好時 (HSY) 2004 Q1 法說會逐字稿

Q1 2004 Hershey Foods Corporation earnings conference call April 22, 2004 commencing at 11:00 a.m.

ET.

The Hershey Foods Corporation earnings conference call will begin momentarily.

Ladies and gentlemen, this is the operator.

Today's conference is scheduled to begin momentarily.

Thank you for your patience.

Good morning, ladies and gentlemen.

My name is Tina, 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 speaker's 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.

If you would like to withdraw your question, press star, then the number 2 on your telephone keypad.

Thank you.

Mr. Edris, you may start your conference.

Thank you, Tina.

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 this morning's call.

Rick will provide a overview of the company's performance for the quarter.

Frank will provide the specific details and then we'll take your questions.

We welcome those of you listening via the webcast.

Let me remind everyone who is listening that today's conference call may contain statements which are forward looking.

These statements are based on current expectations which are subject to risk and uncertainty.

Actual results may vary materially from those contained in the forward-looking statements because of factors such as those listed in this morning's press release and in our 10K for 2003 filed with the S.E.C.

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

Rick.

Thanks, Jim.

And good morning.

Following a strong 2003, this year is off to a very good start as we continue to execute our value enhancing strategy.

We began 2004 focused on accelerating topline growth and achieved solid performance during the quarter.

Sales growth was broad-based, behind a successful introduction of new platforms such as Swoops and one-gram sugar carb bars, as well as innovative line extensions such as Kiss's with caramel and white Reese's cup.

The combination of profitable organic growth and continued cost containment yielded record profits and returns.

This morning we also announced a two for one stock split.

This action reflects the Board's confidence in Hershey growth potential and commitment to building shareholder value over the long term.

Frank will provide some specifics on this in a moment.

In terms of the first quarter, net sales increased by 6.3%, with about two-thirds from volume and the remaining one third from favorable price mix.

Equally as important, we expanded our market leadership position.

This sales growth reflects the continued shift in our portfolio to the higher margin ontrend brands and items, specifically instant consumables experienced a sales gain of better than 10%.

It's important to note that the majority of our new products are in this more profitable fact type.

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

In addition to an earlier Easter, retailers continue to shorten their purchasing period and we continue to limit our exposure by not chasing unprofitable sales.

Within the retail marketplace, Hershey experienced strong consumer takeaway in channels that accounting for about 80% of our business takeaway increased by 5%.

This includes food, drug, mash -- including Wal-Mart and convenience stores.

In the reportable FDMX C channels we increased our share leadership by 0.2 points.

Once again our performance in convenience stores was strong.

In this channel, take away increased by 9% with a 0.8 point gain in market share.

In terms of brand support, total advertising and promotion spending increased by 80 basis points with a good balance between the components.

It's important to remember that both the category and Hershey brands, particularly given our scale are very responsive to marketing support.

Advertising increased behind the new product introductions with the higher trade spending aimed at securing new distribution and effective customer-specific events.

In terms of our profitability and returns, the combination of net price realization and solid productivity gains yielded a gross margin of 38.2%, up 80 basis points versus year ago.

Diluted earnings per share of 82 cents per share.

It was up 12.3% versus year ago.

As we move into the rest of 2004, we'll continue to introduce ontrend new products and innovative packaging to increase Hershey's leadership position within core confectionery and expand into relevent snack market adjacencies.

Within core confectionery, we're continuing to meet the consumer needs for Better For You products by adding two new varieties to the one gram sugar carb line in the third quarter.

One gram Reeses and one gram Hershey's Dark Chocolate.

We're also introducing a four item tegbar line of reduced sugar carb products called Carb Alternatives, thus bringing the lower sugar carb benefit to the packaged candy format and to our iconic Kisses brand.

We'll build upon the favorable trend in instant consumables with additional limited editions in the third quarter.

Some of them include white Reese's Big Cup, which capitalizes on the success of both white Reese's and last year's successful Big Cup limited edition.

We'll also be introducing triple chocolate Kit Kat and Hershey's white chocolate with almonds.

Within non-chocolate candy, we're leveraging the Jolly Rancher franchise with three items that will help contemporize this brand.

Jolly Rancher Fruit and Sour, Smoothies and Sour Chews.

Turning now to the snack market adjacencies, the strategy is to deliver the key benefits that are propelling the significant growth within the nutrition and snack bar segments.

In the third quarter, we'll be introducing two new platforms.

The first one is Hersheys, Reeses and S'mores Snack Barz, that's barz with a "z", which capital on our confectionery expertise and strong brand franchises within the permissible snacking bar segment.

Hershey Smart Zone bars, in association with Dr. Barry Sears, founder of the Zone Diet, will also be introduced in the third quarter.

Given the lawsuit that was filed last week, I won't be commenting further.

Suffice it to say that our initiative remains on track and we're confident in our position on both the name and Dr. Sears' endorsement.

