好時 (HSY) 2003 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Hershey Foods Corporation Quarterly Earnings 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 one on your telephone keypad.

If you would like to withdraw your question press star 2 on your telephone keypad.

Thank you.

Mr. Edris, you may begin your conference.

Thank you, Carol 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 mornings call.

Rick will provide an overview of the company's performance for the quarter and the year.

Frank will provide the specific details and then we will 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 risks and uncertainties.

Actual results may vary materially from those contained in the forward-looking statements.

Because of factors such as those listed in this mornings press release and in our 10-K for 2002 filed with the SEC.

If 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 and summary of consolidated statements of income prepared in accordance with GAAP and our pro forma summary of consolidated statements of income quantitively reconciled to GAAP.

As we said in the press release the company uses this non-GAAP financial measure as a key metric for evaluating performance internally.

This non-GAAP measurement is not intended to replace the presentation of financial results in accordance with GAAP.

Rather, the company believes the presentation of earnings excluding such charges and gains or losses provides additional information to investors to facilitate the comparison of past and present operations.

With that led me turn the call over to Rick Lenny.

Rick.

Thanks, Jim.

Good morning.

Hershey's fourth quarter performance was solid and represented a continuation of the strong results we achieved throughout 2003.

In fact, in each of the past three years we delivered double digit earnings per share growth while significantly improving both margins and returns.

Equally as important, we gained market share over the same three career year period.

Turning now to the fourth quarter.

A combination of balanced topline growth and continued productivity gains delivered a 13.7% increase in diluted EPS on a pro forma basis.

Net sales for the quarter increased by 2%.

One third coming from price and about two thirds from volume.

This growth is consistent with your strategy of shifting the portfolio to more profitable higher growth segments that better leverage Hershey's iconic brands.

We experienced strong gains in instant consumables of 5% and it continue to benefit from new product activity.

In addition to accelerating the growth in the sugar-free line during the quarter we introduced several new items, such as Swoops and Hersheys S'mores.

Seasonal sales, while in line with expectations, were down from year-ago.

Retailers continue to tighten their inventory position and we remain disciplined in terms of not over-selling the seasons.

This strategy is appropriate given the current retail environment and we gained share and improved profit margins during the season.

Within the over all retail marketplace Hershey experienced solid gains.

For the quarter, consumer takeaway increased by over 3%.

Most important, we are outpacing the category in our focus areas.

Instant consumables experienced a 6% increase during the quarter and finished the year up 8%.

Hershey's scale brands up better than 4% for the quarter and up 6% for the the year.

We expanded our leadership position within the attractive convenience store channel.

Takeaway was up 13% during the quarter and up 9% for the year.

This 9% growth for the year is on top of the 9% growth in 2002.

In fact, convenience stores now represent 32% of our measured takeaway, up 3 points in just two years.

By focusing on delivering superior consumer benefits and targeting more profitable customer segments we achieved both price realization and volume growth in 2003.

This occurred across our entire retail business as well as within the loose bar segment where industry pricing occurred.

Two key enablers to Hershey's retail performance have been the successful restructure of the U.S. selling organization and the rollout of Hershey's new trade promotion program.

We achieved increases in the level of merchandising support.

I'm encouraged by the results to date behind these initiatives and both position us well for the future.

Trimming up 2003, Hershey delivered record earnings, margins, and returns, and achieved profitable growth in our strategic focus areas.

Turning now 2004, the major emphasis will be to accelerate new product activity and leverage our enhanced selling capabilities.

In terms of new products, we are focused in two areas.

Innovative platforms and the continuation of successful equity extensions.

Regarding new platforms, we just introduced Swoops and S'mores, both of which are off to a good start.

Hershey's three item line of one-gram sugar carb bars begins shipping end of the first quarter, our first entry into the attractive Better For You nutrition adjacency.

Our line will be merchandised in both the confection and nutrition health bar sections.

We're introducing Icebreakers Liquid Ice, looks like caviar, but tastes like an intense mint, in individual pocket packs.

Regarding equity extensions, the white Reese's peanut butter cups began shipping last month.

Kisses filled with caramel the first ever soft centered Kiss product offers a new growth avenue for year round consumption.

Sugar-free York Peppermint Patties are being added to our sugar-free line, both the Caramel Kisses and Sugar-Free York will be available in March.

Our limited editions effort continues with Hershey's Cookies and Mint and Cookies and Chocolate Bars, and Pina Colada Almond Joy.

Momentum will continue to build within our sales force.

The restructure is moving into the first full year.

We've made enhancements to our trade promotion strategy and will complete the National expansion of hand held technology.

