好時 (HSY) 2007 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Hershey Company first quarter 2007 results conference call.

[OPERATOR INSTRUCTIONS] Thank you.

Mr.

Pogharian, you may begin your conference.

Thank you, and good morning, ladies and gentlemen.

Welcome to the Hershey Company's conference call.

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

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 statement because of factors such as those listed in this morning's press release and in our 10-K for 2006 filed with the SEC.

If you have not seen the press release, a copy is posted on our corporate website www.hersheys.com in the Investor Relations section.

Included in the press release are consolidated balance sheets and summary of consolidated statements of income prepared in accordance with GAAP as well as our pro forma summary of consolidated statements of income quantitatively reconciled to GAAP.

As we said in the press release, the Company uses non-GAAP measures as key metrics for evaluating performance internally.

These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP.

Rather the Company believes the presentation of earnings excluding certain items provides additional information to investors to facilitate the comparison of past and present operations.

We will discuss our first quarter results for 2007 and 2006 excluding net pretax charges associated with our previously announced business realignment initiative to advance the Company's value enhancing strategy.

These net pretax charges were $40.4 million in first quarter 2007 and $1.7 million in the first quarter 2006.

Any future projections will also exclude the impact of net charges related to the business realignment initiative.

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

Thanks, Mark.

Results from the first quarter were essentially in line with our expectations.

Net sales increased 1.2% as we're building momentum behind our new products and continue to benefit from the growth in dark chocolate.

Seasons and a rebound in Canada provided additional growth during the quarter.

However growth was adversely affected by slower single serve sales.

This is being driven in part by marketplace performance that's not yet achieved desired levels.

Although we did experience an improvement in core brand take away the residual impact of last year's limited edition and discontinued items resulted in only a 1.5% increase in measured take-away.

The price increase announced on April 4, had no impact during the quarter.

Importantly we made good progress against several of our strategic priorities.

The global supply chain transformation was announced in February in addition to creating more flexible cost effective networks this initiative will enable step function increase in the level of investment across our business.

Our strategy of disciplined global expansion was advanced by the announcement of two joint ventures.

In China we announced an agreement to create a manufacturing alliance with Lotte.

In India we entered into an agreement to create the Godrej Hershey foods and beverages company.

Both of these will enable Hershey to deliver profitable growth in high potential emerging markets.

Dave will discuss the first quarter in detail, then I will highlight our marketplace initiatives for the balance of 2007.

Dave.

Thanks, Rick.

As Rick highlighted our Q1 results were roughly in line with our expectations with a 1.2% growth on the top line generating EPS diluted from operations of $0.51, flat versus year ago.

Importantly we remain committed to our full year sales estimates, 3 to 4% net sales growth, and an increase in diluted earnings per share from operations in the 7 to 9% range for the year.

Let me give you some details starting with sales.

New products, dark chocolate and premium performed well contributing about 3 points of growth; however a portion of these gains were offset by increased trade promotion and softness in single serve.

During the quarter we increased merchandising and trial behind our new platform including Cacao Reserve, Reese's Crispy Crunchy and IB sour mint.

With respect to single serve the impact of our shifts away from [Inaudible] began in earnest in the second half of last year.

As a result we are still lapping some discontinued items and programs versus a year ago.

The price increase we announced earlier this month had no impact on first quarter results nor do we expect that this action will change category dynamics.

On average at retail the price of a standard bar will still be below $1 and in most cases the consumers will experience only a $0.05 increase.

Discussions about the price increase with our retail customers who have also experienced increased operating costs have been generally positive.

We plan to honor 2007 commitments to plan consumer and customer promotions and merchandising events.

Given the timing of the increase and these retail plans we expect minimal financial impact in the pricing in 2007.

Turning now to marketplace performance.

Hershey's retail take away in the quarter was in line with shipments.

Consumer take away for the 12 weeks ending March 25, and channels that account for over 80% of our retail business increased by 1.5%.

This number was slightly benefited by the one week earlier Easter timing.

As a reminder, these challenges include food, drug, mass, including Wal-Mart, and convenience stores.

Our take away in chocolate in the [SCN XCW] channel was up 2.8% driven by the Reese's franchise and solid merchandising and in-store performance around established Reese's Crispy Crunchy as well as established Easter egg product.

The reportable SCN XC universe Hershey's 12 market share declined by 1.2 share points.

Category sales for the Valentine's season were up 4.7% in the SCN X classes of trade after several years of flat to declining results.

While the category increased on a dollar basis it declined on a unit basis as consumers traded at the higher price premium gift box.

This translates well for our Cacao Reserve and Joseph Schmidt lineup, as they will be extended into gifting later this year and next Valentine's Day.

We streamlined our Valentine's offering and did not participate in the low margin boxed heart category.

As a result we lost slightly over 1 share point.

On a [Inaudible] basis, excluding these items, our Valentine's sales were up slightly.

Normally our Easter results looked good, despite the fact that Easter had one less selling week in 2007 our shipments were slightly up driven by successful merchandising against key packed items.

Refreshment retail sales declined by 5.8% in the quarter, but this is not indicative of the overall trends of the business.

The Ice Breakers mint business and introduction Ice Breakers sour gum and York Mint tins is doing well.

However, these results are more than offset by discontinued items and the timing of new product launches.

Taming of new product launches.

For the quarter, importantly where resources have been invested core brands have responded.

Philosophies have improved throughout the quarter on many of our everyday core brands including Reese's, Hershey milk chocolate bars and Kit Kat.

We expect our overall share performance to sequentially improve as we restore core brand growth and support our new platforms with enhanced customer and consumer activity throughout 2007.

Our retail coverage initiatives should also improve our merchandise.

Rick will have the details on these initiatives shortly.

Turning now to margins, during the first quarter gross margin was down 100 basis points.

As expected overall input costs were higher year-over-year, a continuing trend since 2006.

In particular dairy products are up markedly year-over-year, greater than our initial expectations.

Dairy markets are not as developed as any of the other commodity markets and therefore it is more difficult to take forward positions to extend coverage for longer periods of time.