In addition to our new product innovation, we're very excited about the alliance that we entered with Telia, the highly popular latin star.

Wwe'll implementing a comprehensive marketing program that includes Spanish language advertising, consumer promotions, customer specific events and exclusive sponsorship Telia's nine city U.S. tour beginning in New York on May 4.

In the third quarter we'll also be introducing Dulceria Telia's or Telia's Sweet Shop, a co-branded line of chocolate and non-chocolate products.

This marks just the beginning of our Hispanic marketing initiative.

We view the Hispanic growth opportunity with the same great potential as Seasons offered five years ago, and more sustainable.

Stay tuned, there is a lot more to come in our Hispanic effort.

The first quarter results continued the momentum from 2003.

We're encouraged by our progress to date, and look forward to the remainder of the year.

We remain committed to our long-term guidance of 3-4% in sales growth and a 9-11% increase in diluted earnings per share.

Now Frank Cerminara will review the quarter's results in greater detail.

Thank you, Rick.

Good morning, everyone.

I'm very pleased to discuss our first quarter results.

As Rick stated in his opening comments, we are off to a good start for 2004, with more balance of top and bottom line growth.

For the first quarter of 2004, record consolidated net sales increased by 6.3%.

As 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 and net price realization which contributed about one third of the increase.

Regarding the matter of extra shipping days in the quarter, there were in fact four more shipping days than in the first quarter of 2003.

However, our business is programmed around specific customer events, and brand and product initiatives, not around shipping days.

Our first quarter sales were, therefore, not materially affected by the extra shipping days.

We are maintaining our strategic guidance for sales for the year 2004 at 3-4%.

As we have stated on many occasions during the past year, one of the major challenges for us in 2004 is significantly higher commodity costs.

Despite these higher costs, gross margin continued to show improvement.

In fact, by about 80 basis points, coming in at 38.2% versus 37.4% in 2003.

Higher net price realization, better mix of products, and improved productivity throughout the supply chain enabled the gross margin expansions.

Selling, marketing and administrative expenses increased 40 basis points as a percent of net sales, coming in at 20.1% versus 19.7% last year.

Direct brand support, mostly advertising and consumer promotions increased, while general and administrative expenses remained flat.

Our top line growth and margin expansions combined to create the affordability for increased brand investment.

As Rick mentioned earlier, our total brand support, including trade promotion, increased by about 80 basis points as a percent of gross sales.

We continue to gain insights and to refine our marketing mix.

With the goal of creating the most efficient and effective marketing spin.

Earnings before interest and taxes of $183.3 million increased by 8.6%, compared with the first quarter of 2003.

And the EBIT margin was 18.1%, verus 17.7% last year.

A 40 basis point improvement.

Interest expense for the quarter was essentially flat, coming in at $14.9 million, versus $14.6 million last year.

The effective income tax rate for the first quarter of 2004 was 36.4%.

Down slightly from last year's 36.7%.

And we do expect this new rate to persist throughout 2004.

Record net income from operations of $107.1 million was 9.8% higher than the first quarter of 2003.

And our net margin was 10.6% versus 10.2% last year.

Weighted average shares outstanding on a diluted basis for the first quarter of 2004 were 131 million shares versus 134.2 million shares for the first quarter of 2003.

Leaning to a EPS of $0.82 per share diluted, compared with $0.73 per share diluted for the first quarter of 2003.

For an increase of 12.3%.

Turning now to the balance sheet, at the end of the first quarter, net trading capital declined $57 million, or 7.8% compared to last year's first quarter.

On a rolling 12-month basis, net trading capital declined 100 basis points as a percent of sales.

We have focused on collection of receivables, control of inventory and expanded payables.

Pre-cash flow increased $41 million during the quarter, compared with the first quarter of 2003.

As a result of higher net income and better working capital utilization.

During the quarter, we spend $20 million to repurchase 261,000 shares of our common stock on the open market.

This brings our total share repurchases on the current authorization to 5.2 million shares, at a cost of $350 million or at an average cost of $67.42 per share, thus we have completed 70% of the $500 million authorization.

Now I'll cover a few additional items of information frequently asked by many of you.

In the first quarter, capital additions, including capitalized software were $65.5 million.

For the full year, we expect capital additions to be in the 180 million to $190 million range.

Depreciation and amortization for the quarter totals $47 million.

For the full year, we expect D and A to be in the 190 to $200 million level.

Dividends paid during the quarter were $50.1 million.

As many of you know, we have increased dividends annually for the last 29 years and our policy has been to increase them in line with earnings and cash flow growth.

I'll conclude my remarks with a few comments on the stock split announced this morning.

As Rick mentioned earlier, our Board of Directors approved a two for one stock split in the form of a 100% stock dividend to stockholders of record May 25, 2004.

Hershey stockholders will receive one additional share for each share in their possession on that date.

This does not change the proportionate interest the stockholder maintains in the country.