In terms of is the supply chain there are a number of projects underway to off set higher raw material costs and thus achieve moderate gains in gross margins.

Hershey's continued emphasis on shifting the mix to more profitable brands, pack types and customers will also contribute to improved margins.

In sum I'm pleased with the results achieved in 2003 and the consistency in our performance.

Our strategy is clearly on track as we add value to the brands, enhance Hershey's advantaged business systems, and deliver strong financial performance.

Now Frank Cerminara will review the fourth quarter and full year results in greater detail.

Thank you, Rick.

Good morning, everyone.

I'm very pleased to discuss our excellent fourth quarter results.

In order to give you the proper perspective on our business, I will be discussing our fourth quarter results excluding the charges related to the business rationalization and re-alignment initiatives.

Elimination of these items would deal adjusted earnings per share dilute of $1.16.

Compared with $1.02 per share diluted in 2002.

An increase of 13.7%.

For the fourth quarter of 2003, consolidated net sales increased by 2%.

As Rick mentioned earlier, this sales performance was achieved through a combination of volume growth, about two-thirds of the increase, which was stimulated by the introduction of innovative new products such as Hershey's S'mores and Swoops, and growth within the instant consumable business.

Pricing contributed about one-third of the increase.

Adjusted gross margin during the quarter continued to show improvement.

In fact, by 100 basis points, coming in at 40.0% versus 39.0% in 2002.

The gross margin was enhanced by higher price realization, better mix, and overall supply chain efficiencies.

Including logistics and raw materials, offset some what by prior promotion spending.

Adjusted selling, marketing, and administrative expenses decreased 50 basis points as a percentage of sales coming in at 18.3% versus 18.8% last year.

As we said a number of times, we continue to look at the most attractive marketing mix for your spending and the best allocation between trade and consumer support.

Given the significant gross margin expansion, our total brand support including trade and consumer spending increased during the quarter.

Earnings before interest and taxes of $256.4 million increased by 9.4% compared with the fourth quarter of 2002.

And the adjusted EBIT margin was 21.7%, versus 20.3% last year.

A 140 basis points improvement.

Interest expense for the fourth quarter of 2002 was $16.1 million, compared with $15.3 million last year.

Two primarily factors contributed to this increase.

First, additional long-term debt related to the change in accounting for certain leases effective July 1st of 2003.

And secondly, lower cash balances for the quarter leading to lower interest income.

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

Adjusted net income of $152.1 million was 9.7% higher than the fourth quarter of 2002, and our net margin was 12.9% versus 12.0% last year.

Weighted average shares outstanding on a diluted basis for the fourth quarter of 2003 were 131.3 million shares versus 136.3 million shares for the fourth quarter of 2002.

Leading to an EPS of $1.16 per share diluted compared with $1.02 per share diluted for the fourth quarter of 2002.

Again, an increase of 13.7%.

During 2003 we made considerable progress on our $500 million share repurchase authorization.

In the fourth quarter, we bought another 391,000 shares for approximately $30 million.

For the full year our total share repurchases exceeded 4.9 million shares at a cost of approximately $329 million, or an average price of $66.90 per share.

Thus far, we have completed two-thirds of the $500 million authorization.

Let me now quickly review our full year results.

Sales increased 1.3% principally result of net price realization.

Adjusted gross margin expanded to 39.1% versus 38.0% an increase of 110 basis points.

Adjusted EBIT of $813.5 million increased 8.5% with the EBIT margin at 19.5% versus 18.2% for 2002.

An increase of 130 basis points.

Net interest expense was $63.5 million versus $60.7 million in 2002.

Adjusted net income of $474.7 million was 8.9% higher than 2002.

EPS diluted of $3.59 was 13.2% higher than last year's $3.17.

And finally, economic return on invested capital was 17.8%, a 90 basis point improvement over last year.

Now, let me turn for a moment to our balance sheet and cash flow.

During 2003, we continued to focus on improving utilization of working capital.

Concentrating on inventory balances, trade receivables and accounts payable.

We made good progress as our average net trading capital throughout the year was reduced by about 20 basis points as a percent of sales.

Our increased profitability along with management of working capital resulted in another year of strong cash flow.

In fact, free cash flow increased by $91 million compared to 2002.

Even after considering our accelerated capital expenditures program.

To update you on the re-alignment initiatives we announced in July of 2003, they have now been completed.

The effect for the full year was a pre-tax charge of $25.5 million, partially offset by pre-tax gains of $8.3 million on the sale of certain gum brands.

Therefore, we incurred a net pre-tax charge of $17.1 million or about 7 cents per share diluted.