Obsolescence costs in the quarter were slightly higher than last year.

The softness in single serve and relative strength in seasons did have a negative product mix impact on margins in the quarter versus our expectations.

EBIT margins was down 50 basis points, and SM&A was about 2% below last year.

The majority of this decline was driven by lower G&A.

Total brand spending for the quarter, advertising, consumer promotion and trade promotion was up 7% versus prior year.

Our ad spending up versus prior year was focused on core brand growth such as the Reese's franchise and new platform, primarily premium and dark chocolate and Ice Breakers sour gum.

Brand spending on a quarterly basis for the remainder of the year should increase at a greater rate than the first quarter.

Now moving on to some other items.

Interest expense for the quarter increased coming in at, $28.3 million versus $25.2 million in last year's first quarter reflecting higher short term borrowings to fund the $500 million share repurchase program completed in 2006.

Tax rate for the first quarter was 34.8% in line with prior year; however note that this is below the average rate we anticipate for the full year which we currently project at 36.1%.

The tax rate was lower than first quarter of 2006 and again in 2007 due to finalization and resolution of certain state tax issues.

We anticipate a tax rate of 36.6% in the second quarter.

Weighted average shares outstanding on a diluted basis for the quarter were 233.7 million versus 243.1 for the first quarter 2006, leading to EPS of $0.51 per share diluted from operation.

Now let me turn to our balance sheet and cash flow.

At the end of the first quarter net trading capital decreased from the end of last year's first quarter resulting in a cash inflow of $62 million.

Accounts receivable grew slightly, up $34 million and remains extremely current and of high quality.

Inventories were lower by $76 million compared to the first quarter last year and accounts payable increased by $20 million in the quarter reflecting the execution of planned programs to improve our sales and operations planning process and stretch our days payable.

During the quarter capital additions including capitalized software were $42 million.

For 2007 we continue to target total capital additions to be in the range of 250 to $300 million driven by our global supply chain transformation initiative.

Depreciation and amortization was 60 million in the quarter including accelerated depreciation related to the growth of the supply chain transformation plan of $10 million.

Therefore operating depreciation and amortization totaled 50 million in the quarter and should be in the 200 to $210 million range for the full year.

Dividends paid during the first quarter were $61 million.

We spent $100 million to purchase 1.9 million shares in our share repurchase program during the first quarter this leaves $150 million outstanding on the current authorization that the Board approved in December 2006.

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

In addition during the quarter we repurchased $50 million of our common stock shares in the open market to replace shares issued in connection with employees exercising stock options.

Our goal is to repurchase all such shares.

Let me quickly update you on the impact of the global supply chain transformation initiative announced back in February.

During the quarter total business realignment charges of $40.4 million pretax were recorded.

This produced recorded diluted EPS by $0.11 for the quarter.

Today, our plans are on track and we expect to realize the $15 million in planned savings from the realignment by the end of the year.

We have announced that our Sioux Falls Ontario, Canada facility will be closing in early 2009 and we also communicated with employees at all three of our Hershey, Pennsylvania based plants related to a work force reduction plan totaling 800 to 900 employees.

The Union representing the West Hershey Hershey plant ratified a new contract following these discussions with a 93% affirmative vote.

By mid year communication should be made to all employees and facilities to be impacted by the realignment.

Let me now talk about the rest of 2007.

For the full year we continue to anticipate net sales growth of 3 to 4%.

Marketplace performance will improve throughout the year as brands and investment increases.

We are committed to improving core brand performance and restoring Hershey's marketplace momentum within the overall confectionery category.

We expect gross margin expansion year-over-year.

We still have good visibility into our total 2007 cost basket.

Planned productivity, cost control initiatives, and price realization impact will help offset a portion of these costs.

We have not changed our approach to brand investments discussed at CAGNY in February.

In 2007 total consumer investment will be up double-digits versus a year ago.

This investment in the U.S.

and in selected international markets will result in an EBIT margin profile for 2007 which is roughly flat to 2006.

As such we continue to expect 2007's EPS diluted from operations to increase in the 7 to 9% range.

Our long-term goal remains 9 to 11% growth.

We expect our performance in the marketplace and within our cost structure to improve throughout the year as our productivity and reinvestment program continues to gain momentum.

Now Rick will provide you with more specifics.

Thanks Dave.

As Dave just highlighted our sales and earnings performance during the quarter was in line with our expectations.

We expect momentum to build through the year behind accelerated brand investment and stronger impact at retail.

In the first quarter we executed against the three initiatives we outlined at CAGNY.

Restoring program growth, building new platforms, primarily within premium and dark chocolate and refreshment and disciplined global expansion.

I'll highlight our plans for the balance of the year against these three, beginning with restoring core brand growth.

While take away and market share are not at expected levels we have experienced areas of improvement.

On those brands where both consumer and customer programming were in place the business responded.

Thus as investment in our core brands ramps up new product launches gain momentum and we cycle through the prior year impact of limited editions and discontinued items marketplace performance should improve.

The Reese's brand will be one of our major success stories in 2007.

The in-store shipper program to support the launch of the new Reese's Crispy Crunchy bar as well as Reese's based products was very strong.

This resulted in overall Reese's franchise retail growth of more than 5% during the quarter.

Consumer response to the Reese's Crispy Crunchy promotion, Is it crunchy or creamy, was overwhelming, voting closed on February 28 and over 0.5 million consumers responded.

If you are keeping score at home creamy won.

Crispy Crunchy retail distribution is about 60% so there's room to grow for this item.

This new Reese's advertising supported both base Reese's and Reese's Crispy Crunchy.

Crispy Crunchy Toffee started running in late February, base Reese's Toffee will air this month and remain at strong levels throughout the second and third quarters.

Support in the fourth quarter will be focused on the key Halloween time period.

The Reese's peanut butter and jelly spot, a version of which many of you saw at CAGNY is the first to air.

This commercial had the highest Reese's effectiveness index ever, driven by strong branding.

Total Reese's advertising spending will be up 225% in 2007.

Reese's will also benefit from the Elvis peanut butter and banana limited edition.

