好時 (HSY) 2003 Q1 法說會逐字稿

Good morning.

My name is Constance and I will be your conference facilitator today.

At this time I welcome everyone to the Hershey Foods Corporation quarterly 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 this time, simply press star, then the number 1 on your telephone keypad.

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

Thank you.

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

Thank you, Constance.

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.

Rick will make opening comments, Frank will discuss the business results for the first quarter of 2003, and then we'll be happy to take your questions.

We welcome those of you listening via the webcast.

Let me remind everyone 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 form 10K for 2002 filed with the FCC.

In the event you have not seen the press release, a copy is posted on our corporate website, www.Hersheys.com.

In the investor relations section.

Included with the press release are the consolidated balance sheets, summary of consolidated statements of income prepared in accordance with GAP and our pro forma summary of consolidated statements of income.

With that, let me turn the microphone over to Rick Lenny.

Thanks, Jim.

Good morning.

Hershey Foods turned in solid performance for the first quarter.

Diluted earnings per share of 73 cents increased by 9% versus a year ago within our on-going range.

In the 73 cents is a provision of 2 cents per share with the Flemming bankruptcy situation.

Regarding sales performance, the base business was equal to last year.

The difference between this and the as-reported 3.6% decline is due to two factors: One, as previously communicated, the December price increase shifted about 2% from the first quarter of 2003 to the fourth quarter of last year as a result of the buy-in at the lower price.

The second factor is the continued rationalization of non-strategic brands and less profitable SKU's, accounting for close to 2%.

We continue to make progress in those areas where we're focusing our resources and are competitively advantaged.

Instant consumables has been a major source of positive sales growth for Hershey.

Brands benefiting from either new items or advertising experienced solid sales growth, such as Hershey's Milk and Almond brands, Kit-Kat, Bites, which include the 99-cent To Go line and Ice Breakers gum.

For the quarter, we achieved fresh realization, partial layoff-set by higher trade expense to protect previously agreed upon consumer merchandise customer merchandising activity.

This higher spending was effective in terms of performance at retail as we continue to strengthen our leadership position.

For all reportable channels, FDMXC, Hershey increased the market share by 0.4 to 28.7%.

The share gain was broad-based.

Share growth was achieved in the chocolate, non-chocolate, and mint segments.

Gum experienced a slight share loss, mostly concentrated in the non-strategic brands.

Our focus brands, which account for about 60% of measured take away, gained 0.4 share points.

Instant consumables had a 4% increase in take away, increasing share by 0.4 points.

Our momentum within the convenience store channel continues to build.

Take away increased by 7%, resulting in a 1-point gain in market share.

Both gum and mints outperformed the category in terms of take away.

Gum, up 4%, mints up 20%.

Instant consumables in convenience stores experienced a 7% increase in take away.

Recognizing the shift in Easter timing, it's important to break out seasonal, versus non-seasonal.

For the quarter, Hershey's non-seasonal take away overall increased by 6%, and the seasonal decline should reverse itself in the second quarter.

Our new items continue to do well.

Fastbreak was number 2 in the category in terms of velocity during the quarter.

In fact, Hershey had three of the top 6 largest and fastest turning items, Fast Break, Coolers, and To Go.

In terms of total marketing spending for the quarter, advertising, consumer promotion and trade as a percentage of sales increased by 70 basis points due to the aforementioned higher trade spending.

Total consumer spending declined by about 1% of sales, primarily in advertising, and there were two factors here.

First, a year ago we had the Fastbreak introduction with the higher media weight and secondly, with the earlier Easter in 2002, it resulted in earlier seasonal advertising support last year.

However, where we are spending behind new advertising, for example, the Hershey brand and Kit-Kat were gaining both sales and market share both.

On the margin front, our on-going productivity initiatives are yielding solid gains.

Gross margins increased by 50 basis points and GNA expense was down versus a year ago.

All in all, a solid quarter, despite a sluggish retail environment.

Looking ahead we have many key initiatives for the balance of 2003.

I'll highlight a few.

First, in the area of [INAUDIBLE] new item launches, at the end of March we began shifting to Hershey sugar free.

We're introducing Minnies to go on the other brand, the first consumable packaging item for Kiss.

Reese's has five Limited Editions, two in the second quarter and three in the third quarter.

Building on the momentum within the Bites line, we're introducing Kit-Kat white and dark chocolate Bites as well as Mr. Goodbar Bites.

Late in the fourth quarter, we're introducing Reese's mini pieces and Jolly Rancher Minnies hard candy, both in to go plastic tubes.

We're also introducing a line of thin slices of chocolate in four flavors in resealable, portable canisters.

We have new advertising in addition to the Kit-Kat and Hershey brands which is starting run on Jolly Rancher, Icebreakers and Reeses.

In consumer promotions, we have strong events over the balance of the year that will bundle our brands to lever Hershey's scale.

Coming up in the summer is the great American summer event.

This capitalizes on the 2002 successful event we had with the red, silver, and blue Kisses.

