好時 (HSY) 2005 Q1 法說會逐字稿

Good afternoon, my name is Cassandra and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Hershey Company 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. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Edris, you may begin your conference.

Thank you, Cassandra.

And good afternoon, ladies and gentlemen.

Welcome to the Hershey Company's first quarter conference call.

Rick Lenny, Chairman, President, and CEO, Dave West, Senior Vice President and CFO, and I, will represent Hershey on this afternoon's call.

Rick will provide an overview of the Company's performance for the quarter.

Dave 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 afternoon's press release and in our 10-K for 2004, filed with the SEC.

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

Rick?

Thanks, Jim, and good afternoon.

Following a very strong 2004, we're off to a solid start this year.

Broad-based sales growth, combined with good cost control delivered record profitability.

Here are a few highlights, new product innovation in both core confectionery and snacks more than offset lower seasonal sales.

Net sales for the quarter increased by 11.2% with organic growth of 8.3%.

In core confectionery, new platforms such as Hershey's Take 5, caramel-filled Kisses, Ice Breakers, both Liquid Ice and Sours, continued to build distribution and velocity.

And sugar confectionery, the introduction of new Twizzlers and Jolly Rancher single-serve products helped to achieve double-digit gains for these brands.

In snacks, our line of Premium Indulgent cookies, along with Hershey's Snack Barz, and Hershey's SmartZone balanced nutrition bars continue to build momentum in the higher growth, more profitable classes of trade.

As expected, seasonal sales were down versus last year as a result of the shorter Easter season.

However, our focus remains on managing for profitable share growth, not low margin sales.

With the earlier Easter, both category and Hershey's take-away are artificially higher for the 12-week period.

Therefore, market share trends are a more valid measure of end-market performance.

Hershey gained market share in all classes of trade with a composite increase of 1.0 share points.

Hershey's momentum continues behind our strategic initiative.

For example, we increased our leadership share of the chocolate segment by 1.6 points.

Largely unaffected by seasons, our take-away within C stores was up 6%, which translated into a gain in market share of 1 full point.

Instant consumables, another growth platform, largely unaffected by seasons, experienced a 15% in take-away, delivering a market share gain of 3.1 points.

New items were particularly strong and the FDMxC universe, which excludes Wal-Mart, but includes the C-store channel, Hershey had three of the top five, and six of the top ten fastest-turning items during the quarter.

Hershey's Take 5 was number one overall.

While seasonal sales were down as previously mentioned, we did gain market share in both the Valentine's Day and Easter holiday periods.

Price realization at retail improved during the quarter.

Unit prices on average increased by 4 to 5%.

This was the result of more favorable mix and more effective trade promotion management.

Higher list prices won't impact retail pricing until later in the current quarter.

Hershey's Hispanic initiative is gaining traction.

For the most recent 12 weeks, in IRI-defined Hispanic outlets, Hershey experienced a 29% increase in take-away, driving a 1.3 point gain in market share.

We've now outpaced the category for 10 consecutive four-week periods.

Turning now to our marketing investment.

Spending continues to be better utilized.

Total advertising and consumer promotion increased at less than half the rate of organic sales growth with advertising higher behind new products and consumer promotion lower, reflecting more cost-effective events.

Trade spending continues to be a profitable business driver.

Customer-specific, scale-focussed events within a pay-for-performance structure are delivering new distribution, better merchandising, and gains in share-promoted volume.

For example, our total points of retail distribution increased by 7%.

In addition to this gain, we picked up new distribution in Best Buy, Circuit City and Kinko's.

Regarding first quarter profitability, the combination of strong net sales growth and solid cost control delivered a 12.3% increase in EBIT, and diluted earnings per share increased by 14.6% versus the prior year.

Turning now to the balance of the year, our strategic direction remains unchanged.

We will continue to build Hershey's leadership position through benefit-driven innovation and leveraging our advantage business system across both confectionery and the broader snack market.

Specifically within core confectionery, we're introducing the following new items over the next few months White Reese's Big Cup, Hershey's chocolate with caramel in a single-serve format.

We're expanding our refreshment offerings to the addition of Ice Breakers Sours Berry, and three-hour BreathSavers mints.

We will continue to build our sugar-free platform with a better tasting flavor profile, new Reese's and Hershey's items and single-serve formats.

Sugar-free continues to be a good growth area for us, and we benefit by secondary placements at retail, such as in the drug class of trade.

We're introducing PayDay Pearl with 15 grams of protein, offering a benefit upgrade to a strong equity.

To capture growth opportunities in both the drug and dollar classes of trade in the U.S. and the value segment in Latin American markets, we're introducing a fudge enrobed caramel wafer bar.

This product, produced in our Brazil facility will be marketed under the Hershey's MICE [ph] brand in Brazil, the Hershey's MOSS [ph] name in Mexico and under the Hershey's MORE [ph] brand name here in the States.

This is a good example of leveraging our global value chain.

Within the adjacent snack segments, our line of Premium Indulgent cookies is off to a great start.

Due to increasing customer interest in our cookie innovation, we will be expanding this platform to include take-home packs to complement our single-serve introduction.

Within the highly profitable convenient store channel, we will be adding distribution and in-store merchandising vehicles, such as counter units and display shippers.

While our cookie line will now be available more broadly, we will remain disciplined in our focus on higher growth, more profitable classes of trade and customers.

Hershey's and Reese's Snack Barz continued to do well, particularly in the single-serve format, which accounts for about half of our business.

We will be adding two new flavors this quarter, caramel and cookies and cream.

We'll remain committed to providing superior product in the area of balanced nutrition.

Our SmartZone platform is gaining velocity and with the recent introduction of the four crunchy texture varieties, will add much needed scale to this brand.

Our two acquisitions from the fourth quarter of last year, Grupo Lorena in Mexico, and Mauna Loa are in good position to grow.

While the first quarter was devoted to successfully integrating these businesses, we're now focused on driving sales and market share gains.

For Grupo Lorena, we're extending the Pelon Pelo Rico brand both in Mexico and here in key U.S.

Hispanic markets.

For example, we just added Pelon Pelo Rico to select CVS and Target outlets, and other U.S retailers.

In both geographies, this brand significantly boosts our sugar confectionery presence.