A full product lineup, including a king size, standard cup, and miniatures, will begin shipping to retail customers in June with the PR blitz scheduled to start in late July.

We're excited about Elvis and customers are as well.

Here's why.

Preorder requests are the highest in our history and we anticipate merchandising units to be more than two times what we typically average.

In this particular instance, less is more with Elvis.

Sales of the Reese's limited edition will be close to 20% greater than all of the limited editions in 2006 yet with 80% fewer items.

Elvis will accelerate Hershey's industry leading king size business which is up 11% year to date almost double the category.

In the FDM XC channels our king size share is up 2.2 points for the latest 12 weeks.

To further build the Reese's franchise we have developed a new product that delivers a meaningful consumer benefit.

Today we're announcing the introduction of Reese's whips.

It's the perfect combination of peanut butter and chocolate with a new light and fluffy texture that has 40% less fat and is preferred two to one over the leading competing product.

Reese's whips will launch in the fourth quarter with investment increasing as we reach our distribution targets.

The plan for Kisses is straightforward.

Act set rate growth as we celebrate its 100th anniversary.

The celebration began with the commissioning of the Kisses stamp which is expected to sell more than 300 million units.

To date there have been 147 million media impressions related to the Kisses stamp and its 100th anniversary.

This was followed by the reigning Kisses TV advertisement rated as the most memorable spot ever, and a national print campaign reinforcing the Kiss someone message.

These initiatives have resulted in strengthening trends behind the core silver Kisses franchise.

To add value to the Kisses product we're now offering a mix of special messages on the plumes of silver Kisses such as good luck or congratulations.

The Velocity of Kisses chocolate truffle package candy launched last summer is increasing and performed well during the Valentine period.

The Kisses chocolate truffle single serve item launched in March is off to a good start.

While distribution is building where the product is available, Velocity is on par with everyday chocolate items.

In the second quarter news around the Kisses franchise intensifies.

Kisses and Kissables packaged candy will include special game pieces resembling half of a colored Kiss.

If consumers can match both halves of the silver Kiss, they can earn $100,000 and have the chance to earn $100 million live in November on the TV show Deal or no Deal.

As the summer approaches so does our S'MORES consumer and customer event.

This years event will be huge.

Preassembled pallets of Hershey's milk chocolate bars, Kraft marshmallows, and Honey Maid graham crackers will be shipped directly to retail customers.

Advertising will be stepped up in the Memorial Day and July 4th, windows to capitalize on the in-store activity and increase the lift that we expect to be in excess of 250%.

Preorders for the S'MORES pallets are strong up over 20% versus last year.

It's about winning big and we intend to make S'MORES as big as the season at some of our largest customers.

Now I will highlight our second strategic priority starting with premium and dark chocolate platform.

The continued growth in both Hershey's special dark and extra dark enable us to maintain our leadership share within a segment that has experienced explosive growth.

For the 52 weeks ending March 25, in the FDN XE channels, solid dark chocolate increased about 60%.

In the quarter we had seven of the top ten dark chocolate brands and seven of the ten fastest growing dark chocolate brands in the FDN XE channels.

It's important to remember that the fastest growth is coming from solid dark chocolate and in non measured specialty and boutique channels.

The Cacao Reserve by Hershey's launch is building and receiving good support from our major customers.

We started shipping Cacao Reserve, Country of Origin, and Truffle Tins in the fourth quarter of 2006.

As we reached our initial distribution targets in late Q1 we began TV advertising.

This is in addition to print media.

A large portion of the consumers to the mashed premium segment are new to the category.

Therefore FSI is a great vehicle to drive trial and reach consumers.

Our initial Cacao Reserve FSI that ran on January 28, drove lift of more than 200% in the food and drug classes of trade.

Based on these results we'll run a broader FSI at the end of April that ties in with even greater in store customer merchandising.

Commitments from major food, drug, and mass customers are strong, ensuring that the [Inaudible] is solid.

The second platform, health and wellness.

This includes whole bean, antioxidant, and organic offerings as well as portion control, a niche business that meets a specific consumer need.

In May we'll launch Hershey's organic in both dark and [Inaudible] varieties.

Consumers will find that Hershey's organic provides a rich pure chocolate experience.

The products are made with only the finest organic ingredients and contain no artificial flavors, chemical, or preservatives.

The growth in the natural foods and organic channels continues to accelerate.

Organic snacks are $1 billion category and growing at double digits.

More consumers are choosing organic food and are willing to pay a premium.

As such, we expect both Hershey organic and the recently acquired Dagoba organic chocolate to capitalize on this growth opportunity.

Our Snacksters lineup, 60-calorie sticks and 100-calorie packs are performing well and continuing to gain distribution.

This lineup was supported by in-store sampling and couponing in January.

Response was especially positive on Snacksters which reinforces the appeal of the kid requested, mom approved wholesome snacks.

In the second half of 2007 we'll launch Mini Kids cookies, a repositioned product that delivers 100 calorie benefit.

We'll also leverage the Reese's and York brands with the launch of 100-calorie wafer sticks and rebrand to 100 calorie pretzel bar under the Hershey's name.

The third key platform is refreshment.

As a reminder, this business is highly incremental at over 80% to our chocolate business.

Ice Breakers Sours gum launched in December and distribution is gaining faster than any of our other sours lineup.

Velocity continues to accelerate and was up nearly 60% in February versus the prior month in the [Inaudible] class of the trade.

Ice Breakers Sours gum has a halo effect on the Ice Breakers Sours mint tins where sales have sequentially increased since the introduction of Velocity of 10%.

The Ice Breaker Sours gum launch has been supported through a combination of merchandising and print and television advertising built around the unexpected whirl that comes from Ice Breakers.

We're using creative ways to reach our target audience, males and females 18 to 24 years of age.

The vital marketing and unique product placement.

These are ideal target consumers as they overindex on refreshment category purchases at consumption, particularly in gum due to casual social interactions.

Additionally they're avid users of digital media which allows us to interact with them on a variety of touch points, creating deeper interactions.

For example, Ice Breakers teamed with Lonely Girl, 15, a web based and you too drama with a huge following.