Earlier in the summer, we have tie-in with the movie "The Hulk" including bonus bags as well as Hulk-inspired items, such as Jolly Ranchers Gummies, TWIZZLES and syrup , and yes it does taste like chocolate.

We're building with NICOLODEAN for the school event.

For the holidays, Kisses and Kit-Kats are primarily tying in with "The Cat in the Hat" movie.

Turning to the overall product line, we're initiating the next phase of rationalizing non-strategic brands and unprofitable SKU's.

Our expectation is over the next two years we'll rationalize items that in 2002 accounted for about $150 million in sales.

This rationalization will be split equally between 2003 and 2004.

Sales growth for the full year 2003 will be eithin the 2 percent to 3% range on a comparable basis.

I'll turn it now to Frank who will review the financials in greater detail.

Thank you.

Good morning, everyone.

By now we assume all of you had a chance to read our press release issued earlier this morning.

As you know, the reported results for the first quarter of 2002 included a pre-taxed charge for our business realignment initiative, totally $9 million for 4 cents per share diluted.

Therefore, the elimination of this item from our 2002 first quarter results would yield net income of $92.7 million or earnings per share diluted of 67 cents.

On this more comparable basis, 2003 earnings per share diluted increased by 9%, as indicated in the pro forma statement, which accompanied our press release.

Since this area describes our on-going business, my remaining remarks would be made in this context.

As Rick mentioned for the first quarter of 2003 consolidated net sales were essentially flat on a comparable basis as a result of the buy-in associated with the price increase announced in December, 2002 and continued rationalization of the company's product line.

So, let me move onto gross margin.

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

In fact, by 50 basis points coming in at 37.4% versus 36.9% in 2002 on a comparable basis.

The improvement in gross margin in the first quarter was very balanced.

Contributing were better price realization and mix.

Overall supplied chain efficiencies and somewhat lower raw material costs.

Off-set to some extent by higher trade promotion expense.

Selling, marketing, and administrative expenses were 80 basis points lower in the quarter, coming in at 19.7% of net sales versus 20.5% last year.

As Rick mentioned, direct marketing expenses declined in the quarter, partially because of the late Easter.

We were also lacking the introductry advertising of Fast break and our spend was more efficient.

Absent the increase bad debt reserve for Flemming, administrative costs were lower as a result of realignment savings and good cost discipline.

For perspective, I add that the total brand support in the quarter -- including trade promotion spending -- increased 3% or 70 basis points as a percent of sales.

This increase spending was facilitated by the net price realization that we created.

As Rick said earlier, we are operating in a highly-competitive environment and we also protected certain customer events which were put in place prior to our price increase announcements.

Earnings before interest and taxes of $168.7 million increased by 4.2% compared with the first quarter of 2002 and the EBIT margin was 17.7%, versus 16.4% last year.

A 130-basis point improvement.

Excluding the Flemming exposure, EBIT growth was 7.3% and the EBIT margin expanded 180 basis points.

Interest expense for the quarter for the first quarter of 2003 was $14.6 million compared with $15.5 million last year.

Primarily reflecting the strong overall cash flow in our business.

The effective income tax rate for the first quarter of 2003 was 36.7%, equal to that of the first quarter of 2002.

Net income of $97.6 million was 5.2% higher than the first quarter of 2002 and our net margin was 10.2% versus 9.4% last year.

Weighted shares outstanding on a diluted basis for the first quarter of 2003 were 134.2 million shares, versus 138.2 million for the first quarter of 2002.

That leads to an EPS of 73 cents per share diluted, compared with 67 cents per share diluted for the first quarter of 2002.

An increase of 9%.

During the first quarter we re-purchased 2.9 million shares, or approximately $187 million.

This leaves $313 million in our current authorization, which we still expect to complete in 2003 or early 2004.

As I'm sure you've noted, our balance sheet remains quite strong.

Our total debt to total capitalization ratios continues to hold at the lower end of the 40% to 50% target range.

We're continuing to manage our working capital well and cash flows remain strong.

In fact, the 2.9 million shares re-purchased during the first quarter were all funded from internally generated cash.

We also anticipate funding the balance of the $500 million authorization principly through our own free cash flow.

As a reminder, we generate over $600 million in cash from operations each year and historically, roughly half has been used to fund capital additions and dividends.

The remaining cash is discretionary, to be utilized for share re-purchases, acquisitions and other business development opportunities.

Now, let me conclude with a few additional items of information frequently asked by many of you.

Capital additions in the first quarter were $40 million, and this does include capitalized software.

For the year we expect to be in the $185 to $190 million range.

Dividends paid in the first quarter were $42 1/2 million.

Depreciation and amortization in the quarter totaled $38.8 million and we anticipate DNA of $185 million for the full year.

Economic return on invested capital in the first quarter was 16.7% versus 16.6% for the first quarter of 2002.

For the full year we continue to expect an improvement of 50 to 70 basis points over last year's 16.9%.

Finally, interest expense for the full year is expected to be approximately $65 million or about $4 million higher than last year.

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

Constance, the first question, please.

At this time I would like to remind everyone, to ask your questiuon, please press the star followed by the number 1 on your telephone keypad.