The re-alignment initiatives help the streamline the supply chain by divesting or eliminating certain nonstrategic brands and products, and rationalizing some production lines.

In addition, increased sales force effectiveness was achieved through re-alignment of the U.S. and Canadian sales organizations.

And just to update you on our item rationalization efforts, our SKU count was reduced to between 14 and 1500 active items by the end of 2003.

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

For the year, capital additions including capitalized software were $237 million.

This is higher than our previous guidance due to faster progress on certain projects, including our new Midwest distribution center, and the acceleration of our new product development efforts.

We now expect to be loading the new distribution facility with product in the second quarter of 2004 and to begin shipments to customers from this location early in the third quarter.

For 2004, we expect our cap ex to return to a more normal rate of 180 to $190 million.

Dividends paid during 2003 were $184.7 million, compared with $167.8 million in 2002.

As many of you know, we have increased dividends annually for the last 29 years and in 2003 our dividend rate was increased by 20.6%.

Our policy has generally been to increase dividends in line with earnings growth.

Depreciation and amortization for 2003 totaled $180.6 million, and we expect D&A to increase to about a level of 190 to 200 million in 2004.

And finally, net interest expense for 2004 is expected to be approximately the same level as 2003, which came in at $63.5 million.

That concludes our remarks and we are now ready to take questions.

Carol, the first question, please.

Thank you, sir.

At this time I would like to remind everyone if you would like to ask a question, please press star then the number one on your telephone keypad.

We will pause for a moment to compile the Q&A roster.

Sir, our first question will come from John McMillin with Prudential Equity Group.

Good morning, Jim, Frank and Rick.

Good morning, John.

Congratulations on the quarter.

Thank you.

Thank you.

The only I guess criticism I can find, and you know how I like to look for them, is I guess going into the quarter you were targeting 3 to 4% sales growth and maybe that topline, Rick, came in a touch shy.

Is that a fair statement?

John, you're correct with, first, in terms of what the original targeting was.

A couple of things happened.

There was one incremental point in trade which was contributed to by the new item introductions as we introduced the new items in the fourth quarter and also to ensure that we maintained competitiveness in key markets and key classes of trade.

I think the other point which I did make in the official comments was that we continue to see some structural changes taking place in the seasons as the retailers are being mindful of having a tighter inventory position and we are not going to chase what we have seen in the past as unprofitable seasonal sales.

And so with that we are able to hold our share and in fact in it slightly as well as improve the profit margin.

I think that is just a reflection of what is happening in the marketplace which is why we are stepping up the new product activity in 2004.

So essentially what happened is it was a little bit of inventory contraction on the part of the retailer and a little bit more promotions or deductions to net sales from your standpoint.

Right, I put a point in each of those.

Okay.

Thank you.

And just my last question, when you talk about market share, you obviously have more numbers access to convenience store than I do.

Correct.

And as I look at Nielsens, its total chocolate candy category, which does include seasonal products.

Yes.

I actually see a -- you know, and you had a couple years of share increases but I see a modest half point dollar share decline for the 12 weeks ending December 27.

So, when you talk about holding share what are you referring to?

What data point?

The measured channels that we report on are what we say FDMXC.

So food, drugs, mass excluding Wal-Mart and then convenience stores.

When we see numbers cited as FDMX as we said in the past it represents 48%, even a little bit less of our total measured takeaway.

What does that show for the 12 weeks?

Shows you holding share.

Holding share but holding share for the 12 weeks.

Gaining share in the areas we are focusing on.

Instant consumables and convenience stores and in the scale brands.

And on year to date, we have seen share gains across the board.

And does it show a little bit less category growth than maybe we saw in previous years or we would expect in the improving economy?

The fourth quarter alone?

Yes.

The fourth quarter is a growth rate from a total FDMXC basis a pretty much in line with year-to-date 31 versus 33.

Thanks a lot.

Thank you, John.

Your next question will come from Terry Bivens with Bear Stearns.

Good morning, everyone.

Good morning, Terry.

Good morning, Terry.

In terms of the SKU rationalization, I didn't hear you mention that, was that a factor in the topline in the fourth quarter.

It has been a factor the whole year, Terry.

As you know, we eliminated SKUs that were nonperforming and replacing some of those, of course, with better performing SKUs and then as importantly, it really does make our supply chain more efficient, so the supply chain gains that we have been getting consistently, part of that, of course, is due from lowering our total SKU count, you know, now by almost a third compared to where we were three years ago as you will recall.

Um-h'm.

I was just wondering if we could quantify though for the quarter and while we are at it I was anticipating about another $75 million in rationalization as we two through this year.

Is that still a good number, frank?

Yeah, that is still a good number.