Bree, the teenage star of the show uses Ice Breaker products and mentions them by name as the camera zooms in on the package.

In May we'll launch an additional flavor of Ice Breakers Sours gum and introduce our Ice Breakers Wellness gums, featuring ingredients such as ginseng, vitamins, and antioxidants from green tea consumers will be offered new benefits with innovative pop-up packaging.

In the second half of 2007 we'll introduce pomegranate lemonade and peppermint wellness mint, again, adding natural vitamins and other minerals, and a sugar-free mint packaged in unique tins.

The Ice Breakers Sours gums, mints, and wellness products as well as York mint tins have average retail price points of $1.99.

Customers benefit from this higher dollar ring as it indexes at more than 150 versus similar products.

This strategy is driving profitable sales growth.

York Mint tins launched in December is another example of creating premium value proposition in the refreshment category while extending our brand equities.

Distribution currently at 40% should be in the 70% range by the end of the year.

In the second quarter, we'll move print advertising and our designer tins series PR program in conjunction with the Young Survivor coalition.

To ensure that all of our consumer initiatives receive maximum retail support we'll increase in-store coverage hours by 17%.

Major customers and high volume food outlets will benefit as they'll receive continuity coverage throughout the year.

From a staffing perspective we've achieved about two-thirds of our target.

Momentum from this initiative will build throughout the year with end market results improving in customers where we experienced a disproportionate share loss in 2006.

We're also making good progress on the rollout of our P3 initiative.

This was developed to penetrate underdeveloped, independent and small chain convenience stores which represent two-thirds of the stores in the channel.

P3, or premiere partner program is focused on getting more independent sea-store operators to participate in our flexible programs.

Our goal for the year is to increase customer participation by 20%.

At the current rate we'll exceed our target in the second quarter.

We made solid progress in our third strategic priority disciplined global expansion.

In late January we announced the agreement to create a manufacturing joint venture with Lotte in China.

Several Hershey brands will start being produced in third quarter with retail availability at year end.

We followed this with an announcement a few weeks ago that we entered into an agreement to create a joint venture with Godrej.

The new entity, Godrej Hershey's foods and beverages company with headquarters in Mumbai has two manufacturing facilities and produces heart ambient beverages.

Godrej is an ideal partner because its products are held in very high regard among Indian consumers.

In addition Godrej has an advantage throughout the market.

Today the core business of the joint venture is nutrient branded sugar confections, Godrej branded beverages, and Hershey's syrup.

The combined brands have approximately $70 million in annual net sales.

In the near term plans are to expand the confectionary business using the [Nutrieb] brand and other brands from Hershey's portfolio.

We'll leverage Hershey's R&D and innovation capabilities to build brand equity and drive growth.

Alliances such as these with well established partners in a specific region will enable us to achieve profitable, sustainable growth over the long term.

Now to wrap up.

Our plans are in place to improve upon our performance where we have invested resources we have achieved positive results.

Support for our core brands will increase and the impact from our new product should build over time.

In combination with strong productivity programs, this will enable to us deliver upon our marketplace and financial commitment.

Our financial expectations of a 3 to 4% increase in net sales and a 9 to 11% increase in diluted earnings per share from operations remain appropriate for the long term.

For 2007 we anticipate net sales to be in this 3 to 4% range with higher levels of brand and customer investment to be maintained throughout the year we anticipate diluted earnings per share from operations to be up year-over-year in the 7 to 9% range.

We'll now open it up for questions.

Thank you.

[OPERATOR INSTRUCTIONS] Your first question comes from Alexia Howard of Sanford Bernstein.

I have a quick question on the single serve items.

I noticed that, I guess you have been struggling with that over the last few quarters.

I believe probably at the beginning of 2006 the goal was to be increasing the proportion of single serve, I think up to 33% of sales by 2008.

I was wondering if you could comment on where you think you can get to in terms of the proportion of single serve and more specifically, how the sales have been developing around the single serve items in the Home Depot and some of those new channels that we were talking about, about a year ago.

In terms of the Home Depot rollout, we have -- we've pretty much covered all of the stores now.

We have merchandising solutions in Home Depot, and we feel very good about how that's gone.

We are now looking to expand that and have initiatives in place in some other -- in housewares, electronics, quick serve restaurants, et cetera, so that one is progressing.

That build is moving, it's probably moving about at the pace we would expect it to because each one of them to a certain extent becomes somewhat of a custom solution because each customer has their own set of logistics issues that you have to work through.

We still see that as a good growth opportunity and one we're going to capture in the future.

We did have softness in single serve in the first quarter.

The core brand aspect of our singles business was up pretty nicely.

We're pretty pleased with what we've got going in Reese's and in the core Hershey brand.

We do still have in the marketplace the lingering effects of some of the limited editions and discontinued items that we started to take out of the portfolio in the middle of last year.

So in the the first quarter while we had very good core brand take-away in the single serve component of the business it was offset by some of the lingering effect of the discontinued items and limited editions.

Then on pricing, it seems as though -- am I right in thinking that the 3 to 4% price growth that was -- or price increase that was announced a few weeks ago, is that -- that's pretty similar to the rates that you've been growing at, I guess historically over the last few years.

Is there anything markedly different that we're likely to see this year on pricing or is that pretty much in line with the pace that you have been at?

We have not -- we haven't been taking an annualized price increase or an annual price increase along the way.

That type of price increase, what we think about, closer to 4 to 5% on single serve items.

And that's about a third of the portfolio.

So if you think about that roughly it's 1 point to 2 on a full year basis before you extend back and obviously you have to take into the impact the elasticities of pricing.

When we look at the pricing we obviously look at what's the right merchandise price point because so much of the category moves at a merchandise price point versus an actual list price.

Into the algorithm as we think about pricing we think about what the promoted price point will be and then also because pricing is so different across the multiple channels we look at what the current price point is and then we wanted to move a nickel or a dime, et cetera, and keeping very critical price points in mind as we do that.

So I think the pricing algorithm for us is probably no different than we thought about it in the past and it really is related to the cost increases in the portfolio.