We're also using Pelon Pelo Rico's innovative packaging for new Hershey's and Jolly Rancher's novelty items.

For Mauna Loa, we will add scale through new distribution and value-added snack nut and confectionery products.

Our disciplined approach to leveraging Hershey's core competencies will continue.

Resources will be disproportionately allocated to those brands, pack types and customers that represent the greatest potential for sustainable profitable growth.

Here's what we mean.

Our leadership position within confectionery is where we have and where we will continue to concentrate.

However, we're also targeting selected snack market adjacencies as sources of profitable growth.

While we're a strong No. 3 in total snacks, we're No. 1 in the drug class of trade and No. 2 in the convenient store channel.

Both classes of trade are highly profitable and experiencing strong growth.

In the more profitable single-serve format, we're focusing our marketing innovation and investment, Hershey is No. 1 in the FDMxC universe overall and No. 1 in all measured classes of trade, but convenient stores, where we're a strong and growing No. 2.

Therefore, we have a scale to leverage and room to grow.

In sum, were encouraged by our first quarter results and look forward to successfully executing our strategy for the balance of 2005.

We anticipate full-year sales to increase above our long-term guidance of 3 to 4% prior to the benefit of acquisitions.

Diluted earnings per share for the full year will increase at the upper end of our ongoing 9 to 11% range.

Now Dave West will review the quarter's results in greater detail.

Dave?

Thanks, Rick.

And good afternoon, everybody.

As Rick mentioned, we're off to a solid start.

Let me give you some statistics.

For the first quarter of 2005, consolidated net sales increased by 11.2%.

As expected, the two acquisitions delivered incremental growth of 3% with Mauna Loa adding about 2 and Grupo Lorena adding about 1.

Approximately three-quarters of the 8% increase in organic sales was achieved through unit volume growth.

Volume was driven by the introduction of innovative new confectionery products and Limited Editions, as well as by the growth in the adjacent snack categories, behind our launch of cookies and the continued success of Snack Barz.

In addition, our international businesses have healthy organic sales growth.

During the quarter, we executed the U.S. price increase that was announced last December.

A buy-in on standard bars and packaged candy occurred in the quarter.

We anticipate that the volume helped Q1 revenue by a modest amount.

Price increase did not contribute much to retail price realization in the quarter, as its effects will be gained later in the year.

Nonetheless, we did achieve about a quarter of the 8% organic sales increase, via a continuation of our trend in utilizing much more efficient trade programming, with our promotion rate declining in the quarter.

Favorable RD&As, that is unsalables and seasonal mark downs were also a help.

Going forward, we continue to expect to operate at the higher end of our 3 to 4% long-term sales goal prior to the impact of acquisitions.

Key drivers of this performance will be innovation scheduled for the fall months, as well as price realization.

We are closely monitoring price points and velocity to see how elasticity models play out as we phase in the price increase.

We do expect to see continued promotional efficiency throughout the year.

However, during the balance of 2005, this efficiency will help provide funds to spend back against the price increase, to hit key promoted price points.

So, given the first quarter numbers and our expectations to be at the higher end of our range for the balance of the year, we now expect our organic sales growth for the full year to be above our 3 to 4% ongoing target.

Turning now to margins.

Reported gross margins improved by 10 basis points.

As expected, integrating the lower margin Lorena and Mauna Loa acquisitions dampened its reported gross margins.

Both acquired businesses have recently been migrated into existing Hershey's systems.

Sales force transitions are ongoing, and throughout the year, we will complete the integration.

Gross margin for the organic business, or excluding the acquisitions, increased at the lower end of our ongoing 70 to 90 basis point range, aided by strong promotional efficiency.

We will continue to face higher input costs as the year progresses, and believe the price increase will help offset these costs.

Straight promotion efficiency will continue, but at lesser rates than in the first quarter.

As a result for the year, we still believe that gross margin will increase at a rate better than last year's 40-point expansion, approaching the lower end of our 70 to 90 basis point ongoing target, before the impact of the acquisition.

For the quarter, EBIT of $205.9 million increased by 12.3% compared with the first quarter of 2004, and the EBIT margin was 18.3%, versus 18.1% last year, a 20 basis point improvement.

The acquired businesses incurred one-time integration impacts during Q1 and were therefore below their anticipated ongoing operating margins.

Thus, they depressed EBIT margin by about 60 basis points in the quarter.

Consumer marketing spending grew slightly at a lesser rate than that of sales, contributing to EBIT margin expansion.

Employee compensation expenses were higher during the quarter.

Interest expense for the quarter increased to $19.4 million versus $14.9 million in last year's first quarter.

Primarily reflecting higher short-term borrowings to fund the $500 million share repurchase from the Milton Hershey School of Trust, which was executed in July 2004, as well as to fund the two acquisitions made last year.

The effective income tax rate for operations in the first quarter of 2005 was 36.6%, up slightly from last year's 36.4%.

Record net income of $118.2 million was 10.3% higher than the first quarter of 2004.

Weighted average shares outstanding on a diluted basis for the first quarter of 2005 were 250.3 million shares, versus 262.1 million shares for the first quarter of '04, leading to an EPS of $0.47 per share diluted, compared with $0.41 per share diluted for the first quarter of 2004, an increase of 14.6%.

Now let me turn to our balance sheet.

At the end of the first quarter, net trading capital increased $90 million or 13.5%, compared to last year's first quarter.

Primarily as a result of increased inventories from the timing of demand and the two acquisitions.

On a rolling 12-month basis, net trading capital decreased 20 basis points as a percentage of sales, as we continued to improve receivable collection and to expand payables relative to the growth of our business.

Now I will cover a few additional items which relate mainly to cash flow.

During the first quarter of 2005, our operating cash flow remained quite strong and we deployed it in a variety of ways.

During the quarter, capital additions, including capitalized software, were $32.2 million.

For the full year, we continue to expect total CapEx to be in the range of $190 to $200 million.

Depreciation and amortization totaled $49.3 million in the first quarter.

We expect full-year D&A to be in the $200 million range.

Dividends paid during the first quarter were $52.8 million.

We spent $44.2 million in our open market share repurchase program during the first quarter, leaving about $10 million on the current authorization.