The additional shares will be distributed on June 15, 2004.

The stock split reflects our Board of Directors confidence in the long term growth prospects of the company.

It also puts our share price in line with the pier group and in a better range for individual investors.

And, over time, it should also create more liquidity in the stock.

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

Tina, the first question please.

Ladies and gentlemen if you would like to ask a question, please press star one on your telephone key pad.

And your first question comes from David Nelson.

Good morning.

Good morning, David.

Congratulations.

Thank you.

Were there any one time expenses in the quarter?

There were some immaterial pluses and minuses, just like any quarter, David.

So there's nothing unusual or material that would have affected the quarter.

Okay.

Let me make a -- make a step back then, please.

You know, a couple of years ago there was the -- the sale process by the trust.

And as I understood it it was brought about by the state Attorney General saying that the trust needed to diversify.

Given your strong cash flow, is there -- could you comment on the prospect for the Hershey company buying in more of the stock held by the trust, is that imperative that the trust diversify still stands?

David, as we've said before, the trust has not chosen to participate in our current stock buyback program.

And in terms of the actions that the trust wants to take, I'm certainly -- even though I sit on the trust board, I do not want to speak for the trust.

I'll leave it at that.

Okay.

Well, congratulations then.

Thank you.

Thanks.

Your next question comes from Eric Katzman.

Hi, good morning everyone.

Good morning, Eric.

Good morning, Eric.

I guess first question is, I think, Rick, at the Cagney you outlined the new categories that you are going into, but you did not really specify how much money you are going to spend or how much it is going to cost you to go into these new areas.

Is it fair to say at that as you kind of manage this year, that, you know, the upside from the core business and the line extensions, which are clearly doing well, will be used to -- to fund the new areas, and that that should keep you to your targeted growth rate, even though in the past two years you've, you know, substantially exceeded it?

I think there's a couple of things going on.

In terms of your -- your first point, Eric, we -- our new products, the one that we've at least introduced through the first quarter are at least meeting our expectations, the two that we've talked about introducing in the third quarter, the snacks barz and the Hershey smart zone bars.

Remember we talked at Cagney about our newer items having higher price realizations so we have inherently better margins, and the way we look at it this gives us entry in the bar segment which is one we have a higher profit margin and also in the higher growth alternative classes of trade.

So it's not as though we're taking money from one to invest in the other.

Obviously there is new product introductory expenses, whether it be advertising or promotion.

But it's not necessarily taking it from one, just to support the other.

But I think the second part, or the last part of your question was, and we've, you know, remain committed to our 9 to 11% long term guidance.

I think that gets at your question.

Okay.

And then, I guess maybe more of a legal or a political question: During the quarter your stock spiked at one point, because I guess there were rumors going around that you were trying -- Hershey was trying to change some aspects of the law that was put in place with regard to the eventual -- or impossibility of selling the company and I think Jim had said to me that that was a function of trying to deal with JVs.

Can you kind of go into that?

And have you changed that, so that now if you wanted to go into joint ventures you feel legally you could do so?

Well I -- I think what -- I won't -- certainly won't comment on any speculation that might have driven the stock one way or the other.

There was a law that was passed hastily back in 2002 at the time with the potential sale process and all we're doing is making sure that the law doesn't unfairly restrict Hershey as a publicly traded company and not permit the Board of Directors to act in the best theres of all of the shareholders.

I think that is really what it has to do with.

The example that has been used was being overly harsh in terms of permitting prehaps alliances and things of that nature but that -- that's really what we're working on to ensure that our Board of Directors has the same degrees of freedom that any other publicly traded Board of Directors has to continue to build shareholder value.

Okay.

And I'll -- why don't I leave it at that?

Thank you.

All right.

Thank you.

Your next question comes from Pablo Zianek.

Good morning, everyone.

Good morning.

Good morning, Pablo.

Just a couple of questions, in terms of revenue growth in the first quarter, what part of the 6% really came from the new products?

What -- what frank and I both said was about two-thirds volume and a third from price and mix.

And I'm not going to split out the specifics between new products and base, because, for example, we have permanent introduction of white Reese's which is really a new product but it is a line extension.

I would rather not get into the splits between new and base at that point.

Pablo, while most of our sales, while we call them new products, do include things like limited editions so they are really building for the most part or existing brand franchises and platforms.

So to make a arbitrary split like that really doesn't serve much purpose.

We really are building on the franchises that we already have.

Okay.

All right.

Thank you.

And just to follow up in terms of the cocoa front, do you have a sense already for the rest of the year, what increase you are looking at?

I mean have you pretty much secured the price for cocoa for the next two years?

Yes.

I think the guidance we've given -- pardon me.

The guidance we've given early Pablo is we have pretty good visibility to our entire cost structure for the year and it is true as well for our input costs of ingredients and packaging.

And so maybe the best way to characterize it for you is that we don't expect any surprises.