I mean the entire year we have had about a one and a half roughly percent rationalization.

And when you consider both SKUs and the the product lines that we have sold and then given the time of year when we discontinued items or when we sold off some of those brands, will have a similar impact next year.

I would expect between a percent and percent and a half of what would be rationalization of both SKUs and brands to affect '04 as well.

Okay.

Rick, as you look at your distribution strategies, I know you want to get a little bit further into the dollar, the club channels.

Right.

And keep up on the C stores.

Could you kind of update us on that and has McClane's -- the fact that is no longer with Wal-Mart, does that give you an edge as maybe they seek some more accounts.

I think that will help McClane in terms of talking to them of where they may see some opportunities.

What I like is we are continuing to bring the right products and right programmings to the C store channels regardless of which distributor gets this there with a 13% increase in takeaway in the quarter and 9% for the year we feel pretty good about the convenience store initiatives.

The important thing is -- another channel that is a good growth channel that we don't tend to cite as much is the drug class of trade.

We continue to do well there.

I think it is more a function of as we bring the products that make sense for those consumers that shop in those classes of trade and continue to introduce what we feel to be more on trend items as we've talked about, I think we will continue to see growth in the broader marketplace we have seen improvement in club and the drug and C stores I cited.

Okay, and just one last one.

I guess one of the big questions on the company is what you are going to do with this year's free cash.

I know you're now perched on the Milton Hershey trust.

Are they still under a broad mandate to diversify and do you think there's any chance that, maybe as we've seen in the past they might step up on a big block of shares.

That is a question that the entire board would be better served to answer and I can't comment on any issues with that with the trust board.

Okay.

It is fair to say they it have not participated in the $330 million of repurchases that we made this year.

Okay.

All right.

Thank you very much.

Thank you, Terry.

Thank you, Terry.

Sir, our next question will come from Leonard Teitelbaum with Merrill Lynch.

Good morning.

Good morning, Leonard.

Good morning, Leonard.

You know, there has been no question that what you have done in the C store channel has been dramatic.

And added to growth.

As I look forward, we talk about the C channel but isn't there a kind of a practical limit about you said almost a a third of your sales now.

Aren't you going to be limited to how much shelf space they they they are going to give you in the stores and if that is the case, Rick, do you see the other initiatives picking up the slack?

And then, what I'm really trying to get to is kind of like a schematic of what the growth looks like for the next couple of years versus what it looked like for the last two years.

That is my first question.

Let me answer that.

The comment I made is 32% of the measured takeaway.

So that's not of our total takeaway.

Again, it's just the universe of FDMXC so doesn't have Wal-Mart in there and other non-measured channels such as club dollar stores so convenience stores is about 20% of our total sales.

We still see upside in convenience stores.

The second part and more important part of your question is as we continue to come out with products that we think are attractive from a consumer standpoint such as our 1 carb -- 1 gram sugar carb line, that helps us in terms of getting dual merchandising in traditional food places of trades and food customers so it is more a function of shifting our portfolio and introducing new items which will permit to us have upside across multiple channels.

You added 100 basis points to the gross margin.

You have been talking about adding anywhere from 70 to 100 going forward.

Does that still hold or what kind of an increase should we be looking for as we get into '04 and beyond if you can comment on that?

Well, our long-term guidance, Leonard, still remains 70-90 basis points.

Given the cost increases that we previously announced we would expect to be much closer to the bottom end of that range rather than being at as we have the last three years we have averaged almost 130 basis 130 basis point improvements.

Thank you very much.

Helluva quarter.

Thank you.

Thanks.

Our next question will come from David Nelson with CSFB.

Good morning.

While sales not much up as much as you hoped, they're certainly not tracking along with cookies, which has been attributed to being affected by low carb preferences.

Do you attribute this mainly to the innovation you have brought forward in.

I think a lot of it is innovation.

I think within the chocolate segment we have seen good chocolate segment growth throughout the year and that is due primarily to innovation and it still represents a very attractive product for consumers.

It is a personal indulgence that they enjoy we have seen continued strength in the chocolate segment and we will see that going forward.

And just maybe this is for Frank.

The net headwind from commodities is being offset by productivity is that what you said earlier, please.

In yes, it is a combination of a lot of marketing levers as we said in the past, David.

Part of it is productivity.

Part of it is better mix, which we realized the last two years and we expect to continue moving in that direction.

Part of it is rationalizing items that don't have quite the same margins but as Rick said introducing new and innovative items that have better margins.

So it is a combination of a lot of things.

But rather than give up on margin expansion we fully expect to have some margin expansion in 2004.

Great.

Thank you very much.

Thank you.