Your first question comes from David Nelson of CSFB.

Good morning!

Good morning, David.

When you're talking about your sales, you suggest we exclude the 2% from the brand rationalization and think about normalized sales growth here.

When does the brand rationalization wind down?

David, we've had a couple of programs -- as you know we went into our new strategic direction, saying that we had not improved our margins very much for a long period of time.

That basically came from two sources.

One of those was our item pro liveration.

The other source was really chasing sometimes unprofitable sales during the seasonal periods, they're growing those more and more.

So, we went into a SKU rationalization program, the first part of which reduced rescue's from did -- about 2300 to between 1800 and 1900.

We're in the process now as Rick mentioned, of rationalizing more of those and getting down, over the course of this year into early next year, of getting down another maybe 20 percent of our SKU count, give or take.

We expect by the end of the process -- that is essentially getting the business fit to compete.

This will be the last one the way we see it.

There will be normal in's and out's, new product developments and additional items, but in effect we're saying we're gonna go down ruffle another 20 percent of our SKU count to maybe the 1300 to 1500 level.

We'll see as we go along.

The other part of that that we expect to complete within the context of the next year is also looking at our portfolio, which we are doing and deciding what parts of that portfolio brands deserve to stay in the line or not.

Over the course of this next year, we expect to complete all that rationalization.

Okay.

Also, following up on -- I guess more of the taxes issue.

Over the last two years your cash taxes paid has declined from $299 to $57 million with also a increase in deferred income taxes.

What are the prospects of having to unwind and actually pay out those taxes?

Well, I think over time, David, those taxes will have to be paid out, but what gave rise to those essentially is the contributions, the pension.

So while you know, we reported last year, particularly for our domestic plans having contributed about $280 million to pension plans, it obviously didn't take $280 million of cash, it would have taken closer to $170 million in cash.

The balance of that, of course, would be in the deferred tax account and over time that will have to be unwound.

Great, thank you very much.

Our next question comes from John McMillin of Prudential.

Good morning, everybody.

Can you hear me?

Yes, good morning, John.

You know, Rick, just when you say a solid performance -- and again, I'm gonna focus on the top line --

sure.

This compares to you know, a flat quarter last year, even if you add back the $17 million that you shipped last quarter.

You know, I guess it is a tough retail environment, but you know, things like Granola bars are growing fast.

When you define solid -- I mean, it's hard for me to look at that top line and say it was solid in the quarter.

John, my characterization for the quarter for solid performance takes into account several things.

Obviously the 9% EPS growth, which included the provision for Flemming of an additional 2 cents.

That's one.

Two, I'm also looking at our performance in the marketplace because we look at FDMXC, which is a greater visibility than I think is typically released to the investment community, and I'm saying .4 share points overall and where we're investing.

That seems to be the continued focus that we feel is heading in the right direction, the areas where we're investing in brands or particular higher margin channels.

We're seeing good growth.

So that's -- obviously the 50 basis point improve naent gross margins.

I add all those together and if we're winning in the marketplace, as indicated by market share gains and good takeaway, we're investing and are kpet dwriv -- competitively advantaged on top of EPS growth, it's solid performance for the quarter.

And you're right, it's very tough out there for us and retailers as well.

Have you studied the granola bar and healthy snack category and try to figure out what percent comes from your hide?

One of the things we talked about in December when we had the session with you all is where the opportunities are that we see in the categories because of the blurring across multiple snack segments.

So the short answer is yes, we studied the category you referenced, as well as others and we have plans in place to -- what's a good opportunity for us to leverage our competencies into the other segments.

I'd rather not go any further than that.

Okay, have a good holiday.

Thanks.

Your next question comes from Christine McCracken of Midwest Research.

Good morning.

Good morning, Christine.

Wondering if -- you've made a lot of progress in the convenient store channel this year.

I'm wondering, you had talked previously about some other underpenetrated markets that you were gonna target.

Can you give us an idea of when we would expect those initiatives, maybe club stores or other channels that might be in the area?

There's a area growing rapidly and one that we're doing well with, and it's an interesting one.

That's the whole area of dollar stores.

Dollar stores is a classic trade that's growing rapidly and it's certainly gaining a lot of attention from traditional grocery stores, but it's also an unmeasured channel from our standpoint and we're doing well in dollar stores.

The one that you mentioned and two I'll comment on, which we've said before, where we need to improve is in club stores and vein, but those are two channels.

The vein channel is suffering from the soft economy and we're holding the our shares in vend.

We're doing well in one of the clubs, we're not doing as well in the other club and I won't obviously identify which is which, but we have improvement plans in place and certainly anticipate a rebound in club by the back half of 2003.

And then, if you could just give us an update of where you are on Easter sales, getting pretty close now.

You should have a pretty good read.

Yeah, Easter in terms of shipments have been largely in line with our expectations, about total Easter maybe about equivalent with a year ago, maybe off 1% or 2% from a shipment standpoint to the point we're just starting to see the early retail takeaway and indications we're receiving, both from IRI as well as our sales force is that early takeaway on Easter seems to be favorable.