A few days ago, our Board approved a new authorization to purchase from time to time up to $250 million of our common shares in the open market or through privately-negotiated transactions.

The timing of the share repurchases is subject to market conditions, but most likely this program will be completed within an 18 to 24-month period.

Shares acquired through our repurchase program are held as Treasury shares.

In addition during the quarter, we purchased $223 million worth of our common stock in the open market to replace shares issued in connection with our employees exercising stock options during the current quarter, as well as the latter part of 2004.

The net cash flow impact was $167 million after netting proceeds received from employees.

Over time, our policy is to repurchase all such exercised shares.

Depreciation in our stock price, combined with an upcoming expiration of the options for those employees who retired under the 2001 Early Retirement Program, created unusually high option exercises over the past few quarters.

With this Q1 repurchase activity, we are now basically current in this program.

We also funded our pension plans with an additional $46 million during the first quarter.

Our pension obligations are essentially fully funded.

As we look at our priorities for the uses of cash, our current cash flows are more than adequate to meet our projected needs relative to capital position, dividends and pension funding.

Bolt on acquisitions in areas where we can add to our portfolio in confections or snack adjacencies continue to be attractive.

Carrier purchases under the program just authorized and/or as a part of our options program would then be our next priority.

We believe this best meets the needs of the business and our stockholders at this point in time.

That concludes my prepared remarks.

And now we'll be happy to take your questions.

Cassandra, the first question, please.

[OPERATOR INSTRUCTIONS] Your first question comes from Ken Vaslo.

Hello?

A couple of questions, if the buy-in was so small this quarter on the impact on sales, how come you can't continue at this pace in terms of the sales growth throughout the full year?

What is the slowdown coming from?

Let me talk to you a little bit about the buy-in.

Customers were able to buy up to eight weeks of inventory of standard bars and packaged candy based on their historical levels of purchase.

It's really difficult for us to calculate the exact impact of the buy-in on the quarter sales.

It's obviously dependent on future programming, the speed with which retail prices move upward, the elasticity and duration of the pricing curves and also the interaction with prices in other categories.

To this point, we haven't met with much resistance from the retailers.

To date, less than half have raised their standard bar prices at retail.

That said, we will continue to monitor the factors that I just mentioned.

And our best estimate in Q1 is somewhere that it's really led to an increase of about 0.5 to around 1 point of sales.

So in that first quarter number is about 0.5 to 1 point of sales from the buy-in and we will continue to monitor that going forward.

But your growth for the full year is still just a little bit above the 3 to 4%, yet you hit about 8% internal volume -- internal sales growth.

If you knock off that half a point, you're still going well above the 3 to 4%.

Are you -- when you say you're going to be a little bit above the 3 to 4%, it sounds like there's going to be some slowdown in the last three quarters, then.

Is that that not a fair assumption?

Excuse me, Ken, Rick Lenny here.

I think part of it points to the new products that we introduced in the first quarter that we talked about.

The pickup and acceleration of new products that we introduced at the tail end of the fourth quarter.

And we still have strong, seasonal periods coming up in the second half of the year and we've talked about seasonal sales being flat to slightly down.

Our goal is continue to bring -- to continue to bring news and innovation each quarter and have steady growth and continue to gain market share, which we have done over the past several quarters.

So, that's what we're reflecting our strategy in our expectations.

And my last question is, in the instant consumable products, you had a pretty significant acceleration, you've been tracking basically between 8 and 10% per quarter in terms of growth.

This quarter it sounded like it was 15%.

What was the impact -- what was the acceleration in the instant consumables?

Just the new products?

Yes, the 15% increase that I cited was in retail take-away and that was new-product-driven.

Great.

Thank you very much.

Okay.

Your next question comes from John McMillin from Prudential.

Good afternoon, everybody.

Can you hear me?

Yes, John.

How you doing?

Good.

Great, great numbers.

I just want to make sure I heard things right.

Basically your sales were up 8% organic.

There is no currency in that?

It may get a little Canadian business, but 8% is basically a clean, organic number?

True.

And you said volumes were what percent of it?

Roughly three-quarters of the 8, John.

And the buy-in was basically 0.5 to 1 point.

How do you think that compares with your consumption?

I know you give us -- you give us quoted numbers.

I'm not sure that measures the market.

Is that what you feel -- did you feel like you shipped with some of these new products a little ahead of consumption.

No, not really.

What I didn't want to do is give -- I can give you take-away all the way through all measured channels, IRI, Neilsen and what we include for Wal-Mart and it's such a big number because of the seasonal shift.

But at this point, I think we're still shipping well within a consumption level and we haven't seen any wide fluctuations over the past several quarters.

And just on a longer-term strategic issue, I know you increased your share authorization at different times for splits and other things, and I know you did it at the annual meeting with the naming of the new company.

Your stock valuation certainly has gone up and up until coming down maybe recently.

But still, have you thought at all -- you just mentioned new acquisitions, Dave, I know you mentioned, but anything bigger that would use your stock?

John, no, we don't comment on acquisitions and we won't speculate --

No, I'm talking about in general, just your attitude towards it, willingness to use stock and [inaudible].

We have a willingness to use stock for something that's -- that's of size.

We have -- we did strong cash flows and they certainly allow us to do both on sort of fold-in acquisitions pretty readily.

If the right asset were there, we would certainly consider it.

Okay.

And just in terms of the acquisitions' impact, did you say on EBIT margins it was 60 basis points, did I hear that correctly?

Yes, it depressed us by about 60 basis points.

And then gross margins, did you give the number and I missed it?

We were basically X the acquisitions at the bottom of our goals, of our range, John, 70 to 90.

Thanks again.

John, just to clarify, one other point, the shares that were authorized are Treasury shares at this point.

They're not --

Okay.

Yes.

I got it, thanks.

Okay.

Thanks, John.

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

Good afternoon.

A couple of questions for you.

You did talk about some promotional efficiencies coming, I guess it was in this quarter and going forward, but a lot of those being spent back.

So, is there an increased marketing investment?

I assume there is around new products, but such that it will constrain our needs in the upcoming quarters here?

No, no, Chris.

I mean, we did continue to get trade promotional efficiency, that had started, really, in the back half of last year and our consumer investment was up in the quarter, although not as -- at the same pace as our sales growth.