Thank you.

You're welcome.

Your next question comes from John McMillin of Prudential Equity Group.

Good morning, everybody.

Good morning, John.

Rick, I've been around long enough when people say essentially in line or roughly in line, it usually means a little bit short of the internal expectations.

Do you care to comment on that?

Can you define the word essentially?

John, I think what's important, and we've discussed it, we saw some good pockets of improvement where we had everything coming together which would be the right consumer programming, programming in the right retail execution and that's what we feel confident about.

Our core brand take away, all channels, all in, was up about 4% for the first quarter, and some -- and the offset were discontinued items and some limited editions from last year and some of the tail brands.

So as we start to get things in place, we believe we'll see a broader base of support and improvement in retail take-away.

I know you don't want to give second quarter guidance, but broadly speaking, you would expect to see a sales acceleration from 1%.

Sorry, didn't hear the first part.

I know you said we don't give--.

I know you don't give quarterly expectations, but, just broadly speaking, you just had add 1% sales gain in the quarter.

You're still targeting 3 to 4.

Can you just tell us, is your internal expectation to do more than 1% sales gain in the second quarter?

John, you're right, we don't give any type of guidance on sales growth by quarter, but what we have said, and we believe this to be the case, is we expect to see sequential improvement in our performance through the balance of the year and I'd like to leave it at that.

That's fair enough.

Now just conceptually, if single serve is not -- or loose bars, I can't call it single serve, if it's doing poorly, conceptually speaking, raising the prices will just make it worse.

I think there's a couple of things.

Dave talked about as we follow the industry pricing there are the opportunities where we will continue to provide the right levels of promotional support, and that's where a lot of the spin back comes.

Dave also mentioned the elasticity.

So when we talk about single serve we're not just speaking of loose bars, we're speaking of some of our gum and mint products.

They have higher pricing.

That's where we've seen some growth.

What we had said in the first quarter was that we were up against prior year's limited edition and some discontinued items.

We also had a major introduction and trial period for an Ice Breaker Sours and this year we're supporting Ice Breaker Sours, done Ice Breakers Sours mints a year ago.

That's really the way to think about pricing and the impact in single serve, not just necessarily loose bar chocolate bars.

Just my last question.

I know you're not going to say anything directly about Cadbury or your interest, even though it is somewhat interesting that they talk about you.

I just kind of want to broadly ask you about Hershey's global scale.

Is it enough, or do you kind of run the risk a little bit here, I mean, if prices keep going up domestically and Americans don't eat more chocolate, you run the risk of kind of being the next Tootsie Roll where you don't grow and you certainly look younger than 87 years old, but you feel like the Company is getting old.

Can you just kind of broadly address your need of a more -- of mobile scale and just how something like Cadbury would fit or not fit into your plans?

Well, I'm certainly not going to comment on any specific company as you knew that I wouldn't.

I think the important thing is our strategy of disciplined global expansion is the right way for us to achieve our long-term goals.

What we've said many times is that it's less about being able to adapt a Hershey's brand to local taste preferences, more about getting the appropriate end market capabilities from a production and distribution, and given our growth targets of 3 to 4%, given the growth in the U.S., call it 2 to 3%, and ability to gain market share, the arithmetic is simple in terms of what type of incremental growth we need to get from these high-growth markets.

It's not just China and India.

We have a very strong business in Mexico.

We see other opportunities and other Asian markets so we're certainly satisfied that we can deliver our long-term marketplace and financial expectations with our own strategy of global expansion.

Thanks for all that.

Thanks, John.

Your next question comes from Christine McCracken of Cleveland Research.

Rick, you mentioned that King bars were up 11%, you gained some share there during the quarter.

Can we take away from that that you have turned around your sales trends in see stores or is this strictly in -- across the board?

No, within convenience stores we saw two very good pockets of strength.

We gained share in nets as we said in King size we had 11% increase in take away.

We gained a couple of share points.

We did not do as well in standard loose within convenience stores.

A lot of that is recycling the limited edition and discontinued items from a year ago.

Is there anything underway really -- I mean is it -- that we'll see better trends through the year as you get past some of that obsolescence and move past some of the product that's still in the channel?

Yes, Christine, two things in convenience store specifically if that's when your question is specifically about convenience store.

We're selling in the new convenience store program, the P3 program.

We will probably reach the saturation point that we'd like to on that some time in the second quarter and our C store merchandising program really began in earnest in the summer months.

We have a large promotion around the Reese's peanut butter cup, the Elvis promotion.

We have a number of tie-ins with Coke during the latter part of the year.

See store operators as many as four times would run a merchandise bundle with us and Coke.

Then all of our fountain beverages programs haven't started yet either.

So within the first quarter we're really working through the remainder of some of the overhang of the inventory discontinued items out there.

The core brands have started to turn from a velocity standpoint, we're feeling good about that and then the programming really starts to kick in in earnest in the second quarter.

Then just on your premium brands you mentioned that you're stepping is up support behind that in order to, it appears to get people to trade up from kind of your everyday business to that premium level.

Do you run the risk that you dilute the category by bringing down the price points of that premium product?

How do you balance that, I guess?

I think there's a couple of ways.

What we're talking about with the mass premium, which is Cacao Reserve, it's capitalizing on explosive growth within that segment.

It's less about diluting the equity or diluting the premium.

At the higher end we have Scharffen Berger, Joseph Schmidt, and Dagoba.

So we really look at segmenting the match premium with Cacao Reserve.

There's a wide variety of price points within that segment and we have a wide variety of products to deliver the premium benefit to consumers.

You don't view bringing down the average price point as a significant risk for that category?

No, because we're not bringing down the average price point.

We're taking the appropriate steps to ensure that we build awareness and gain trial for our new items, but we're not bringing down the price point within that segment.

Then just on Halloween, any -- it sounds like a lot of sales have been completed at this point.

Can you give us any color around that?

I think it's probably too early to give you much more than, I think we had a very good Halloween last year.

That's always the basis and the starting point for how you go about your program for the next year.

We have good item development in place and we feel pretty good about where we're going to be.