We do know to -- with a fair degree of certainty, what our cost structure for those input ingredients are going to be for the balance of the year.

Right.

But if that is the case, does it mean for example in terms of your cocoa price you can take an average price for a full year and you book the same price for every quarter?

That's right.

In order to reflect the proper price quarter by quarter, we basically are pegging to a price expectation that we have.

Right.

And just one last question, in terms of nutritional bars, on the cereal front, the name Snack Barz, is that it, or is there like an extension to that, will it be Snack Barz Reeses or Snack Barz S'mores?

What I had said, there are three varieties, and it's Hershey's, meaning the brand name Hershey's Snack Barz, there's Reese Snack Barz and then S'mores snack Barz.

All right.

So each of them -- each of the snack bars has a Hershey brand name in in front of it.

Okay.

And just understanding, Mars has used the idea of a -- they use a brand called Kudos in the cereal aisle.

They didn't go with one of their chocolate brands.

I mean, do you think at that going with a chocolate brand is probably a better strategy then what Mars has done in terms of cereal bars?

Well, I will not comment on what Mars has done.

The important thing is that we know in the consumer research work we've done in developing these brand names, the three that I mentioned, Hershey's, S'mores and Reeses, do very well with consumers in this permissible snacking segment of the bar market.

And it's also important to note that with all of the energy and nutritional bars the three most prominent ingredients are chocolate, caramel and peanut butter and so that's why we like the opportunities for our brand names.

Okay.

Thank you very much.

Thank you.

Thank you, Pablo.

Your next question comes from Tery Bivens.

Hi, good morning, everyone.

Good morning, Terry.

Hi, Terry.

Just a couple of things, rationalization on the sales line during the quarter, Frank, I think most of us were looking somewhere in the range of 40 million.

Could you quantify that?

Yeah.

For the quarter, the impact of -- of our rationalizations, Terry, would have been close to 1.5%.

Okay.

And are you still on-track to largely complete that by Q2?

Well, we -- we've pretty much completed.

We're -- in terms of screws, we're pretty much down to -- we're very close to the level where we said we wanted to be, which is somewhere around 1400 skews.

Okay.

So we're there.

To the extent that we had some of the skews and then some of the brands that were sold later in the year last year, of course, we'll be anniversarying those.

But, as we said, our guidance is still to have a reported 3-4% top line.

But it could have a total impact of around 1% for the full year.

For the full year?

Yes.

Okay.

And, Rick, I noticed on -- you know, obviously the progress on the chocolate brands has been very strong.

You mentioned today some innovation on Jolly Ranchers.

But, you know, as you look at your other two big none chocolate brands, Payday and Twizzler, I know there is a feeling there that you have not gotten the effect that you'd like to, could you just address those products and kind of give us some idea of your thinking there through the balance of the year and beyond --

Absolutely, we have the number one position in non-chocolate with about a 14% non-market share, so it shows a more fragmented market.

We have new initiatives on Twizzlers that will be coming out.

And since we have not yet presented them to the retail trade, I did not want to discuss them today.

So stay tuned on Twizzlers.

Payday has done well in the bar format when this has been Payday in the package candy in the food class of trade, which is one of the chroer grower classes of trade, it has not done as well, but on the front end, the Payday on the bar -- in the bar format has done well.

Okay.

Very good.

And last thing, just on the share refranchise, -- on the share repurchase, Frank, I know you've extended it into this year, but any thoughts as to when that may be finished, the 500 million authorization?

Well, at -- at the pace that we're going, Terry, it looks like it should take us the balance of the year, but it really depends on the liquidity that is available in the market, how often we're blacked out, what the trading is on any given day.

Because, you know, the rules are pretty specific on being able to only buy on down ticks, being able to take block offerings only on particular days.

And so there are a lot of dependencies.

But we certainly continue to be in the market to buy back our stock.

Okay.

Thank you very much.

Thank you.

Next we have Christine Mccracken.

Good morning.

Good morning, Christine.

Good morning, Christine.

Two things, one, you mentioned your Latin American strategy and it sounds like -- or it is very logical that you would target that market given its growth.

But I'm wondering, it seems to me that the products or the flavors that that market tends to gravitate toward are essentially, you know, very strong fruit flavors and caramel, wondering, you know, given your portfolio and your strength, is it a good fit or are you seeing developing a entirely new line to target that market.

Good question.

One of the comments that I made was later in the third quarter we'll be introducing a co-branded line of both chocolate and non-chocolate products to make sure they appeal to the hispanic segment and I'd rather not get into the flavors at this juncture, again because it has not been fully presented to the retail trade.

Fair enough.

But is -- or is it fair to assume that you would be developing new products or are you adapting current products that you have?

A little bit of both.

Thinking of our current product we've introduced in in the first quarter, it has been successful and carmel filled Kisses or Kisses filled with caramel excuse me, and that has a high appeal with the Hispanic segment, there's other products currently in our line as well, but we see an opportunity in both chocolate and non-chocolate.