One follow-up.

I had heard some rumors that the K-Mart, given their exit from certain markets has been aggressive in promoting Easter candy.

Can you comment on if that's disrupted sales at all?

Have you seen any impact?

No impact or disruption along those lines that I've seen.

Thank you.

Your next question comes from Terry Bivens of Bear Stearns.

Good morning, everyone.

Good morning, Terry.

Just a couple of questions on some other moving parts until the top line.

Do you think there was any impact, any volume hid in Q1 from the chocolate bar price increase, Rick?

Too soon to tell.

What we did see was measured by IRI and that's the best indication that we have.

About a 2% increase in total candy, gum, and mint pricing versus a year ago, and it's too early to figure out if that all tied to standard bars or not.

Don't forget there was less packaged candy sold in the first quarter this year versus a year ago because of the seasonal shift in Easter.

So, what we're looking at is we're still seeing the price points that we had protected in the customer merchandising activities that we had committed to still holding true through at least the April period.

So too early to tell in terms of any major pricing impact at retail.

And you know, in terms of Easter, do you think that Easter may have taken some of your sales out of the first quarter and -- as you can see here, what I'm trying to do is kinda' get a read on how some of the moving parts might come into play in the second quarter, which I know is small, but can you help us with that a bit?

Virtually all of our Easter shipments took place in the first quarter.

If you think about where Easter is falling in April, it's be very difficult to ship Easter volume in the first week of April and hope to get it merchandised and on shelves in time for takeaway.

I think for the Easter holiday -- I think that's what also leads to chasing unprofitable sales because the later one ships Easter merchandise, the greater likelihood of it being marked down or sitting on the shelf the day after Easter, and as I said before to Christine, the fact that our Easter shipments are maybe down about 2% versus a year ago, that's much in line with our strategy.

Our strategy of being smarter of how to ship for consumption for the holidays and certainly not chasing unprofitable sales.

It's important to note our Valentine's business, which is primarily shipped in the fourth quarter, a little bit in early January, it was essentially flat with the year ago, but we gained shares during the period.

So we continue to be disciplined about how we want to maintain or growth share profitable during the seasons as we see other brand-equity oriented initiatives gaining traction.

Okay, sugar-free -- do you expect any impact there in Q2?

Yes, we started shipping that at the end of the first quarter, so it's just starting to show up at retail now.

Just the last thing on the rationalization. 150 -- a bit higher than I was looking for over the next two years.

I was looking somewhere in the 120 range, but I guess following on Dave Nelson's question, you think at the end of '04 rationalization kinda' goes away as a deduction from our net sales line?

Yes.

Okay.

All right, thanks very much.

Our next question comes from Romitha Mally Goldman Sachs.

Good morning.

Just wanted to understand a bit about the guidance of the 2 to 3 for the remainder of the year, which you've reaffirmed.

Just backing out the 150 now for '02, right? or '03 - wrong year.

It's split between '03 and '04.

Is that primarily coming from the price mix side and are you expecting volumes to be flat down?

Can you give me some guidance on that?

On the comparable sales, we expect our volumes to be relatively flat, but getting some of the increased sales you know, from the price increase, depending how much of it takes hold.

And some of it coming obviously from mix, which will also help margins, if that's what you're getting at.

Okay.

And then just in terms of the sugar-free candy, any sort of early antidotal data on how that's doing?

In terms of getting into key customers that are pleased with what they've seen initially, but it's still too early to comment on it.

And then Frank, I was just noticing that payables was down pretty significantly on a year-over-year basis.

Any reason for that?

It's just a little bit of timing.

We take full advantage of all the discounts on payables and it could be a little bit of timing refl -- relatively to certain materials that come in heavily during the first and second quarter, and those can come in you know, some of them can come in March versus April.

So there's nothing untoured on it.

On the receiveable side, any changes in terms or anything of that nature?

No, our receiveables are you know, quite healthy and most of them of course are current receivables.

In fact, once you go out over 30 days we have such a small amount, just 2% or 3 percent of receivables would be out beyond that.

Great, thanks.

You're welcome.

Your next question comes from Andrew Lazar of Lehman Brothers.

Good morning.

Good morning, Andrew.

I guess two quick things.

One, on the SKU rationalization, earlier in the year you talked about an incremental 6 cents you absorbed for pension expense, then an additional 2 cents -- let's say this quarter -- as well from the Flemming thing.

Obviously -- you're able to absorb a lot of this, given -- my assumption is what you're seeing in terms of the success around margin line.

And I guess I'm trying to get a sense, is it first a fair assumption that you are seeing this rationalization process have perhaps a better than expected effect on the margin line than maybe you expected when you first started, which kinda' boldens you to do it in a greater degree in phase 2?

What is a fair assumption, Andrew, is we anticipated getting a nice margin improvement from rationalizing, particularly the low-hanging fruit of certain SKU's that we're contributing very, very little in a fully-absorbed cost basis we're contributing nothing.

So we anticipated that.

That is helping our gross margin expansion and then what else is thepg, as Rick pointed out earlier, is we are getting some price realization from the price increase and certain smaller incremental price increases that we took last year in various parts of the line.