I'll leave it there.

Thanks.

Your next question comes from David Palmer of UBS.

Good morning, guys.

How are you, David?

Good, thanks.

Couple -- two topics here.

One is, the lack of a significant super premium brand ahead of this Cacao Reserve, and I don't mean to slight your smaller super premium brands, but Cacao Reserve is something you're trying to build organically, dovetailing off of the Hershey brand.

How much of a disadvantage do you think you have trying to grow that brand, and do you think you're spending enough trying to grow that brand when compared to the doves and the Giordellis of the world?

How much of a disadvantage versus your competitors?

We knew going in that it was going to take some time to build trial, awareness, and distribution, and it has.

From the standpoint of what our expectations were for Cacao Reserve in the first quarter we were right on where we wanted to be.

So that said, the premium part of the category is growing very rapidly and we need to participate there.

Cacao Reserve is certainly one way that we're going to do that as are Scharffen Berger and Joseph Schmidt, but they certainly aren't going to be the last wave who are going to participate there either.

We recognize the category growth there and we're going to participate in it and what you see in the marketplace now is our entry to date.

It's not the end of the game.

It will cost us a little bit of money to gain trial.

We knew that coming into the year.

We're spending appropriately.

How long do you think it will be before you know that you have a sustainable growth vehicle in Cacao Reserve?

Six months?

Do you think you'll pretty much get a sense?

I don't think we're going to speculate on any time.

One of the other things that's important is Cacao Reserve by Hershey still provides some halo effect but we're not going to get into any speculation as to when we might have a success or say we're going to have success.

I think we also need to go through a full cycle of seasons because we have the gifting occasion we can work on as well.

This is one that, as Dave highlighted, we feel very good about the products and feel very good about the initial customer consumer acceptance and we want to build it.

One last thing.

In the first quarter, we saw some trade flyers from the likes of McClain and others and they were pushing two for one on core brands in the see-store channel, two for $1, that is, it seemed like an effort by Hershey, assuming there was promotional dollars behind that, to get perhaps restart or jump-start the core in those channels.

Could you comment on that and whether there is a little bit more of a promotional bent on your core single serve?

I think, David, your first -- one of your statements there about you assume that we found that it was promotional dollars that is an assumption on your part.

It may or may not be true.

From the standpoint of merchandising in the category we'd love to see it.

At times we'll fund it and at times some of our customers will decide to fund it on their own.

I'm not going to get into anything specific there.

For us the category moves very well when it's merchandised, so to the extent that we can get merchandising that's great.

We are also very cognizant of the fact that we don't like to commoditize the brand, and/or get the price points at the consumer expects to pay a low price point every day.

There's a right balance for the price point.

There's going to be times when customers want to do things that drive traffic and we don't necessarily always fund them.

Thanks very much.

Thank you.

Your next question comes from Eric Larson of Piper Jaffray.

Good morning, everyone.

Could you give me some help, I'm struggling a little bit with your gross profit margin guidance.

You talk about the price increase not giving you any benefit this year, yet you announced it with nine months -- with three-quarters of the year remaining.

I know that will you get some of that benefit.

You're going to get a lot of your cost savings, I suspect the bulk of your cost savings from your supply chain initiative flows through your cost of goods sold line, and yet you're going to keep a relatively high promotional level for the near term.

Can you give us a feel as to how the gross profit margin, the components, and maybe how it kind of lays out for the rest of the year?

Obviously your second quarter is a small seasonal quarter.

So you'll have to make a lot of hey in the second half to have an up growth profit margin.

I am just struggling how we're getting there.

Good question.

In the first quarter, our gross margins were off about 100 basis points.

That's lower than we would have expected.

We would have expected it to be somewhere around flat.

So in the first quarter, two real items, one was the mix factor, single serve was a little softer than we would have liked.

Seasons were stronger so we had a mix impact there.

And commodity costs, particularly dairy, were a little higher in the first quarter.

So those two things suppressed margins in the first quarter.

We have always said that the margins would improve as the year went on, to give you some factors here, four or five factors, you mentioned the global supply chain transformation project.

That's really -- doesn't start until the fourth quarter, for all intents and purposes.

So we have significant amount of savings coming from that but they are very back end loaded.

Our productivity programs in general this year were certainly more back end loaded than not.

The pricing will give us -- certainly will give us some benefit in the back part of the year but we are doing promoted price points, protect promoted price points on merchandising units, so a little bit of pricing that we would get is certainly back end loaded and helps to offset some of the commodity costs that we had visibility into.

Then if you think about what we're cycling in the latter part of the year the back part of the year had, of last year had significant obsolescence costs in it.

We're going to be a much more normalized place on obsolescence as we get in the back part of the year so those factors plus the mix improving as the year goes on because our new offerings are all in premium and single serve for the most part those factors are all going to build throughout the year.

So while we're a little behind where we wanted to be in the first quarter we still see margin expanding for the year and that's always been the case, that it's kind of going to be back end loaded.

Okay.

Then just the follow up question on that.

Will you, by kind of the end of the second quarter will you have -- basically fully lapped most of your negative comparisons on limited editions and obsolescence?

Is your second half really the clean part of the year regarding that factor?

I think the question on the top line on the sales line, pure revenue line, by the time you get out in the back half of the year most of the lapping will be done.

If you remember we started to kind of pull back on limited editions in the second and into third quarter last year.

The obsolescence really started in the second quarter and really ran for the entire back half.

So in the margin aspect of it we lapped that later in the year this year in terms of the cycling the top line aspect, that will will start to be behind us by the middle of the year.

Thank you.

Your next question comes from Eric Katzman of Deutsche Bank.

Good morning, everybody.

A few questions.

I guess regarding the pricing, it's -- based on what I heard it seems somewhat unusual that Mars would have led the price increase, and I think they did that maybe a week or so before you followed.

So while you kind of wrote that pricing didn't affect your -- your pricing didn't affect the business, wouldn't retailers have kind of tried to load up during that gap between the two of you, and how does that -- like had you planned on raising prices later in the year, given the cost pressures that everybody's feeling, and how does that affect kind of the, I guess the flow of the business on the top line?