So, all in marketing, if you will, sort of being up in line with sales, roughly, would that be reasonable?

Probably a little below the rate of sales growth.

That includes promotion?

Yes, what we're not saying is we're going to see an aggressive step-up in promotion.

What we're saying is until we see where pricing shakes out and to make sure we maintain our merchandising and take-away trends, we just want to be mindful of what we might need to spend.

Okay.

And just two more.

One is, regarding the price increase, and maybe we're a little too early for this, but has there been any competitive challenges?

Have you seen an increase in promotion or activity in that regard in the category?

No.

Okay.

And then my last one then is regarding your inventory and your inventory has been growing at a much faster rate than sales.

I know a lot of that was new-product driven.

But the fact that we're into a lot of these new product launches, is that potentially troubling or concerning going forward?

We watch it very carefully.

I think if you look at the increase, you also have to remember that raw material costs are up, that's in the inventory.

We had the two acquisitions that we made in the latter part of the year, so, versus year ago, that's incremental inventory.

And then we just have some timing related to demand.

We watch it carefully and it has been growing, but it's certainly not something that's alarming, but we do watch it.

Okay.

Thank you.

Your next question comes from Andrew Lazar from Lehman Brothers.

Good evening.

Rick, is there any way you can give us a metric to better understand how much of the C store opportunity is still in front of you?

Maybe it's an ACV distribution measure or relative market share in that channel versus Hershey overall.

It's been, obviously, only one of a number of strong drivers and I'm just trying to gauge that opportunity better if I could.

I think there's a couple.

First off, there is a relative market share opportunity.

I think we have about 2 share points still versus our FDMxC that we know we can continue to go after.

Our Hershey top performer program that we discussed at Cagney and we talked at the time about how many more retail outlets we believe we can add to that program, and the benefit of the HTPP initiative is it gives us multiple locations within a convenient store.

So, we don't see any significant reason why we would change our profile when as to how we look at convenient stores.

We look at the growth we've had over the past three years, the growth this quarter and we know what type of take-away growth we want to get out of convenient stores and we're building our programs and strategies accordingly.

So, there's -- you have nothing structural there that means a 2 percentage point gap makes sense to you, if you will?

No, in terms of we continue to see opportunities.

Okay.

And then I guess lastly, looking at some of the -- the share gains that you mentioned in this quarter and in previous quarters, they're obviously pretty significant and you can't judge and I realize speak for what competitors will or won't do.

It seems like from a pricing environment perspective, it's -- it's progressing in an irrational way, in terms of how folks are executing it.

Is there anything going on that you see -- I mean if I'm a competitor in your core chocolate business, which is really where I'm focused right now and I'm seeing those types of share gains, maybe I have no ability at the moment to really rectify that.

But I'm curious if there's anything, is anyone doing anything structurally better that worries you?

Or even irrationally, that worries you?

One way or the other it seems like --

I'm sorry, finish the question, please.

Sure.

You kind of see what I'm getting at.

Absolutely.

We look at that quite carefully and that's a cornerstone of our strategy.

If you think about it, we have the number one position in the chocolate segment with the 44 share.

Our two major competitors from a share standpoint is Masterfoods, No. 2 at 27, Nestle's No. 3 at a 9% share, so we are already have quite formidable competition, yet we continue to strengthen our leadership.

I think I cited we gained 1.6 share points of chocolate in the past quarter and we will continue to do so by extending our iconic brands through innovation and leveraging our advantage business systems.

So, we're not seeing anything irrational, and from a rational standpoint, with the 44% share of chocolate, we have significant brand scale, business system scale and retail scale to leverage.

So we will continue to bring news and innovation.

I think, Andrew, that's really where we see the opportunities within chocolate.

It is a benefit-driven and news-driven segment and it represents a great source of growth and profitability for our retail customers and for us.

And we're not blind to any competitive entry, but we also realize where our competitive advantages are and we will continue to leverage those.

Thanks very much.

Your next question comes from Eric Katzman from Deutsche Bank.

I guess, Dave, my first question has to do with the acquisitions, if they accounted for like 30 million of revenue, but they caused a 7 million change in EBIT -- or 7 million swing in EBIT, that seems like a lot for 30 million in sales.

And I'm wondering are those -- did those businesses cause a loss in the quarter?

Or were they barely profitable?

I think I'm going to give you a ball park.

Think of them as pretty much break even.

Both of them went through both sales force and systems integrations in the first quarter, so there are a lot of one-time costs and we haven't gotten the admin synergies that we will get going forward.

So, in an initial ramp-up quarter, Eric, pretty much break even is the way to think about them.

And the way you're characterizing one-time costs, that's not like, I don't know, banker's fees or something like that?

That's just the cost of integrating the business?

Right.

And it's duplicative costs in some cases and moving inventory from old warehouses to new warehouses, et cetera.

Yes.

Okay.

And then on the -- the gross margin line, you didn't show -- obviously the acquisitions had some impact there as you said.

You haven't shown as much expansion as you -- as you have in the past few years and I'm kind of wondering, could you quantify how much commodities or just general input costs limited results?

Because, obviously, on the top line with that kind of throughput and the mix improvement that you're getting, one would have thought that gross margins would have been up very strongly, even though you've obviously been doing a great job for years.

Eric, I -- we specifically don't want to talk about commodity costs, for a lot of competitive reasons.

We know that we have commodity cost increases this year.

The price increase will certainly offset some of those costs.

We -- we continue to find productivity in the supply chain.

As I said for the quarter, we were, X the acquisitions, in the bottom of that 70 to 90 basis point growth.

So, we were within in the quarter, in the stated range that we thought we would be on our long-term goals.

So, I think we're pretty comfortable with that in the environment given the commodity cost increases.

Eric, maybe another point, if you think about a few years ago, we were getting very good gross margin increase and weren't getting the type of top-line growth that we knew we needed to.

I think we're in a much better balance in terms of driving profitable organic growth, and we knew this year would be the year of a step up in input costs, not just commodities and we didn't get, as we had talked about, you wouldn't get the price realization from the price increase in the first quarter, so we're mindful of both of those.

But again, our goal is to strike that correct balance between strong, profitable organic growth, good margins and doing a good job on the profitability standpoint.