So, all that really is helping us afford more marketing spending overall, including the trade line, but it's also giving us the affordability.

It's also allowing us then to expand EBIT margins and bring it down to the bottom line.

Okay.

On your gross margin, can you remind me where -- what you're thinking of with respect to the full year, in fermz -- terms of a year-over-year change, sort of current?

Still looking at 70 to 90 basis points, we're getting a little more momentum in the second half.

All right, and then I think the last thing is you mentioned you still had some obviously price points you needed to protect through perhaps April, if I'm not mistaken.

As you go through the second quarter, will you see perhaps less of an off-set to whatever positive net pricing realization that you get -- which you did have some of this quarter?

Andrew, at this point I'd rather not comment.

What I mentioned before, and we certainly talked about when we initiated the price increase, we knew we were protecting a key event through April, because that got us through obviously the Easter time frame and we're seeing sporadic, but still some aggressive pricing from competition, selectively and we're being smart about you know, where to spend in terms of where we need to be competitive, and I'd rather leave it like that.

I guess the very last thing is Rick, in December you talked a lot about sort of the tradeoff between you know, trade spending and the lift and return you get from there versus just pure kind of let's say advertising, if you will.

How do you ensure that over time you -- this is not just a Hershey question, but also a broader, I think because a lot of folks are focusing on more sorta in-store merchandising -- how do you ensure the overall brand equity doesn't ever so slowly erode, such that you know, ten years from now you look up and say you know, the brand's not worth as much as it used to be in consumers' eyes.

I'll certainly only comment for Hershey.

Obviously the foundation has to be trade support.

Do we have strong consumer-oriented brand events?

If we didn't have the Limited Edition items, which clearly capitalize on as wael as contribute to the equity, I take the five items coming out on Reese's, which we know will be successful in terms of the initial sell-in, then it makes sense to provide merchandising funds to get trade support.

If it was higher trade spending just to discount existing SKU's, then I think there's a caution around brand equity erosion.

So when we come out with Limited Edition items or if we had higher funding behind let's say the Coolers new gum varieties or Icebreakers unleashed, at least we are spending appropriately to build brand equity.

So it has to be tied to what I think are competitively-advantaged brand-building initiatives, as opposed to price discounting.

Thank you.

Thank you.

Your next question comes from Chris Growe of AD Edwards.

Good morning.

Good morning.

Hi, I have a couple sales questions.

Are you able to break down sort of in rough terms, volume and pricing mix for the quarter?

Chris, the way I look at that for the first quarter here is that if you allow the 2% of the quarter that was shipped in Q4, right?

And then the 2% that Rick mentioned on rationalizing the product line, then our core business -- the remaining core business -- was essentially flat in volume.

We got a little 2% bump in it from price increase and then we dealt a fair portion of that back in incremental trade allowances.

That would probably be the fairest characterization of it.

Perfect.

Then I know you gave your market share for SDMXC, can you give us Hershey's growth rate under that -- in those venues and relative to the category growth rate?

Yeah, I gave the non-seasonal growth of 6% because of the shift between Easter, between March and April last year and this year than the pure takeaway numbers for in total are meaningless in that regard.

Makes sense.

Then just to be clear on the comparable sales, if I stripped out $75 million roughly for SKU reductions this year and then took out ruffle $20 million for the buy-in, would that take me to a comparable number for this year?

Yes, we're stripping about 2% of this year's sales for those two activities.

Okay.

My le last question on the cost savings for this year, can you remind me what your cost savings will be this year from the restructuring program of a couple years ago?

Well, the restructuring program we announced called for last year saving between $35 and $40 million.

We did get up to about $37 or $38 million.

We said long-term, it would be over $70 million, say $70 to $75 million and we fully expect to be there.

So those savings are helping us both in margin expansion and in cost control.

Okay, thank you.

Your next question comes from Leonard Teitelbaum of Merrill Lynch.

I think that's me!

Good morning.

Good morning.

You've changed -- you know, you telegraphed this some time ago about instead of going for one blockbuster product, we're gonna have several products introduced throughout the year and you've tagged a few of them here.

Now, it used to be $100 million product was a successful product.

As you go for these -- not to use your term -- but these minuties that come in -- what should we look for to see if A, it's successful, and B, when should they prove to be a good drop to the bottom line and what percentage of sales are you looking for from these new products, whether a Limited Edition or a regular edition of the product line?

Either absolute dollar-wise or percentage-wise.

Yeah, the way we're tending to look at these Limited Editions, first of all, we're going to only apply them to brands that have a significantly large platform where they made sense.

To a large extent that, depends on the period of the year.

Take the Kisses brand for instance last summer.

If we can get $10 to $20 million increase in a brand like that in a period of the year where sales are not very high, that's a pretty big success.

I'd put that kind of pramenter around it for Limited Edition, but we don't want to be introducing a whole lot of SKUs that are sort of mist yus.

I say every SKU has to have $7 million in sales and kind of the combined Limited Edition ought to be well above $10 million.

