was it in '02?

John, in '02, you have to remember in '01 we really stepped up our advertising and total direct brand expenses, even without trade promotions.

So in '02, the way I would characterize it, that came down somewhat.

The direct advertising expenditures.

But, what -- what Rick has talked about a number of times in the past is that we were not near as democratic about it in '02.

We focused it on -- on more like 10 to 12 brands rather than on 20 brands.

So, the -- the number of GRPs that we would have gotten for, you know, real focused brands, would actually have gone up.

But it came down about what?

I'm sorry?

It came down about what percent?

I don't have that right off the top of my head, John, but we tend to look at it -- that's why I'm talking about it in GRP terms.

When you look at our entire cost for DBEs, they were about flat as a percent of sales for the entire year.

Some of that shift occurred between consumer advertising and consumer promotions.

So, as a percent of sales, we really don't go down in our consumer -- in spending against the consumer.

There was a little bit of a shift between advertising and consumer promotions.

And as I said, the -- the advertising was principally geared toward the scale focus brands that we wanted to support the most.

The other thing I should add is that in the fourth quarter and I mentioned this in December, is that we did eliminate -- not -- from a buying point of view, we ended up with one agency of record for our buying and that's given us a lot of leverage to reduce the cost for buying each gross rating point.

So, you have to look at a combination of those things to see how much we really spent against the consumer or how many impressions we delivered against the consumer.

Just, you know, you've got ingredient labeling on the back of your packaging and some of this obesity issues that you read week after week after week, they seem to go after the wrong guy.

But just in terms of any changes that's going on in Hershey because of this -- any PR changes?

Any marketing changes?

Any hindrance you think it will be on your ability to grow or improve product mix?

John, obviously the discussion around obesity is become a front and center for a lot of companies within the industry.

And we're working with GMA and other associations to be sure, you know, that the appropriate and balanced message gets out in terms of what's -- what's eaten and what's in moderation and then the appropriate exercise and things of that nature, but specifically what we can control, we're looking across our portfolio and seeing where it makes sense to lean into some items that might reflect a broader -- a broader consumer framework than before.

That's one of the reasons we're introducing sugar-free, obviously our gum and mint line is primarily sugar-free, as well.

And it's one of the reasons we're looking to snack market adjacentcies.

We're looking across multiple benefits within the snack market.

Obesity is an issue that everybody is going to have to confront.

It's one we're watching very, very closely, as well.

Okay, thanks.

Thank you, John.

Your next question comes from Doug Christopher.

Okay, Doug has with drew his question.

Again, if you have a question, press star, then the number one on your telephone keypad.

Okay, your next question is from Bucky Rollingmeyer.

Hi.

Hi, Bucky.

How you doing?

Just fine, thank you.

Everyone has danced around the advertising and promotion and I don't recall anybody asking directly what -- what the actual spend was.

As a percent of sales and in dollars.

So, I'll -- I'll throw it at you.

Bucky, I thought I did answer that.

The way we try to look at our direct brand expenditures, our support of our brands, particularly against consumers is a combination of advertising, consumer promotions and then a number of other activities associated with it.

What I said we did in '02 was basically shift some of the money from consumer advertising to consumer promotions but as a percent of sales, we stayed flat completely between '02 versus '01 and then '01 we had gone up considerably from the year before.

So, I think we've addressed that.

Okay.

Can -- can I ask you to be specific in dollar amounts and percent?

No, I'd rather not get into every line item like that.

I think it's important take a step back and -- and think about where we've -- how we've approached this strategically.

We said that a better part of a year ago we're going to do modeling work to see what the response functions were for advertising, consumer promotion and trade promotion for our brands.

We've done that and where it's been appropriate, we've reallocated spending appropriately.

Some brands have gotten more.

What we're going to be doing and it's obvious by the marketplace, is where we can bring news.

And excitement to the category.

Whether it be limited editions, the 99-cent To-Go line on bites, obviously upcoming with sugar-free we will spend more aggressively behind new product news and exciting packaging.

That's where the emphasize will be placed.

It's less about did advertising increase 10% or increase 10%, it's are we applying it against the strategic principals of where we've brought product, packaging or consumer news to the category.

Okay.

Thanks very much.

Thank you.

At this time, there are no further questions.

Do you have any closing remarks?

Hearing no more questions, we will conclude today's session.

We will now be available to answer any additional questions you may have.

As a reminder, our first quarter sales and earnings release for 2003 and conference call is scheduled for April 17, 2003.

Thank you for your interest and good day.

Thank you for participating in today's conference.

You may now disconnect.