Our next question will come from David Adelman with Morgan Stanley.

Good morning, everyone.

Good morning, David.

Good morning, David.

A couple of questions.

First, sequentially the reduced price realization in Q4 versus 2003 is that primarily due to the higher promotional spending you revenue referenced earlier?

Yes, it is, David.

Secondly, was the share repurchase particularly in the fourth quarter a little bit lower than what you would have pencilled in three months ago?

It would have been a little lower than what I pencilled in maybe 6 or 9 months ago, but the volume really slowed down dramatically compared to the first half of the year.

The volume of trading in our stock, along with buying back a certain number of stock options that people exercise in times when the price of the stock does well.

So it as combination of things.

But we stuck with the program and as I said good about two-thirds of it done by the end of the year.

Okay.

And in terms of gross margin expansion during the year, should we expect that skewed towards the first half of the year given the timing of the realization of the net pricing as you went through '03?

I think we have to wait and see on that.

Our target remains at 70 to 90 points as I said a little while ago to Leonard, we expect to be closer to the bottom end of that range.

But we will see as the year goes along.

Lastly on the total SG&A spending, which in dollars was flat for the year, what do you attribute the success to in terms of your cost management and what is the outlook for that line item in '04.

It is a combination of things.

We tried to be and think with some success very disciplined in our G&A spending and that was kicked off, of course, two years ago or a little over two years ago with the restructure that we announced.

And then we are taking a look at what is the best place to spend our marketing dollars and how do you focus those between trade and consumer and so we will continue to do that and try to make the best choices.

Going forward, I would expect that line to continue to be flat to maybe a small uptick in terms of what proportion of sales it takes up.

Again, you need the gross margin expansion to create that affordability to be able to spend both against the trade and consumer and support our brands.

Okay.

Thank you very much.

Our next question will come from Chris Growe with A.G. Edwards.

Good morning.

Good morning, Chris.

Good morning, Chris.

I just have a couple of questions to follow up on.

In terms of commodity prices for the year, there was a mention of those in the press release, and just curious on your thoughts on, I guess, the major ones, cocoa and dairy, Frank and how we should look at the gross margin then in that context for 2004?

John, I think the way we ought to look at it is in total.

We said that in total our raw material costs will be going up next year and I don't want to parcel between cocoa and dairy and various other raw materials that we use.

Some will be up.

Some will be down.

But the important thing is that what we have challenged ourselves to do is to make sure that we don't give up on margin expansion.

So that is why I keep talking about it more in terms of our total input costs and a good portion of those, of course, are raw materials and without getting into any raw material very specifically, we still plan to expand margins by doing all of the other things I mentioned with previous callers.

Okay.

Then relative to the year, will we see a little more pressure in the second half versus the first half, would that be a fair characterization for commodities?

No, in the way we run commodity costs through our income statement, we do peg to an expected price for the full year.

If you see what I mean.

I understand, that's correct.

We expect cocoa costs to be a certain amount in order to --

Yep.

-- to really match up costs and revenues we try to pay to a price that is consistent for the entire year.

And then just to be clear.

And got not to get too deep into this if your peg was a little low and came in a little higher how would that affect the results then?

I didn't get your -- if our what?.

If your peg lower than what actually occurs.

If our peg is lower by the end of the year you have to catch up.

So the second half would see potentially in that circumstance more pressure then.

Depends on which way it goes.

I wouldn't infer from that from your statement.

Okay.

My last question was just in general on cost savings.

I don't know if you quantified the cost savings received in 2003 and get a quick line on marketing how much that was up in 2003.

You may recall in 2001 when we announced the restructure, from the restructure loan we were looking for, for 2002, were cost savings of $35 million to $40 million and we said if you annualized those for '03 we would get to a level of about $75 million to $80 million.

With that restructure alone we did realize the cost savings and, of course, we look for other cost savings through our processes.

And we have got some more of those cost savings as well through the year.

That really is what allowed us to expand the margins as much as we did by 110 basis points while at the same time increasing our trade allowances as you know are above the net sales line and that automatically mathematically reduces the expansion in gross margin.

Um-h'm.

And then it was market -- can you say what marketing was up in 2003 overall, media, or promotion or?

Our promotion spending was up more than rest of what you might traditionally call direct brand expenditures.

So we -- you know, we made the choices during the year, Rick pointed out a little earlier and we spent a little more heavily toward the trade and it seems to have paid off in our market share gain.

I think just a point of clarification again.

We continue to see in all of our modeling work as well as what we talked about the past couple years, that trade promotion is a good spend for us in terms of the pass throughs we get, the lifts that we have, and then the result in share gains.