That's kinda' getting the point because if the others -- not the seasonal ones or the Limited Editions -- but the others are going through -- are you adding SKUs at a greater rate than you're adding dollars I guess is my first marketing question to ask, and the second is, are they profitable, not at the top line as much as at the bottom line because we're in the market for such a short period of time, we can't recover our advertising?

Let me make two comments on that.

First, the rationalizing you know that, I talked about a bit earlier that Rick put another $150 million on the table for, that's essentially playing catchup -- okay, so we've had two big waves of it, and it's catchup from having allowed our SKU count in the 90s to really get too big.

So, we're catching up and it's coming in two different phases.

By the time the catchup is done, as I was saying earlier, we'll be much closer to 1400 plus or minus some SKUs.

Where we have to have the discipline -- and it's a very key question -- is not the introduce then more products we're eliminating from the line, otherwise it will be self-defeating and we'll keep adding SKUs to the line.

So that is part of the discipline we're introducing, that we've got to continue to rachet down the SKU count of the line, allowing us to add new SKUs to areas where we think we have a lot of potential and good platform brands.

This is Rick, a couple other comments if I might make.

While we have talked quite a bit about Limited Editions, think of line items such as Fastbreak, Sugar-free, the To Go line -- those are all permanent items.

If we introduce a Limited Edition, we don't have dedicated advertising necessarily for that Limited Edition.

We might tag existing franchise copy for example, KISSES copy and then tag it for Limited Editions Reese's.

We're not going to have separate advertising.

We'll have it tagged to the existing Reese's campaign.

So that's where we get the marketing efficiencies.

Also, going back to another comment you made in terms of our stating that don't expect necessarily a big new item for us from us every two years, but we do have some other "big new items" currently under works.

So it's not one to the exclusion of the other.

Okay, I didn't mean to get hung up on Limited Editions.

I just wanted to make sure if we're gonna keep the line at 1400, something's gotta come out for something to go in.

I've tried, you desperately avoided how much of that will come to the operating income line and that's really what I was trying to push for, are these nice extenders or do we hope actually to get the lift you know, coming in there to grow our operating and how much of the growth in operating income's gonna come from new products versus products currently in the line?

That question I can't necessarily answer at this point, but I will say to your point that we have a much more disciplined approach to new product screening and introduce and key internal hurdles both from sales and in margin standpoint, that these brands and items have to exceed before they're introduced.

That's one way we will not fall back into the trap of not having margin expansion in terms of having margin erosion because of introducing less profitable items.

Thank you very much.

Thanks.

Your next question comes from Jaine Mehring of Solomon Smith Barney.

Hi, Jane.

I know John misses me, but I do actually do have a question.

I want to poke at a channel -- couple channel issues.

Sure.

There seems to be a lot of mass in the channels, obviousplay Flemming and K-Mart.

What do you think is the next thing that you know, we, as food and consumer analysts, should be most cautious about.

I know you wouldn't want to name names necessarily, but there just seems to be so much disruption and potholes along the way.

I think we're seeing there will be some continued consolidation.

I certainly don't know where that will come from, but as I said earlier, the explosive growth in dollar stores are -- is really getting the traditional grocery store operators you know, scratching their heads in terms of how best they want to compete, and that's one that we need to be smarter about in terms of how we win in that channel and we are doing well there.

In terms of any potential shakeouts, I wouldn't comment on anything specifically.

Okay, then on the issue of vendor allowances and trade promotion, obviously what happened before was on the food service side of the office, -- business, but sometimes the events cause other companies to maybe think about checking out their processes and cleaning up their acts.

Are you seeing any kind of change at all in behavior on the part of your customers, with respect to trade allowances or trade promotion?

I wouldn't want to comment on the behavior internal to our customers.

I can tell you about the behavior internal to us.

Okay.

And the behavior internal to us is we have very strong, very tight controls.

We do offer obviously performance-type of allowances and we're very careful about that.

So you mentioned U.S. food services for instance.

We do very little business with that food service as you pointed out, and we are very, very careful that we are getting performance and that it's very, very visible.

So there's no money paid aside from what is generally offered and it requires performance for it and we have very tight controls around it.

Okay, lastly, you sorta said that the dollar stores are perhaps de-stablizing or causing supermarkets to think a little bit.

And yet some of the supermarket comps are seem to be getting less bad, if not better -- are you seeing any kind of stabilization in that channel or is -- or any prospects at all that some gross can be renewed in traditional retailers?

I clearly believe some growth can be renewed in traditional retailers.

What I was talking about is from an overall retail environment, dollar stores are growing and it's one that's creating some issues, but certainly create some opportunities and some of the traditional grocery retailers are certainly looking at how they can put in departments compared to what's offered in a dollar store, which is not dissimilar from years ago when they put in items that was close to what was offered in club stores.

We are clearly winning with customers in terms of that are growing and that respond to the type of promotion activities that we want to put in place to build our brands, so yeah, this thing -- there's plenty growth out there.

Thanks a lot.

Thanks, Jane.

Your next question comes from Eric Katzman with Duetche Banc.