Eric, I think the reality of the way the pricing works for us, and the way our programs work, we have certain promotional windows and growth programs in the first quarter and customers had already really made their decisions on what they were going to buy throughout the first quarter by the time we announced our price increase, which was in April.

So we didn't see any real strange spike in orders for the first quarter at all.

And the way the pricing works for us from a standpoint of how we're going to impact it, it all happens in the second quarter.

Customers have the opportunity to buy goods at the old price for a period of time, and it all happens in the second quarter and ships in the second quarter.

So there's really no -- it's an eight-week window, if you will and it all falls in the second quarter.

So from the timing standpoint of shipment, very little if no impact.

In terms of did we have pricing in our cost, given costs, I won't get into it as I have said earlier on, later last year and earlier on at CAGNY this year, we had visibility into our cost, the pricing lever is always something that's in our thoughts and in our plans.

Would we have taken a price increase in a March/April time frame?

Probably not.

Obviously since March, took one prior to us that would probably give you the answer on that.

I'm not saying that we wouldn't have had producing in our minds at some point in time in the year given the cost structure.

That's helpful.

Second, unrelated, I guess, can you, Rick, can you update us on the CFO search?

You don't like Dave doing both jobs.

But I thought you -- weren't you searching?

Yes, we are.

The search is actively underway and we're considering both internal and external candidates, and Eric I'd like to leave it at that please.

Then lastly, I think this is kind of follow-up to John's question, but didn't a year or two ago you went back to the Pennsylvania legislature and asked them to amend the law to allow you to be, I guess, more agressive on joint ventures because the way the law had been written during the time of the last merger discussions or sale discussions that prevented any type of activity?

Can you kind of update us on the specifics of what changes were made to that law?

Not to get too much into specifics, you're right, but there was some hastily passed legislation, maybe at the end of 2002 around the time of the abortive sales process and then there were some revisions made subsequently that would permit -- Hershey was a Delaware based company.

The Board of Directors found more degrees of freedom to look at opportunities that are more in keeping with other corporations and I'd like to leave it at that.

I think it may be explained in some of our materials or in our proxy but I'll leave it at that.

There was a revision made but it's really to permit the Board and the Company to have more degrees of freedom as other corporations do.

Okay.

Thank you.

Your next question comes from Terry Bivens of Bear Stearns.

Good morning, everyone.

Good morning, Terry.

Good morning, Terry.

Dave, I'm not sure if you actually did this.

Can you quantify the effect of the so-called obsolescence products in the first quarter?

Terry, it was a bit higher than last year, a tiny bit, not a huge amount, but did it hurt margin a little bit in the first quarter versus prior year but not as much as it certainly has in prior quarters.

Okay.

And secondly, just to take one more run at this overseas thing because does it seem to be a topic, just having returned from China, there's clearly a lot of interesting stuff going on around your Lotte JV in clearly India, for a company your size is pretty significant.

Rick, I Guess this would be for you.

What would be, given those two initiatives that have been announced, what would be the logic of any combination with a company that's clearly facing kind of its own issues with the confection, specifically the chocolate side of things, how would you look at that?

I'm certainly not going to comment on anything that is speculative around any combination.

What you said we agree with wholeheartedly.

The opportunities in both China and India, on two dimensions, one, both countries chocolate markets are small but growing rapidly so we think we have the opportunity to get in early on and also have the opportunity to positively influence taste preferences with consumers, they are not so well ingrained from having been established for a number of years.

I'd leave it at that, that we see these as excellent growth opportunities but equally as important, the routes that we've taken, meaning the partnerships with Lotte in China, with Godrej in India reflect our strategy of going in with a well established partner, not necessarily feeling as though we have to go in alone.

I guess in your description, granted this is a speculative area, but would you focus us on the word disciplined?

We are disciplined, yes.

I tried.

We're also going to be global.

Thanks a lot.

Thanks, Terry.

Your next question comes from Edgar Roesch of Banc of America Securities.

Rick, I always appreciate your review and outlook for the business.

I'm encouraged that it's focused on the core.

But just wanted to circle back also on something that was a highlight or a focus last year and that was the cookies and snack nuts business.

Can you give us an update on how those are trending?

Essentially we gained share in the cookies segment during the quarter and where we see the opportunity is as we discussed at CAGNY and previously the area of substantial snacks, whether it be brownies, whether it be in road cookies, and where we're going to focus our single serve opportunities within selected high growth customers, think of that within some see-store customers, certainly within some drug and selected mass customers.

We see those as close-in opportunities to expand outside of confectionary.

I think the other area of snacks that really has taken off that we didn't talk that much about initially was Snacksters and the area of portion control, 100-calorie Snacksters.

There's done extremely well.

So there's an area where we've expanded beyond pure close and confectionary, and at this stage it's working.

So it's fair to say that there's been some wins, and there's some that you threw on the wall and they didn't quite stick, it sounds like.

Has the approach been disciplined such that we're not going to have any kind of overhang with some of the things that did not work, would you say?

The strategy was always where could we extend our core brands, take advantage of our confectionary net expertise, and leverage our retail capabilities, and we've said over the past year or so we put a lot of businesses out there, certainly not all businesses are going to work.

We are certainly scaling back and focusing on those where we see opportunities again to build our core equities and take advantage of the right customer relationships.

Thanks.

And one other question, if I could.

Just getting your philosophy, you have some marketing programs, and you describe incredible amount of activity to restore the base business this year.

Are you thinking about this as just standard operating procedure now as you plan, even into '08 and year after year, or is this sort of a restoration project to get the base momentum back, and then you'll see what comes after that?

Thank you.

Thank you.

I think it's a couple things.

First off, we continue to see upside potential in our core brands.

They're very responsive, whether it be Kisses, Hershey's or Reese's to both advertising, consumer supported, and in store execution, and for us, we're stepping up the investment that we need to restore core brand growth, but one of the reasons for our supply chain transformation is so that we can have an ongoing level of funds to invest in our brands, our selling capabilities, our global expansion so it's a little bit of both.