So we continue to feel good in terms of the direction we are taking the trade promotion.

Particularly with our new strategy where we are bundling our funds together, leveraging our scale, and certainly paying differentially for differential growth rate.

Thanks a lot.

Thank you, Chris.

Our next question will come from Evan Morris with UBS.

Good morning.

Good morning, Evan.

Good morning, Evan.

Just quickly.

Can you just break down sort of your expectations for the '04 top line?

I know you quantified the impact from the SKU rationalization, but kind of walk us through the volume price mix expectations?

Yeah, Evan, we will -- have to stick with our guidance of the expectation really is 3 to 4 topline.

This year, in '03, we got a lot of that topline growth came from price realizations.

We would not expect as much of it in to '04 to come from price realization but some of it from price realization and mix.

And some of it from volume.

So, the way we might look at it is probably about half and half for '04 which is more what our strategic guidance has been is to grow that top lip on a long-term basis.

About half relying on price mix, half on volume growth.

Okay.

So does your top line guidance and for that matter your gross margin expectations, does that include an additional price increase in '04, and if not do you think there is room to take another price increase in '04, will the retail environment allow you?

Evan, we don't want to be telegraphing anything to competitors and we will not talk about additional expected price increases on the line.

What I am saying, though, is the way we are running the business is to continue to get price realization.

Not necessarily across-the-board price increases, and some of that coming through going to -- toward the most profitable channels with the most profitable acts, as well as what Rick mentioned earlier and that is introducing new innovative products that command a better margin to begin with.

That is understood but more broadly though, do you believe that the retail environment right now -- I know you mentioned earlier they were contracting some inventories in segments, do you think the retail environment would accept another round of price increases if you decided whether to go that way?

I'm not asking whether you would do it or not.

That is a hypothetical question.

I would rather not comment on what we think hypothetically a retail environment might be regarding pricing or any type of issues that would impact their cost.

Thank you.

Your next question will come from Mitch [Cadler] with Piper Jaffrey.

Hi, everyone.

Eric Larson speaking.

Good morning.

Hi, Eric.

Great quarter.

One of the things you just talked about very briefly, and I am curious as to where you sit on this.

Are you fully now integrated with the new sales organization, the go to market strategies have changed dramatically.

And do you see, you know, much better further improvement in our topline due to better execution this year from your sales force?

I think it is a combination of several factors as I talked about before.

We continue to sue some strength in our new product strategy which is why you will see a lot more new product activity in '04 than you've seen in '03 and and if you think about it, over the past couple of years we used limited editions as a place to strengthen our core businesses.

Now we're adding new platforms.

So instead of coming out necessarily with a product here and product there, think of it as new platforms with is what we did with the 99-cent "To Go" line, it's what we did with Sugar-Free at the early part of '03, and certainly what we are doing with Swoops which we think will be a terrific platform from which to build.

The low carb bar that we're talking about, which will be introduced at the end of the first quarter.

We see those as great platforms upon which to build and also combining that with a sales restructure entering its full first year of operation and therefore increasing effectiveness every quarter as well as making some enhancements to the trade promotion strategy that we introduced in 2003.

So if you think about within 2003 we successfully executed the price increase and got both price and volume growth.

We restructured the selling organization and we also introduced a new trade promotion strategy, so we have a lot of that foundation if place in two two '03 that we expect good things in '04.

Thanks.

A follow-up question on category growth.

I believe, Rick, in your prepared comments you said that consumer takeaway volumes for the category were up 3%.

Is that defined by what the measured outlets are and what would you expect the category to look like going forward?

What I cited was about 3% and that is dollar growth rate which is slightly above the longer term growth of 2% or that.

But again, this is for food, drug, mass excluding Wal-Mart, and convenience stores.

That is the universe that we look at most closely what is reported externally is many times just food drug and mass excluding Wal-Mart.

In terms of going forward in '04 we think that is a pretty decent run rate.

Okay.

Thank you.

Our next question will come from Christine McCracken with Midwest Research.

Just a follow-up on Eric's question.

On these new product platforms it seems like this move away from limited edition products and going toward new platforms is a little more risky if you look at new product success rates in the past and it looks like it may be a little more costly.

What gives you the confidence at this point that now is the time essentially to change your strategy?

Well, it is less a changing of the strategy, Christine.

It's more an enhancement because what I also said in my prepared comments is we have two major area we are focusing on for new products.

One is innovative platforms with Swoops, S'mores and One Gram Sugar Carb Bars and the second is to continue to successfully introduce equity extensions and I mentioned several limited edition items.

We saw in 2003, particularly with the Reese's franchise, we had five limited edition items and that responded.