Okay.

And then I guess given -- given Kraft's announcement, I'm not going to ask you to comment necessarily specifically on them, but their announcement and Irene Rosenfeld's comments about Frito-Lay, it just seems, Rick, that what has been a very, very beneficial snack growth market for everybody in the industry is just getting more competitive as players start to enter against one another in what has historically been core areas.

And I guess how do you think that we should view that?

Only time will tell.

You guys are doing a great job and maybe you will be the winner out of all of it.

But it just seems like when Irene gets up there and says I'm going after Hershey and I'm going after Kellogg's and I'm going after Mills and then Kraft says I'm going into single-serve cookies because you're coming in.

Wouldn't you characterize it as seemingly like everybody is starting to go after one another?

I think that's the nature of consumer products goods in the food business and snack business overall.

I think there's a couple of ways to think about this.

It's a great question and correct observation.

When we said we were going to go more broadly outside our core confectionery into logical adjacencies, the first reaction was, well, how you can compete against the Kraft's, Kellogg's, Frito, et cetera, and I think our answer, and we've proven it, is we do it everyday in convenient stores.

If you think about it, within convenient stores we're not competing against just other confectionery companies.

It's broadly within the snack market and we continue to do well there and we will continue to grow there.

I think, as I said earlier in my comments, first and foremost, continue to build our leadership position within core confectionery, and then where smart from a profitable standpoint, go into adjacencies that make sense.

I'll give you a perfect example, cookies, you mentioned cookies, with over a $4 billion market and we're only looking for a 2 to 3% share of that.

We can be very selective in both where to compete and how to compete.

In our cookie business, we've added no capital, we're using existing brands and where we're targeting distribution and merchandising opportunities, our products and sales force are already there.

So we think we've taken a lot of the risk out of that.

And while we are going to get into competitive segments, we're leveraging what we think we do pretty well, which is our iconic brands, confectionery expertise and supply system.

I guess just -- I'll pass it on after this, but I guess my comment would be is that, yes, it's only 2 to 3% share, but that 2 to 3% to Nabisco's cost structure is pretty important as you probably know.

So, they've got to fight tooth and nail to make sure that they don't lose that share.

So, it seems like if you -- maybe because of your cost structure you can do it at an above average margin or an equal margin to what you have, but every point the growth in the business is so important that even if it's small it's meaningful.

So, I will just let it go at that.

Thank you.

Thank you.

The next question comes from Eric Larson from Piper Jaffray.

A quick question back on -- on kind of the gross margins.

You mentioned that you had planned on getting for the full year, back up to kind of the low end of your full-year guidance.

Obviously with pricing, that will help.

Will just the absence of the integration costs of the acquisitions be a main -- a big factor in that?

And is that pretty much behind you?

Do you expect more in the second quarter on that?

I just want to be clear.

The way we thought about the -- the gross margin for the year is we would do better than we did last year in expansion, which is 40 basis points.

Approaching the bottom end of the -- of that long-term 70s and 90s guidance.

And that's before the impact of the integration of the acquisitions, which will take that down a little bit on a reported basis.

So, just to kind of frame that off.

We had -- we enjoyed quite a bit of trade promotional efficiency in the first quarter.

We really started to pick up a lot of the trade promotional efficiency in the back half of last year.

So as we go forward into 2005, we will still get some trade promotional efficiency, although the rate at which we will get it will start to moderate.

And that really was the one driver in the first quarter that we believe will moderate going forward.

And then we really haven't even seen new priced goods in the marketplace, so it's a little early for us to tell you what the impact on margins are going to be related to the price realization and how quickly it comes.

So, we're kind of watching that.

That's really the driver and we're monitoring it, but it's a little too early to give you a read.

Thanks.

And just one other follow-up.

I may have missed the full comment on your funding of the pensions and I know you've been fairly aggressive with that over the last few years.

Are you getting to a point where you might not have to make many more contributions to the pension?

We're fully funded.

We made $46 million of funding in the first quarter.

Again, and obviously it depends on market return.

So it depends on how the asset base does.

And we watch that, obviously, and maybe your crystal ball is better than mine.

All right, thank you.

Your next question comes from Terry Bivens from Bear Stearns.

Good afternoon, everyone.

How are you, Terry?

Pretty good, pretty good, thank you.

Just on uses of cash, I mean I did notice the dividend is now around 1.4%, which clearly is below the peer group.

Any thoughts given there to maybe more of a dividend?

Terry, I think we really look at it more from a payout ratio standpoint, not a dividend yield.

We're fairly comfortable with where we are in the current dividend yield environment and I guess we would see it kind of going forward as growing with -- with our rate of our earnings.

Okay.

And, Dave, just in terms of the margins on the acquisitions, obviously those are, I would think subject to change after you get the integration done.

Can you give us some kind of metric as to where they were and where you expect them to go, even if it's kind of a general range of basis points?

Terry, I think what we said with them is that they were probably somewhere between 10 and 15% lower than our average gross margin in our portfolio.

And that that's I think what we would have said when we -- when we acquired them.

Obviously, we're looking at all of the -- the normal productivity and integration savings.

I'd rather not get into specific pieces of the business and start to talk about margins, particularly with respect to something like Mauna Loa, where we wouldn't want to start talking more broadly about competitive margin structure.

Okay.

And just in terms of percentage of sales from new products, however you would define them, what -- do you have a metric on that in the quarter and something we could compare to in the same quarter a year ago?

Yes, I'd say -- Terry, the way we've talked about it broadly is we think the right range is 5 to 10% and we said in 2004 we were at the 10%, a little bit above and we expect to be about the same for all of 2005 and for -- for the first quarter, it's probably a little bit higher, but I would rather not get into specifics.

If you think about strong new items and slightly down seasons, that would kind of give you the direction there.

Okay.

And, just to kind of get back to Eric's question, in a way, I was a bit surprised there wasn't more discussion on that, but, Rick, are you in a position to kind of talk about how you see what Kraft talked about yesterday in terms of their cookie initiative?

Or, I don't know if you're comfortable discussing that, I would like to hear your thoughts if you are.

I'm certainly not going to comment on what a particular competitor said or what they indicated.

I think what's important is where we continue to see the opportunity within the Premium Indulgent single serve aspect of the cookie market.