Hello.

A few questions.

I guess, Rick, I'm not sure I completely understood the numbers that you gave for -- I think it was either your growth, seasonal versus non-seasonal, or category growth.

Can you kind of just clarify that ?

Absolutely.

Eric, what I said was it was non-seasonal growth and it was takeaway.

That was in the section of in terms of what's happening within the marketplace.

I stated for the Q4 -- quarter our non-seasonal takeaway increased by 6 percent and the seasonal decline will start to reverse itself in the second quarter.

So the non-seasonal, your business was up 6 and how much was the category?

I don't have that number, but we gained share overall.

We gained shares - FDMXC, we were up 4/10 of a share point and I highlighted with convenience stores we were up a point.

Okay, then second quarter is -- question is, I guess earlier back in December, shortly after the price increase had come through, you had forecasted that a 10% price increase would hit volumes by 10%.

I guess for the category.

Do you still think that that's a reasonable pricey question?

Eric, there are very, very few points in history, or over the last 20 years we've only increased prices about four times.

We don't have a whole lot of regression points to look at.

We know there's some price elast yisity and we said we would try to mitigate that as much as we could.

Some of that of course comes in the form of protecting certain events that we already had in place.

Some of it is in the form of allowing the buy-in.

So you don't have sticker shock at retail all at once.

Plus, don't forget that while it was 10% on the items that were affected, if you include the entire line it's only about 3% of the entire line.

So I hope that helps you.

I'm not sure, then again I'm thrown off by Jane being on the call, so -- okay.

Next question, interest expense, if you're able to fund the re-purchase program basically through your own cash flow or close to it, why should interest expense be up close to 10% year-over-year?

You remember last year we were unable to do much at all with our cash flow, so we had cash on the books, a fair portion of the year that we weren't able to spend.

That cash, after the first quarter here, won't be around on the books because we'll be buying back shares.

So we'll have less cash to be earning anything compared to last year, but that cash was all internally generated.

It was just sitting on our balance sheet and we'll throw off more cash this year to pretty much complete the $500 million, if you see what I mean.

We had large cash balances last year.

This year we had them in the first quarter, but as we buy back the rest of the shares those large cash balances will disappear.

So we won't have that as interest income that's generated.

So, it's only a small amount, were talking $4 million from year to year.

And next question, you were nice enough to talk about the SKU cuts of $75 million a year, this year, next year.

What's the base?

Like what did 2002 SKU cuts take out of the business?

What we said basically was that we're looking at $150 million of reduction in the base business.

Part of that is SKUs, part is brands.

Rick did not break that up because we're still going through the process of fully exploring it.

I also said the base SKUs in our domestic business had come down as from about $2300 to about $1850.

What was the dollar amount associated with that?

If the first part, almost $100 million.

In the cut of SKUs that occurred in '01 and early '02, okay?

Yep.

All right, now in the second part of SKU reduction, we hope to cut out another 300 to 400 SKUs and get down to maybe 1400 plus or minus something, but not that entire $150 million isn't coming from that SKU reduction, it's partly that and it's partly looking over our portfolio brands and rationalizing it along at the same time.

So, when you take those brands and SKUs combined we hope to eliminate another 20% of our SKUs, that's what accounted for $150 million in sales in '02, part of which will disappear in '03 and part of which will disappear in '04.

Okay, last thing, if the -- if you lost about $100 million from the SKU cuts in 2002 and then it's $75 million in '03 and roughly $75 million in '04, then like kind of the year-over-year negative impact to the SKU cuts you know, is less to flat, isn't that a fair way to look at it?

No, I'm not sure what you're getting at.

The SKUs that we cut $100 million worth out of that were essentially 400 SKUs that we talked about -- that process started in 2001.

Okay.

So as you eliminate some of those from 2001, the following year, and you know, you don't have those same sales that you had the year before.

So what we're saying here is that at some time this year -- and we've already started the process -- we're slowly getting rid of certain SKUs.

Those SKUs accounted for a certain amount of sales last year, they were partially be here this year, partially not.

So, as we get into '02, again, some of those sales or into '04, some of the sales will have occurred in '03 that won't be around for '04.

I think we're making it a little too complicated, frankly.

I think if you look at -- think about $150 million worth of business that existed in 2002, we are in the process of eliminating that over these next two years.

I mean, just last comment I'll give it up, but while maybe making it too complicated to be quite honest with you, I think there is reservation out there as to what really is the top line and because the numbers are kind of every quarter you know, having to deal with this SKU reduction and not having a solid base of dollar sales that you're going forward with, versing our model, I keep missing your top line.

So, it's not that insignificant because quite honestly, when I'm trying to forecast your top line, I keep missing!

Okay.

Eric, as Rick said for this year, we're looking at comparable sales of 2% to 3%, and that would mean a reported sales of closer to 1%, if that helps.

All right, given the rationalizations that will take place, we're looking for top line, as reported for the full year to be closer to 1%, and that leads to a comparable sales of that 2% to 3%.

Okay.