And I was talking a little bit before in terms of continuing to build our Jolly Rancher and Twizzler brand names or franchises in non-chocolate and we feel this is a good opportunity to do that.

You are not targeting it, just to be clear, going into actually Latin American markets specifically, or is this something that you can I guess, restart the international effort.

This is really -- as of this juncture, it's a U.S. based initiative, but we also see opportunities to benefit Hershey Mexico.

All right.

And then you mentioned, I think weaker seasonal sales in the quarter, I'm assuming that's largely Valentine's sales, wondering if you had an early read on Easter.

It seemed, at least from some of the survey work that we did, that it did seem to be a pretty good holiday for Easter sales.

Could you comment on that?

And, again, Easter was about, I think, eight fewer days this year than last year and we've had good sell-through at Easter.

We do not have all of the final share numbers yet, but Easter was in decent shape.

Valentines was the one we see the most compression and it is the holiday most likely to receive compression from the retail trade.

So we're continuing to manage our seasonal promotions, and -- and therefore our sales in a way that we can manage them for profitability and ensure that we're building the other parts of our franchise.

Seems to have worked.

Thanks.

Thank you.

Your next question comes from Chris Growe with A.G.

Edwards & Sons, Inc..

Good morning.

Good morning, Chris.

I just had a couple of questions here for you.

And the first one is, I know you talked about the shipping days in the first quarter.

I don't -- I'm not familiar with the number of shipping days for the full year.

Are there more shipping days for the full year?

No.

There are the same number of shipping days, it's just that our calendar runs on a four week, four week, five week quarter, and this year's quarter happened to end a couple of days later than last year's quarter.

But as I pointed out, in -- a little bit earlier, we really don't -- don't sell to shipping days, we really sell to very specific customer events and to initiatives that are related to products and brands.

And so the number of shipping days, as long as it's within a few days, is -- is immaterial to the quarter.

Okay.

And then on the -- on -- just -- I know you've been raising your promotional levels for the business, and that seems to be the way the business is responding, and you had pretty strong volume growth this quarter.

How many did increased promotion hurt your top line?

I guess if you -- if you do include that in your pricing and mix calculation?

Yeah.

You recall that both Rick and I mentioned that -- that our brand support in total was an extra 80 basis points, and that was pretty evenly split between below the net sales line and above the net sales line.

So you're talking about an extra 40 basis points.

Basically that the top line would have been hurt as a result of that math.

But you've got to remember it is also that programming that helped us to get the gross sales top line.

So we're not using it as a deflater to net sales because that programming is driving our business.

Absolutely.

Okay.

And the last question I have then is just if you could talk about, and perhaps I missed it and I apologize, by your C store performance and also vending and how those two channels performed in the quarter.

Yes.

The C stores we continue to do well with C stores, the number that I cited was that for the quarter Hershey's take away in convenience stores increased by 9% and we gained 0.8 points of a market share -- in market share, so continued growth in that channel.

And vend, while we do not cite the numbers specifically, we had a pretty good quarter within vend.

Okay.

Thank you.

Your next question comes from Andrew Lazar.

Good morning.

Good morning, Andrew.

Good morning, Andrew.

Two quick things.

One, I think last quarter, Rick, you mentioned that, you know, because you were having pretty good success in a lot of the alternative channels, you had, you know, spent back a little bit of the incremental net price realization in some of the bag product in, let's say grocery, just because that was where some of the -- some of the other players were, you know, feeling that was the only area they could kind of step it up and compete.

Did that change one way the another that is even worth mentioning in this quarter, or not?

No.

Because this -- this -- this first quarter has so much -- the package candy is so much seasonally dependent it kind of -- it makes it difficult to draw that same comparison versus previous quarters.

What we have said and have continued to see it is that packaged candy and the higher-price -- or the more price-competitive channel tends to be in the food class of trade, and that's one we're mindful about holding our share.

But we also know that were our growth is going to come from is two things, one higher margin, ontrend instant consumables and the higher growth channels.

So nothing there, has let's say changed meaningfully that gives you pause?

That's correct.

And the last thing is that given your focus and your realization is that the top line is what is going to get you there this year, more than let's say than in years in past, given your growth algorithm you stepped up the trade promotion side in the past couple of years as part of the strategy you've talked about.

And of course much of that does come off the top line.

Right.

Is it potentially as you look forward to what could be a favorability this year on top line growth versus last year, are you at levels that are at least, you know, somewhat more in line with where you want to be going forward such that maybe on a year-over-year basis the trade spending component is less of a negative impact you know for, then, let's say for than it might have been last year or the year before.

I think it is a good question.

And it is difficult to answer directly.

Because last year at the beginning of 2003 we obviously had the protection of the pricing actions that were taken in the fourth quarter of 2002.

Where we stand today, there are a couple of things, we feel good about the progress we've made in our new trade promotion strategy.