We said from the very beginning we weren't going against the middle tier or the primarily take-home package cookies in the food class of trade.

We said we're going to invest in the cookie market, but we'll do it as appropriate and remain disciplined in terms of our focus.

And that's really the most important thing.

We're going to focus on single-serve where we're the leader, Indulgence, which we believe is our strong suit.

And in the high growth, high profitable, yet underdeveloped from a cookie standpoint retail channels, primarily drug and C stores, where we have scaled to leverage and we think we have upside there.

It's interesting because the two channels that I just talked about, drugstores and convenient stores, they represent only a small portion of the total cookie market, about 10% of measured take-away.

Yet for us, our total measured take-away in these channels is over 40%.

So for us, it adds to our scale.

And maybe for other cookie manufacturers concentrating on those two channels might perhaps deleverage their scale.

So, it's less about going broadly, it's more about where we think we can expand logically from our core competencies and be successful.

Again, it's important note we're doing this on a very cost-effective basis in terms of using existing brand names and minimal capital additions.

Okay.

Thank you very much.

Your next question comes from Evan Morris from Banc of America.

Good afternoon, guys.

Just a quick question on the sales, of that 8% volume growth.

I'm -- I'm sorry, the three-quarters of the 8%, which was volume.

Could you break that down a little bit further?

Just how much of that came from just distribution of products like cookies versus -- just where are you in terms of ACV and on some of those new products that are not in and out necessarily, but, some of these other ones that are adjacencies, just getting a sense there.

I think we're in the early process of gaining distribution on cookies.

We were focused on drugstores, particularly, in the first quarter, with some convenient store presence, you will see us ramp up our convenient store presence in the second quarter from the cookie standpoint much more solidly.

Take 5 for example, our ACV distribution build on Take 5 was -- was well into the 80% very, very quickly.

I think we've done a very good job getting distribution against the items -- the new items in the first quarter.

I don't want to give much more detail in the breakout of the volume.

We had good sales behind new products such as Take 5 and cookies.

We had particularly good performance behind the Jolly Rancher and Twizzler brands in the quarter.

We were pleased with the non-chocolate business and how it performed.

And probably would leave it at that.

Just staying on that sugar confectionery business for a second.

You highlighted a couple of the new items and gave some numbers around those, but Rick, maybe if you could just talk a little more broadly about the growth that you're seeing in the overall sugar confectionery business, what are the trends more broadly?

And if you can kind of just walk us through sort of the balance of the year, what type of growth rates and outlook we should expect from that business?

You mean on the sugar confectionery?

Yes.

We're not going to break out growth rates specifically by segment.

I think what we're saying is we have a very strong position in sugar confectionery and if we start to bring new innovation into that segment, which we haven't done as much of as we have in chocolate, particularly in single-serve.

And I mentioned Twizzlers and Jolly Ranchers, I think we're going to be in much better shape and we have a new Vice President in charge of that business, so, we see opportunities for innovation.

And we're learning a lot just by bringing Pelon Pelo Rico from Mexico here to the United States.

But I'd rather not break out any specific growth by segments.

But overall, the growth rates that you're seeing, while you're not giving specific numbers, are they tracking sort of below your expectations?

What type of opportunities, I guess, do you still see?

We see good opportunities and they're about at expectations.

Okay.

Thank you.

Your next question comes from David Adelman from Morgan Stanley.

Good evening.

A couple of quick questions.

First, I think you've mentioned in the past, David, that the acquisitions would likely retire gross margins this year by about 20 to 30 basis points.

Is that still your expectation for the full year?

Right now I think that -- that's probably where we would be.

Okay.

And then, Rick, other -- other packaged food categories have had issues both in the recent past and going back several years with consumer sensitivity to raising promoted price points.

I'm just curious, as you execute that in the coming months, how great a concern is that of yours and how do you think the confectionery category may differ from other categories, vis-a-vis that the consumer elasticity to that dynamic?

I think there's a couple of things.

We learned a lot from the price increase that went into effect in the first quarter of '03 in terms of when we brought innovation into the marketplace, how we structured our trade promotion programs customer-by-customer.

We really changed the dynamic from having the "sticker shock" of all prices going up by the same amount at the same time.

But you hit on it, the absence of a true price segment in the chocolate market, and also the total confectionery market, precludes a major gap between everyday shelf price and promoted price, because if you think about it, primarily on single-serves, where so much of the growth is, the absolute price point is only going up by $0.05 or $0.07 or $0.08 and it's not breaking, in most instances, critical price points or threshold pricing.

We don't see significant risks, although we obviously pay attention to it, customer-by-customer and brand-by-brand and respond accordingly.

And then one last thing, David, could you go through again the share repurchase numbers that you mentioned?

And does the option-related repurchases, do those come out of the standard authorization?

And then lastly, how much of the option-related repurchase was funded by the -- the employee contribution to exercise those options?

Wow!

I'll try and take them all, David, if I don't get them, come back with them.

In the first quarter, we spent $44 million against the shares -- we had a $500 million share -- purchase authorization from December of '02.

We spent $44 million against that authorization.

That left us with about $10 million left on that authorization.

Two days ago, the Board approved the new authorization to purchase up to $250 million from time to time.

The options replenishment does not go against that share repurchase.

We have a policy that we will -- we will replenish those option shares in connection with the employees' exercising stock options.

During the quarter, we purchased $223 million worth of common stock in the open market to replace exercise option shares.

Net of the employees then cash flow, they give us the money back for what their strike price was, the net cash outflow for us was $167 million after netting those proceeds.

Okay, I got it.

Thank you very much.

Okay.

Your next question comes from Leonard Teitelbaum from Merrill Lynch.

Good afternoon.

Having done extensive research on cookies, let me tell you, I don't think you have a whole lot to worry about.

I think you guys' product is just fine.

Thank you.

Second of all, I think you answered -- the question I was really going to ask to David.

And that is, Rick, I thought you said that the average retail price is going to go up $0.05 to $0.07 would be your guess at point of purchase.

Len, they usually move in either $0.05 or $0.10 increments.

I didn't know if you said $0.05 to $0.07 or $0.05 to $0.10.

On average some will move $0.05, some will move $0.10.

Okay.