Eric -- one thing, our goal is to make it more clear, as opposed to less clear and what we're stating is that for the first quarter we know we shifted 2% of price buy-in from first quarter to the fourth quarter of last year, and businesses and it was primarily brands, not SKUs that had been previously discontinued, accounted for 2%, and that's how we get to a flat base business for the first quarter.

These aren't small, little SKUs that come in and come out.

And what we're saying today is recognizing where we're playing catchup with what had been added over the past several years and this is a last phase - phase 2 of $150 million comprised of brands and SKU's.

It's not yet finalized, half this year, half next year and that's it in terms of any big initiative on rationalization.

Okay, thank you.

Thanks.

Our next question comes from George Asku [INAUDIBLE] Mason

Good morning, George.

Can you give us more granularity on the expense savings in the cost of sales line, ingredients packaging costs -- clearly I mean, I assume nuts are down, cocoa probably up, can you give us granularity?

Not from a competitive point of view, George, but what I stated earlier, our supply chain in total -- and that's cost of conversions and input costs -- added let's say about half of the gross margin expansion.

The other half came from a combination of price increasings, but some of it dealt back, and mixed changes.

If you were to look at it as supply chain once again, if you take all the components of it, would have added about half of it.

The other would have come from price mix with a little give-back for additional trade allowances.

Okay, good.

And can you also give us a bit of an update on sort of the state of the cocoa market, and you know, last year in July of '02 you were very kind in giving us some forward guidance on what raw materials and cocoa -- should we expect that for example in July '03, looking at --

Let me answer it this way.

You recall several months ago the cocoa market had gone and made a tremendous run up.

A lot of that we believed at the time and mentioned it was due to the civil unrest that existed in the country.

Some of that has calmed down and the market has come off as a result of it.

So topped out at $2400 a ton.

It's now trading at about between $1800 and $1900 a ton.

As it turned out too, the fundamentals were a little better than what most market forecasters had been saying.

So while they were thinking at the time -- this was back in late fall -- that we would have a applied demand deficit this year, it now looks much more like a small surplus.

So prices, cost of cocoa are coming down from the peak they had reached, but they're still substantially above the very lows we had reached at one time, and as we stated in on our 10K, we really would expect our cocoa costs to go up, but not necessarily up to looking at the spot market right now.

And I think that's as far as we're willing to go at this point.

Okay.

All right, thank you.

Thank you.

Our next question comes from David Adelman of Morgan Stanley.

Good morning.

Good morning, David.

I wanted to does you about the 6% non-seasonal takeaway increase that you referenced in the quarter.

Do you think -- how much, if at all, do you think that's flattered by the fact that last year, later in the quarter consumers would have been purchasing Easter merchandise as opposed to non-seasonal merchandise?

I think that could be adding something to it where I know it's probably not adding anything to it is within convenience stores, which is where we had good increases, but also, we had increases in convenience stores in both mint and gum, and that wonz would a impact.

Part of it would be the shift by virtue of timing between seasons and non-seasonals, but again, our instant consumeables did well in the absolute being up 4% during the quarter, and that was for all measured channels.

Your points are correct ones, but still, looking at it in a bit in greater kael, you see decent increases.

Just a follow-up to the earlier question on cocoa.

Can you give us a general sense if the company had to pay current spot market prices, how much you would have to increase your prices to maintain your profit structure?

For a competitive reason, I really can't go there.

Okay.

Thank you.

Thanks.

Your next question comes from Michael Frank of Gateway Partner.

Good morning, gentlemen.

Good morning, Michael.

I want to take you back six or eight months to the attempt of the trust to diversify and the bids that supposedly were around and the conference call that existed around that time, we thought it was in the best interest of Hershey to stay independent, and that in the long run, the stock price would aappreciate in 40% return that would be available now or even then on the stock could be palg compared to ges I guess where the stock prices might be.

So far in the last six to eight months, the stock has been locked in a pretty tight trading range.

Do you still feel it's in the best interest of investors for the future for Hershey to be independent?

And if so, do you believe the stock one day might break out of the trading range and make a move to somewhere where it would be appropriate?

Well, I'm certainly not going to forecast where the stock market or our stock prices are gonna go or not gonna go.

At the time we said, I believe, is that any takeover premium's gonna outrun a business plan in the near term.

What we feel good about is that our strategic plan is gaining traction, we're seeing some results in the marketplace, subsequent quarters from the time, the earnings margin expansion and where we've invested we've seen good performance in the marketplace, so we're still committed to the long-term -- we're still committed to building shareholder value over the long-term and are confident in our abilities to deliver upon.

Okay, thank you and good luck!

Thank you, Michael.

Your next question comes from Terry Bivens of Bear Stearns.

Mr. Bivens, your line is open.

At this time I would like to give everyone an additional moment if you would like to ask a question, please press star, then the number 1 on your telephone keypad.

There are no further questions at this time.

Do you have any closing remarks?

No more questions, we'll conclude today's session.

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

As a reminder, our second quarter sales and earnings release for 2003 and our conference call is scheduled for July 17th, 2003.

Thank you for your interest and good day.

Thank you for participating in today's conference.