Each quarter we learn more about which brands, pack types and customers respond to which types of events.

So we see opportunities to continue to make our spending more effective.

In terms of whether or not the total spending's going to go up or go down, we'll continue to spend to support our new item.

We know that our brands are responsive to in-store drivers such as such as merchandising, additional distribution and one of the wild cards will be what type of competitive activity takes place.

Right.

Okay.

Thanks very much.

Thank you.

Your next question comes from Leonard Teitelbaum.

Good morning.

Good morning, Len.

Good morning, Len.

Just a couple questions, I want to try a question, I think had been asked -- try it a little bit of a different way.

Frank, if we take out the limited editions on the new products that you guys, you know, have as a -- as a strategy, and look just at the one carb bar and not -- and the zone bar, or whatever we'll wind up calling it, are you bringing that out at a price less than would be sold for on an introductory area, or is it coming out at full price?

Len, I'm not sure I understood your question.

Well, I think you'd price -- I thought you said earlier that this thing was designed to retail at over $2 a copy on the one-carb bar.

The one gram sugar bar --

The one gram I'm sorry, the one-gram bar and is it being introduced into the market at that price or is it coming in at somewhat less?

No.

I think what -- where those bars sell typically can be at low as $0.99 and all the way up to $1.59, $1.69.

We do sell it for much more than we sell a regular bar, so that our own maringin tends to be at the upper end of our product line.

That's what Rick was mentioning earlier.

And so the price realization at retail was always expected to be let's say between a dollar and a dollar and a half and our selling price was always resulted expected to be much more than the regular bar selling.

Frank.

You've done a very good job of avoiding the question.

The question was: Is it coming out at less than what it will sell for when it finds its space, or are you bringing it out at its full price and let it find it's space at a full price.

We are introducing it at the price that it is going to be sold at.

It has a price list price.

How the trade chooses to merchandise or get trial is up to the programming and how that trade -- how that particular trade customer wants to introduce the product.

Fine, thanks.

Now, if we take a look again, just staying with that segment for a minute.

Is that carrying its costs of promotion now?

Or is it being subsidized on a -- on a --

No.

It is carrying its cost of promotion now.

Now, when we take a look at that size of the market, I mean, if we use advantage and indulge as kind of proxies for this product, we're talking about a -- quite a substantial segment of the market just on its own.

You're selling this thing as, I think you called it a permissible snack or something in that area.

Are we talking -- I mean, we're talking about a potentially -- what we would have thought an old-new product would have then added, $100 million.

Is that way too high for this type of a product now?

Or are we looking at just too small a segment of the market to get that high.

Len, there are couple of things.

Make we were not as clear as we should have been.

There are two products that I think that you might have mentioned interchangeably.

We introduced the three item line of the one-gram sugar carb bar.

That's the only one I'm referring to now Rick.

The ones that were called Snack BarZ and the permissible snacking, that's in the 3rd quarter.

So let's go back to the segment where consumers are looking for lower carb lifestyles, that's where we came out with the three-item line of the one-gram sugar carb.

And the -- the good news is it's in the bar format leveraging our existing equities, we've never said it will be 50, 75 or 100 million.

Now is your chance.

[Laughter] And it is too early to tell.

We know that it's meeting our expectations and we want to see where the consumers take this thing.

The good news is that we think it is off to a good enough start to come out with two more items later in the year, which is Reese's which will be a terrific edition because of the size and scale of the Reese's franchise and dark chocolate.

Okay.

Fine, thank you very much.

I'll finish up off-line.

Thanks.

Okay.

Thanks.

Your next question comes from Eric Larson.

Good morning, everyone.

Good morning, Eric.

A quick on, um -- going back to a previous question, Rick, on the level of promotion, in that it's increased a bit over the last couple of years.

Right.

But it is also fair to say that your level of innovation has increased pretty demonstrively over the last few years as well, which is what promotion is designed -- designed for.

What -- what measurement of -- of sales do you have today of new products contributing to your revenue today versus maybe two or three years ago?

What we indexed at Cagney, Eric, we haven't said what pro position of -- what proportion of total sales are coming from new products.

What we indexed at Cagney was that in 2003, if you use the year 2000 as a starting point, and then that's an index of 100, 2003, that index would have gone to 225.

And then we're expecting this year for that to jump to more like 400.

So it -- it -- new products are that much more important in our product line and innovation is that much more important.

As I also stated earlier, a lot of these new products are simply building on franchises and platforms that we already have.

Some are building on new platforms.

Yeah.

Okay.

And then -- and then the final follow-up question is that I -- is that I believe that on an annual basis you -- you guide or give, you know, at lease a -- a judgment of gross margin improvement in somewhere in the 70-90 basis point area.

And if you look at your 1st quarter, your -- your margin is significantly -- you're off to a good start on your gross margin.

What does that mean for the remainder of the year?

Yeah.