Now, and I think again, hit around the question that in your experience, you've been able to manage through it because you were able to back it up with new product and no one can necessarily remember the standard ongoing price.

And I, frankly, tried to work that into my model.

Now, I think attendant to that is that in your assumption of only a 70% -- or 70 basis point move in the gross margin, if the price realization or sticker shock is handled like it was a couple of years ago and the impact is reduced, obviously then results are going to look better.

Is your plan to start to increase spending, if that's the case?

Or are you going to let margin just work their way through?

Len, I think -- we would take it -- it's really more of a channel-specific question because the consumer's used to seeing different price points for the same product in different channels.

So, it would really vary depending on the take-away and where we saw it, if there's any softness or any slowness for the elasticity curves, for the volumes to rebound.

We would really tackle it channel by channel or class of trade by class of trade.

I'd rather not make a blanket statement as to how we would react.

Len, I think to answer the second part of the question, when we continue to bring out innovation -- and the new products I talked about are really only those over the next four months.

For competitive reasons, we're not going to talk about the new products that are coming out in the last four months of the year.

So, our spending is very much geared towards innovation and that's what we would be responsive to.

Thanks.

From a timing point of view, would you expect to see -- you said "later in the year" but wouldn't we start to see it kind of like in the June quarters, what the initial reaction is going to be?

At least in the C-store channel, to a higher price.

I think, Len, you will see some of that.

Remember, people bought eight weeks of goods based on historical basis so they may not raise prices right away.

They may work those eight weeks of goods, that old price.

There is also, when we announced the increase, if we had promotional activities planned out through the first half of the year, we would honor those promotional activities at the old promoted price.

So, it will take a little bit of time, it's not going to occur everywhere in the second quarter.

Obviously, we will continue to watch it very closely but it really is -- to say that it will all occur in the second quarter is probably a little early.

Thank you very much.

Thank you.

Your next question comes from Judy Hong from Goldman Sachs.

Hi, everyone.

I was wondering if you could talk a little bit more about some of these other alternative channel opportunity outside of the convenient stores, you've talked about getting into Kinko's and Best Buy.

And maybe one by one may not be huge, but on an aggregate basis, can you quantify how big an opportunity this is as you gain distribution in those channels?

I think prior to that and certainly I will address it, while we talk about -- primarily we talk about food drug mass and convenient stores and focus on convenient stores because it's a very profitable class of trade for us.

The club channel is a major source of growth for us and one we're just starting to do a better job of penetrating that channel.

And same with dollar stores, which is why we talked about the very unique product coming out of Brazil to give us an entry at the right price point within dollar stores.

So that really rounds out the more traditional type of alternative channels, if I can use that expression.

I think in these truly alternative channels, whether it be Home Depot, Bed Bath and Beyond or whatever, we're putting together, and we have put together a sales team to ensure we get the right logistics and distribution in place up front.

That's going to be the challenge, not so much getting the in-store distribution, it's getting the product to the store and that's what we want to work on.

So I won't quantify it because we're just in the infancy of that part of the initiative, but it represents a lot of incremental cash registers for us.

Is there -- on the part of some of these retailers at Home Depot and others, is there genuine interest for them to carry these products?

Yes, there's interest right now, if you go in they're carrying other types of snack products.

They do very well with carbonated beverages, bottled water and things of that nature and we see opportunities for our products and they've been very responsive to our initiatives.

Okay.

And then just a quick question, and I'm clarifying your new sales growth guidance being above 3 to 4% organic growth rate.

Is this purely a function of the first quarter, just coming in much stronger than expected?

Or a part of it is based on what you're seeing in the first quarter, that you feel better about the balance of the year?

Judy, it's really -- we've set 3 to 4% as a long -- as our long-term target.

We continue to believe the business will operate at the higher end of the long-term target going forward, and we had a good first quarter.

So, if you do the math, you will come up with a number that's certainly above the 3 to 4% for the year.

Okay.

Thanks.

Thank you.

Your next question comes from David Driscoll from Smith Barney.

Good afternoon, everyone.

You said that higher costs in 2005 drove the price increase.

Did you experience higher costs in this first quarter?

Yes, David, because we do hedge commodity costs and are looking out into the marketplace, we would have had a very good idea or did have a very good idea, the middle part of last year, as to what our commodity outlook was going to be.

And, therefore, that's when we began to put into place the plans for pricing.

So, we had visibility to what those prices would be.

And what we do is we have what we call a standard cost system so we essentially set a cost for the entire year based on our outlook for all of the year, and then that cost flows through our P&L, throughout the year in cost of goods sold.

So, the answer to you is yes, we did see higher cost of goods in our P&L in the first quarter.

And we would have had visibility of that middle of last year.

Can you connect the dots for me then, here, because I'm looking at your margins, you said that excluding acquisitions, your gross margins were up -- I forget what you said, 70 basis points or something like that, the bottom end of your range.

You also said that the price increase did not help you in the quarter, so then the logic would seem to me that your margins are going up substantially as soon as the price increase does start to come in, and that, if in fact raw materials did hurt you in this quarter as they will in all the rest of the quarters, this price increase is a big positive event, rather than simply an offset.

I think with the -- the missing component in that algorithm is the trade promotional efficiency that we were able to get in the first quarter.

As part of our trade promotion architectures that we put in place last year, in the latter part of last year we began to get trade promotional efficiency, our trade promotional rate in the first quarter came down.

So, that's really the missing piece.

We also had favorable, as I said, markdowns and unsalables for the season.

So, that's the missing piece.

Okay, that was helpful.

Did you guys say that Take 5 was the single biggest product driver for the revenue growth in the quarter?

No, no.

What I said was according to our IRI and Neilsen FDMxC, it was the fastest turning new item from a velocity standpoint.

We did not discuss it specifically in terms of its net sales.

Is it a fair statement?

Can you comment on it?

No, no.

It's off to a very good start.

I will leave it at that.

Can you guys give me a quantification on the Easter's impact on the quarter?

And then secondly, what will the impact be on sales growth in the second quarter?

How do we make those modeling adjustments?

There's no impact on the second quarter from an Easter standpoint, so that's one.

I will answer that one.

It's the second part I won't say what -- we said it was down slightly and leave it at that for the quarter.