We did not have as many limited edition items on our core Hershey franchise and that is what we will be introducing in 2004.

Plus Caramel Filled Kisses is essentially a limited edition although it is a permanent item because its extension off of a one of our scaled brands.

So it is certainly not a shift in the strategy as much as an evolution.

And regarding the risk return ratio, the fact that we are introducing these new items, using our scale brands, which is consistent with the strategic direction we have been talking about for the past three years, gives us good confidence and we are going to retailer and building upon the new product success we had over the past couple of years.

I guess that makes sense.

Secondly, on inventories, you in your comments talked about the retailer moved toward -- ongoing move toward you know lower inventories, Kraft in its release talked about the same trends.

Is this something we should expect over the next 12 months or getting, in your view, closer to the boll tomorrow of this -- bottom of this kind f inventory deload.

My comments specifically were around the seasons where we are seeing broadly across many seasonal categories retailers being a little more focused on how to manage through the seasons.

We said our goal is we want to win the entire year.

We don't just want to position ourselves to just winning in the seasons.

We are being responsive to how the retailer wants to manage 52 weeks a year and we are being mindful of not selling the seasons because that's where a lot of the inefficiencies and waste comes in.

It has also been one of the reasons we have been able to increase our gross margins over the past three years.

In your other categories you're not seeing essentially lower or a move toward lower inventories.

Christine, it is fair enough to say that just like every manufacturer is working to reduce working capital, every trade member continues and it is kind of a continuous thing.

I don't think you can put a big number, you know, on it one time and say that you know where is -- where is the bottom or where is the end period.

It is a continuous improvement that every trade channel, every customer and frankly every manufacturer like ourselves is trying to do to keep improving the efficiency of our business.

I think this thing will continue to go on but it is not like a quantum leap of so many days coming out of inventory all across the board.

Fair enough.

Good quarter.

Thanks.

Thank you.

Thank you, Christine.

Our next question will come from Eric Katzman with Deutsche Banc.

Good morning, everyone.

Good morning, Eric.

Can't believe it but I actually have a few questions.

Just -- I can understand this right, Frank, you have got, what, 475 million of net reported this year assuming that you're up in line with your range of, you know, 9% or so, on the bottom line and then you have 50 or $40 million less capital expenditures because it was kind of loaded this year.

I assume that there is something else going on either with working capital or deferred taxes or unusual items so it sounds like cash flow should be up at a -- at faster pace than reported earnings growth?

Is that fair to say?

I think it depends on your definition again, Eric.

And in our definition the number that I cited of the $91 million increase, we do that after dividends.

So depending on your point of view, cash flow from operations for us actually increased $200 million.

All right.

Right.

If you take it one step down from that, after capital expenditures, it would have increased $100 million and then after everything else that went on it still increased $91 million including the higher dividend payout.

Did you make a contribution to the pension?

Yes, we did.

In September for a little over $100 million.

So, that, of course, comes out of operations as well.

Right.

And then do you think you will have to make a contribution in '04?

I doubt that we will have to do that but I think we ought to continue to take a look at it and see what the best use of cash and how the markets are doing and so on.

I mean our -- our pension plans are well funded so assuming the equity markets behave we would not expect to have it but sometimes you do it because there are certain advantages so doing it, too.

Okay.

And, all right, maybe I'll go offline with you on the rest of the cash flow statement.

I guess in terms of priorities for cash flow, Rick, you know, you talked about getting into some other kind of, you know, sports bars, possibly and other items, I know you can't talk specifics.

Seems like so far you have been comfortable with putting out differentiated product coming from within the organization as opposed to looking for it externally.

Could you comment on that vis-a-vis the free cash flow which is obviously going to be pretty strong?

Right.

As we said before we are fortunate to have a strong balance sheet and flexibility within our financial picture and we use it as we did this year to increase the dividends by close to 21%.

Step up our capital.

And we stepped up the capital as Frank had talked about for several and quite a few new items, only some of which have been introduced to the trade.

And some of the products that I cited in my comments were really only those that have been communicated to the trade and therefore communicated to competition as well.

So we have put some capital in place at the end of '03 that will benefit us via new products in the second half of '04 and those will be disclosed as a later date.

In terms of what is out there from an external standpoint we continue to be interested in actions taking place in the market actions taking place in the market and look for a combination of both.

I think, Eric, for us, we see such tremendous leverage in our brand franchises, certainly within our condition distribution and retail effectiveness and broad distribution base, we like the potential of continuing to expand off the scaled franchises.

Not that many of those in the marketplace that have the leverage in these categories that we believe we do.

Okay, and then, last question, this may seem a little bit off the wall.