At -- at this point, Eric, we would not change our guidance that we gave at Cagney, and that is to be at the lower end of our guidance range of 70-90 poin.

Okay.

And in terms of the -- your pricing strategy, obviously last year you did take some pricing, which I think is, what, the tenth price increase in 100 years, it's something like that, I forget some of the numbers.

But it -- was that price designed, you know, to look over the -- this year as well, and so, you know, maybe you -- you might not change bar sizes or something to reflect your higher commodity costs?

You know, for the most part, Eric, we said a year ago we did not need for 2003 at least we did not need that price increase.

The fact that -- that we followed Mars and gave us the opportunity to square things away for the -- for the current year, so at least for right now we're not contemplating any major changes but that -- that's the sort of thing that you have to keep -- continue to look at the product line all the time and -- and see what other kinds of cost increases are in the business.

So, I mean, I wouldn't rule out any of the marketing levers that we have going forward.

That's a continuous thing that we have to keep assessing.

Okay.

Great.

Fair enough.

Thank you.

Your next question comes from John McMillin.

Good morning.

Good morning, John.

Good morning, John.

Congratulations.

Thank you.

Thanks for delaying your call to allow us to get our [inaudible] fixed.

You're welcome.

The top line sales, you know, of -- of over 6%, I guess, benefited a little bit, Rick, from a weak comparison.

Can you just remind us again to what extend the year-ago quarter was hurt by the timing of the price increase?

I think it is a couple of things, last year we recorded net sales down 3.6% at the time, and it is correct we said about 2% would have gone into the 4th quarter of -- of 2002.

I think that the flip side is I know that none of our salespeople felt like they were starting off on New Year's Day of this year with plus 2% more orders on their books.

But, ah, if you -- you can take the two out.

And then we also, John, as we spoke about earlier, knew that the seasons would be down and we planned for it accordingly so that's a bit of an offset to what might be the belief it should have been a easier start to the quarter.

And, and can you -- you mentioned a Kit Kat line extension.

I know Nestle's doing a lot internationally, but what was that line extension domestically.

Triple chocolate Kit Kat.

And you obviously see what they are doing internationally.

Yes.

We've had opportunities before in terms of white chocolate Kit Kat from last year and we see opportunities to come out with value added limited editions under the Kit Kat franchise here.

And my exten -- my last question might be viewed as a personal one but, you know, your name, Rick, has been in the news lately regarding other CEO jobs, your friend Bob Eckert [sp], [inaudible] and Jim Kilt have all come out and made statements.

Do you have any statements to make in this regard?

No.

John, I'm certainly not going to, I appreciate your question but I'm not going to comment on any speculation in the press.

What I will say is my focus, has it has been, is to continue to execute our strategy here.

You certainly did in the 1st quarter.

Thank you.

Thank you.

Thanks, John.

Your next question comes from Daniel Perez.

I just have a quick question, housekeeping on the share repurchases, if you could go over those numbers again, the amounts spent and the amounts repurchased.

I'd appreciate it.

Sure.

I'd be happy to.

We spend $20 million in total in the quarter.

To buy back, and let me make sure that I give you the exact numbers, 261,000 shares.

Okay.

Common stock.

Um-hum.

And that brings -- we had a $500 million authorization in total.

That brings us to having repurchased now 5.2 million shares at a cost of $350 million, for an average price of $67.42.

Great.

Thank you very much.

Sure.

And your final question comes from George Askew.

Good morning.

Good morning, George.

Good morning, George.

Rick, can you address what impact you might have had on the top line from a little bit of you know, lingering SKU reduction, you mentioned perhaps the percent for the full year, but what was the impact for the first quarter.

And also, given the price increase obviously you got -- you're getting the pricing this quarter, you didn't get it in the year-ago quarter.

Is, ah, you know, how much of your one-third revenue from pricing, that comes from that actual pricing?

There is a couple of things, the first part of your question, as Frank mentioned, we think that item rationalization might have attributed about 1.5% negative change in this quarter versus -- versus the last year, and in terms of the pricing, it -- it's a combination of higher net price items, some of the new products that we introduced and spending back some in -- in trade support to not only introduce the new products but also to continue to get share growth and take away with a 5% take away, we feel pretty good about how we're executing our sales programs.

But in terms of how much of the -- the one third of the total increase that was price versus mix, we're not going to break that out specifically.

Okay.

And then you made a reference to the, you know, the significance of the seasonal opportunity five years ago.

How big was that?

Can you give us dollars?

Well, what I -- what I was say something four, five years ago the category, and certainly Hershey did a terrific job in terms of building the seasonal initiative.

And we've also seen it over the past year or so, you can see it in our category, you can see it in many categories, retailers are taking lower inventories and their sh -- shortening their merchandising period of that,which is why we've said that we're going to focus on building our brands, taking advantage of our scale franchises and winning in high growth outlets.

What I was referencing was that we view the Hispanic marketing initiative going forward with some of the great opportunities that we might have viewed if we were sitting here five years ago talking about the seasons.