Okay.

And just a last question here.

You didn't raise the range, your earnings guidance range, you've left it at this 9 to 11%.

You now clarified and said the top end of the range, but clearly when I look out there and on consensus estimates, there's significant optimism here.

Are there factors that you would call out that would actually make me believe the 11%?

Or do I just -- do we just disbelieve this altogether and go for something much higher?

What factors out there can you call out here, if any?

What I'm not going to do is compare and contrast what the consensus is to what our expectations are of our business.

And we've said that we think that will be at the upper end of our long-term guidance of 9 to 11% for 2005, and, David, I'd rather leave it at that.

Very good.

Well, it was worth a try.

Thank you.

Thank you.

Your next question comes from Pablo Zuanic from J.P. Morgan.

Hello, everyone.

Just to understand on the price increase and also on the effect of it, when you say it was an eight-week buy-in from your customers, I can't reconcile that with the comment that we made achievements in take-aways were in line for the quarter.

So, that's one question.

Then with the price increase, with the buy-in, that means that all the sales that you are going to be doing in the second quarter, at least to retailers, are really going to come in at the higher price?

They may increase prices by the third quarter, as you mentioned, but you would realize the price increase by the second quarter.

What am I missing there?

I will follow up with a [inaudible] question later.

Let me just do a little bit of the first part, and I'll have Dave answer the second one.

You can't -- one can't equate a buy-in associated with a price increase in retail take-away, and I'll give you a good example.

We shipped Take 5 initially in December, we started to see its take-away in the first quarter.

So, if we shipped any new items appropriately at the end of the fourth quarter, you'd start to see the retail take-away in the first quarter.

So, there is very much a pipeline build and then an inventory build and then take-away associated with new products.

And the second part of your question?

Well, the argument that in terms of the price increase, if people really bought eight weeks of inventories, when you start selling to them in the second quarter, you're going to be selling already at the higher price, right?

So you would start to realize a new price increase in the second quarter.

I think is what we also said was we have promoted price points that we have under agreement in terms of merchandising plans in place, and we still are uncertain as to what type, if any, competitive response will be, so we want to be mindful of what it will take to support our business and continue our market share gains in the second quarter.

So, it's not as simple as stating well, all the products are going to go through at the higher price and we won't need to spend anything back to get the right merchandising.

Are you seeing competitors already increase prices -- at least prices?

I'm sorry, Pablo?

Are you seeing the competition already increasing prices in some of these products?

Yes, that actually has occurred.

Yes.

Just a more -- you have quantified [inaudible] cookies, 4 billion, 2 to 3% market share.

Can you do the same again for say, the new Ice Breaker line and for -- go back and remind us what the numbers were for cereal bars and nutritional bars, if you may, please?

No, I think the only reason we talked about cookies, because everyone seemed to be asking questions about them, we said all along that we were looking at a very attractive category that had not had that much innovation.

And we saw an opportunity in selective benefits of Indulgence, selective pack tight, primarily single-serve and selective channels, primarily convenient stores and drug stores, which is similar to what we said within Snack Barz.

That we were going to focus on the more single-serve, higher -- single-serve variety in the higher profit classes of trade.

But I really don't want to go back and start quantifying potential share goals in all of our adjacencies.

Cookies was a very interesting one because there were a lot of questions about it.

Just the last question.

In terms of what's happening with the competition in terms of their merchandising skills, and I know you don't like to comment specifically on each competitor, but we understand that some of the larger players like Kraft is probably leading with the C-stores and the instant consumption channels through brokers.

I imagine that's where they do most of their merchandising.

And the same thing has been happening with Mars.

So, who is really posing a challenge or who's having more feet on the Street in terms of the merchandising in the confectionery area, if anyone?

Or is everyone pretty much into the third-party broker approach.

I think what we talk about is our dedicated customer teams at headquarters and then our dedicated retail coverage, because we're only selling and merchandising one category.

Yes, confectionery, now we're adding to that, but with very close end adjacencies.

I think the comment I made earlier is where we're going with our new snack entries into adjacencies, they're going into the retail outlets where we already have a strong presence, whether it be our leadership within convenient stores, whether it be our strength in drugstores or certainly our unit leadership within instant consumables or single-serves.

So, we're being very disciplined about where we're looking to gain growth in these adjacencies.

The fact that we have dedicated selling resources and category management capabilities that go along with that, we still feel we're in a pretty good position.

And the last question.

You talked a lot about cookies and then you seem to be very happy with the response so far.

If I were to ask cookies, cereal bars and nutritional bars, of those three, what are you more pleased with?

And what is maybe lagging so far?

I think we're very pleased with cookies and Snack Barz, as we said earlier, or as we've said before, in nutritional bars, Balanced Nutrition, SmartZone, we didn't start off as quickly as we'd like, and I think that's been a melese that's throughout the nutrition bar segment.

But it also mentioned the addition of our four crunchy texture varieties have been well-received by customers and we're going to continue to focus on the segment.

It's a very cost-effective way, if you think about it, it's a bar product.

It uses the Hershey brand name.

It has the equity of The Zone Diet, so we see it as a great opportunity and in interesting growth sector.

Okay, thanks very much.

Thank you.

Your next question comes from David Nelson from CSFB.

Good afternoon.

How about an update on your search for head of snacks.

We announced it earlier this week --

Oh, I missed it.

I'm sorry?

I'm sorry I missed it, I was traveling.

We announced it earlier this week.

What would have to change for Hershey to consider a DSD system?

Short of a lot.

I'm sitting here thinking about where we already have scale that we're leveraging in the category in which we compete.

We have a very cost effective and flexible way to distribute and merchandise a relatively inexpensive product, if you think about single-serve and instant consumables.

That's really the way I'd look at it.

In our category, the way we go to market, is competitively advantaged.

Great.

Thank you very much.

Thanks, David.

There are no further questions at this time.

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

Mauna Fern [ph] and I will now be available to answer any additional questions you may have.

As a reminder, our second quarter sales and earnings release and conference call are scheduled for July 21st, 2005.

We'll release earnings at 7:30 a.m. that day and our conference call is set for 8:15 a.m.

Thank you for your interest and good evening.

Thank you for participating in today's conference.

You may now disconnect.