But it seems like that some of these like higher end chocolate stores are gaining in popularity.

I know it is not a big percentage of the business.

But, do you ever concern yourself about U.S. consumers actually looking for more kind of European and indulgent tastes in chocolate as opposed to you know the chocolate that Hershey produces?

We don't see the concerns there because we see the growth in the category and we certainly what types of products competitors are putting out and what the retailers and consumers responding to.

The first part of your statement, there are interesting boutiques opening up in a couple of markets, but they don't represent a huge scale play, but we are in intrigued by some of ways in which they go about appealing to consumers.

But from a broad market standpoint I don't see any potential, not just impact from that but not necessarily a huge opportunity in that area either.

Thanks.

Thank you, Eric.

Our next question will come from Andrew Lazar with Lehman Brothers.

Good morning.

Good morning, Andrew.

Good morning.

Just wanted to follow up, just so I'm clear, on the incremental trade spending that was stepped up a bit, I think Rick as you mentioned, just to the be competitive in certain areas in the quarter, I guess over the last couple of quarters my understanding was perhaps the overall sort of competitive environment was becoming a little less intense.

Obviously the industry had taken pricing to cover higher commodity costs.

And I'm trying to get a sense if what happened in the fourth quarter was something that, you know, is kind after reversal of that in some way or just more tactical needs in certain parts of the business.

I think it was more tactical in certain parts of the business.

It's certainly not a reversal.

We tend to see, particularly in packaged candy, Andrew, more after competitive stance during the quarters that are more seasonal in nature, and also part of our step up of the new product introductions which is in keeping with our strategy.

So we continue to see in certain classes of trade some competitive pricing in certain package formats and we are responding appropriately.

But again we had good performance in takeaway in the quarter and year and we continue to anticipate that going forward.

Great, thanks very much.

Thank you.

Thank you.

Sir, our next question will come from Mitchell Pinheiro with Janney Montgomery Scott.

Good morning.

Good morning, Mitch.

Most of my questions have been answered but two things.

The midwest distribution center.

Are we going to see, any sort of ramp up period in terms of costs on that that will affect Q2 or Q3.

A ramp up period.

I would say for this year, Mitch, it will be a push.

The extra money for ramping up we will get if terms of savings in the second half.

So and then in '05 we would expect to get more substantial savings but I would say for this year it is probably a push.

Extra cost but then savings from having it in place.

Okay.

What about the inventory I mean so is there an inventory build in queue Q2 because of that?

There should -- we have to plan that very carefully but there should be some inventory build as you are getting out after number of other locations and trying to get product in to one.

But that shouldn't last long either.

Okay.

Finally, I may is missed did but did you speak about the total marketing spend for '04 growth?

I'm -- for '03?

No, your plans, I'm sorry, your plans for '04.

No, we didn't.

Then could you talk about it a little bit?

Well, with expectations of continued you know margin expansion, we will -- I mean we foresee continuing to spend against our brands and we will have to judge it through the year as Rick said a little bit earlier where does it make the most sense, continue to look at where we can get the best bang for our buck.

So rather than say we are going to go up so many basis points, I think this that will depend on how the year unfolds but we are certainly trying to create the affordability to make that possible through margin expansion.

One thing on the advertising side of it as we said in the past and will continue to do so, the majority of our advertising will be spent behind new product news because that is what brings excitement and creates a demand for both the category and clearly our brands.

So the advertising focused primarily in new product -- on new product news next year and then trade continues as we said to be a good spend and we will -- we will continue to improve the effectiveness as we go through the year.

One final question.

Private labels has historically been a nonevent in confectionery.

Any comment, are you seeing anything in Q4 and do you anticipate anything in -- excuse me in the Q4 and do you anticipate anything 2004?

No, we have seen private label remain at about the same low level that this has been historically.

Thanks, Rick, thanks Frank.

Your next question will come from Terry Bivens with Bear Stearns.

Just a quick follow-up.

If we look at the algorhythm on earnings growth, 9 to 11, I guess that is what we are talking about here, right, Rick?

Yes.

On a long-term ongoing basis, correct.

About a year ago holidays and Hershey you were willing to say maybe the high end is more appropriate.

Any similar remark as we look into '04.

We will stick with what we communicated to date.

Okay.

Thank you.

Thank you, Terry.

Sir, we have no further questions at this time.

Do you have any closing remarks?

Hearing no more questions we will conclude the call.

Montifern and I will now be available to take your questions and as a reminder our first quarter sales and earnings release for 2004 will be April 22nd and we will be having a conference call that day at 10:00 a.m.

Thank you.

Thank you for participating in today's teleconference.

You may now disconnect.