The difference is in this regard is we're focused on the emotional connectivity initially with the Latin star Telia and also reinforcing building our brand, and we think that's why it's a great opportunity for us.

The Hispanic market has been written about quite extensively and we see it as a great growth potential and it's also something that our customers have been very keen for us to get more aggressive in.

Absolutely.

No.

I think it is a great thing.

Can you quantify?

I mean, was the seasonal opportunity four, five years ago a $300 million opportunity?

George, your know, the seasonal business, actually, we got it started in confection airy and it has been decades in the making.

I think what Rick was say something is that five or six or so years ago we were counting on season -- we were counting on growing the seasonal business maybe as much as 6, 7, 8% a year.

And so there was -- it's more the buoyancy and direction, rather than trying to put a specific number on it.

And what Rick is saying is there is a great opportunity in the Hispanic market that we see that -- that we can really grow.

Without trying to, you know, put a seven or eight or 10% growth in it.

We'll develop it as we go along.

I was looking for that specific number.

Fair enough.

Thank you very much.

Ask us in five years maybe.

All right.

And we do have a follow-up question from Pablo Zianek.

Good morning.

Sorry, just a quick follow-up.

Rick, is it fair to say that if we think of checkout counters at supermarkets, drugstores, convenience stores, that your number of facings in the last two years has not really changed and if that's the case when you're launching these new cereal and granola bars and the Smart Zone product you need to take out -- decide which of your products you'll end up taking out?

There is a couple of things.

First off, for the quarter, our distribution increased by 5 percentage points, what I do not have facings is this year versus facings last year.

I think the fact that the category continues to grow, candy, gum, and mints, in food, drug, mass excluding Wal-Mart and then convenience stores is up 3% for the quarter, which is good quarterly growth.

And then we were higher than that number.

And we continue to bring in the products that are ontrend from what the customers want, and we're gaining incremental space.

Now the flip side is we also are distributing and purchasing these items in different sections.

For example, sugar-free has gone into the pharmacy or the drug section of stores.

And so we see secondary and tertiary placements for products such as sugar-free, one gram sugar carb and certainly Swoops which has been very successful is merchandised not just in the front end but elsewhere throughout the store.

All right.

Thanks very much.

Thank you.

And we also have a follow-up question from Eric Katzman.

Hi, Rick.

I guess it was 14 months ago that Mars, Nestle and you raised prices.

The industry or the category did so successfully.

Many of your peers are suffering from raw material costs, trends that are well-beyond their expectations.

They've started to announce price increases.

I was wondering if you put on kind of like an industry hat, if you care to comment on what you think the likely success is of prices going through at retail given the inflation, even if you do not need one yourself?

Eric, I want to make sure I understand, you mean the likelihood of prices going through in our category or other categories.

Other categories, just a general sense of what you think -- you know, where retailers stand today.

You know, I'm assuming that with the 11% increase that you had, whatever it was, a year ago December, that you don't -- you don't see any need to race prices, but a lot of your peers do.

And you have as broad a distribution in the U.S. as anybody.

I mean, what's your sense as to whether retailers are willing to take pricing up or not?

You know what my answer is going to be in terms of -- I really do not want to comment, because it would only be my personal perspective of what might be happening with other categories, with other retailers.

I think what's interesting is that you have a much different retail environment today where retailers are really viewed on how they want to market their chains or their stores to their customers, and you don't you not see a blanket that you would see from a retailer standpoint, but I'd rather not speculate at all on what might happen to any specific manufacturer category that takes a price increase.

Okay.

Thank you.

Thank you.

We have a follow-up question from Terry Bivens.

Just on the acquisition front, it does -- you know, there's always, I think, the question of what you folks intend to do with the free cash flow, which seems to be just kind of mounting up here.

Rick, could you address the acquisition situation you see out there.

Just -- I know that you can't be specific about it, but should we infer that you've kind of decided to go your own way into new categories of snacking, or is there still the distinct possibility at some point you might chose to go another way there.

Yeah, good question.

I wouldn't infer one thing one way or another.

I think as we view the landscape, where do we think we can get leverage and where we think we can continue to build our overall presence, right now for us it is internally developed products that leverage our brands, confectionery expertise, distribution and selling capabilities, however, we're always on the watch for what might make a logical acquisition.

Okay.

As I've said repeatedly, it has to be on strategy as opposed to just being a, you know, a quick -- a quick addition for top line growth.

Okay.

Thanks very much.

Thank you.

We have no further questions at this time, sir.

Do you have any closing remark?

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

Mona, Fern and I will now be available to answer any additional questions that you might have.

As a reminder, our secnd quarter sales, earnings release and conference call will be held July 22, 2004.

Thank you for your interest, and good day.

Ladies and gentlemen, this does conclude today's Hershey Foods Corporation quarterly earnings conference call.

You may all disconnect.