Your next question comes from Steven Kron of Goldman Sachs.

Just a couple of follow-up questions on the margin side.

Dave, on the gross margins, down 100 basis points, you mentioned that you would have expected it to be more flat, and it seems as though the variance from your internal guidance was more commodity related, maybe some of the dairy costs spiking a bit more than you had anticipated, yet you talk about having visibility into the complex going forward.

I guess, if we think about the guidance of gross margin expansion, what are you kind of internally thinking from some of these commodities that you have indicated are more difficult to contract or hedge out?

The really the one commodity the entire complex that is more difficult to cover forward is dairy.

There just isn't a commodity market, and because of the nature of fluid milk, it's a daily event, it's something that is a little harder to cover.

So when we talk about visibility and cost structure, other than dairy, when we talked to you in the latter part of last year, we had very good visibility then, that hasn't changed across the board.

Dairy was a little bit more costly for us in the first quarter.

The market has run up.

The reality of it is, the miss in the first quarter on gross margin probably more so mix than commodities actually.

So those two things combined were probably the two things that I think we missed in the quarter.

The mix will improve as we go forward, then as I said we have a lot of other productivity programs and just cost in the base as we go forward that we're lacking that will have more normalized programs this year.

So we feel pretty good about where we are from a gross margin standpoint the rest of the way, although in the first quarter clearly we didn't expect it to be our best quarter of the year and it certainly wasn't.

And just to follow up to that, on the dairy side, going forward, I know it's hard to tell, but is your modeling and your guidance incorporating milk prices or dairy prices where they are today?

I want to say that what we're thinking about in the pricing, but we obviously have a point of view about what dairy prices will be for the rest of the year and it's clearly in our 3 to 4 -- on our -- not 3 to 4, but 7 to 9 EPS number is what we're thinking about.

Just one more if I might on the SG&A side.

I know the pacing of some of the brand support that you highlighted is going to accelerate as we move through the next few quarters but I guess I was still a little surprised that SG&A in dollar terms was down year-over-year again after CAGNY talking about spending quite a bit at the core, two times, three times certain brand support, and it seemed as though more of this down year-over-year both in percentage terms and dollar terms is G&A related but can you just talk to us as to, was this kind of, as anticipated, as it evolved through the quarter, is this kind of a constant evolution here where you guys are kind of moving things around, adjusting for product introductions and stuff?

Brand spending was up in the quarter, and it was up in the quarter as planned.

So we did -- we spent what we said we would spend, what we thought we would spend on brand spending.

We were more favorable than we would have planned for in the D&A, in the pure expense side of the equation, we were more favorable than planned, and so if you think about the algorithm of what's in selling and G&A, it's the G&A side is favorable.

The spending side of it we did spend what we thought we would spend over the brand investment.

Advertising is up double digit, and we also spent more in the promotion line which is up between gross and net.

So we spent on the brands what we were going to spend.

Some we were going to spend out and continue through the year.

We did have very good cost and expense control and favorability there, and that's really what helped us offset some of the shortfalls in gross margin.

Thanks a lot.

Your next question comes from David Driscoll of Citigroup Investment.

Thanks for taking the call.

I'll keep it brief.

Dave, can you just tell us what the price and volume breakdown was in the quarter?

Actually, we had in the quarter because we spent more on promotions -- promotional pricing to get some merchandising and trial and new items we actually had a negative price realization in the quarter, promotional spending was a little bit higher so you can think of pricing being a little bit of a negative and the rest of it volume.

Okay.

Then one more question.

Was -- you mentioned a number of times here that core brand growth in the quarter improved.

What was the number?

Can you actually quantify it for us, and can you tell us what the comparison would have been in the year ago for just your core brands?

Well, I won't give you the year ago, but what we're saying for core brand growth in the first quarter take-away, in all the channels that accounted for 80% of our retail take-away was up about 4%.

Okay.

Very good.

I'll leave it there.

Thanks everybody.

Thanks, David.

Your next question comes from Robert Moskow of Credit Suisse.

Just very quickly, you've now launched -- announced two JV's since the beginning of the year, China, India, and then by extension Japan and Korea.

They're not big each of them but when you had a them up you could have some contribution to your sales growth, and maybe that solves or at least addresses to some extent the issue of rather flat U.S.

trend.

Can you give us a sense of how international expansion like that helps your sales line going forward?

We're not going to break out specific contribution of international growth.

I think what we're saying about the manufacturing joint venture with Lotte in China, we'll begin to ramp up production in late second quarter, third quarter and that product won't start to show up in distribution until late in 2007 and then with the business with Godrej in India we'll start to see some benefit from that by the end of the year but we're certainly not going to break out any specific contributions.

But we do anticipate over the long term international being a good source of growth for us which is on top of the growth we talk about within the U.S.

market.

Can you give us any sense like how big your Asian sales are currently?

No.

Okay.

Thanks anyway.

Okay.

Your next question comes from Jonathan Feeney of Wachovia.

Just one question.

Looking at the very substantial plans for increase in advertising to Reese's, why not increase advertising equally substantially across other core platforms particularly in light of recent efficiency on that front, relative ad rates coming down?

What we've communicated at CAGNY and we're still executing those plans is we're seeing comparable increases that we've discussed in Reese's on Kisses, Hershey's and Ice Breakers.

So we have very strong advertising and consumer promotion support across our major brands and that's all part of our strategy of restoring core brand growth.

So we are doing that.

But you have talked about total brand support up in the 7% range on the year and I guess I just wonder, how does that map to the more substantial type numbers you've talked about at Reese's?

That number was for the quarter.

We've said we're going to be up low double digits for the full year.

I think that's what we communicated at CAGNY.

The most important thing is where we're spending that increases, and that's behind the major core brands, restoring core brand growth, as well as our new platforms.

Thank you.

Thank you.

Your next question comes from [Austin Root] of Chesapeake Partners.

Mr.

Root, your line is open.

Yes, thank you.

I wanted to ask, growth areas, just generally speaking, be they segments or geographies, that would exclude organic growth.

You mean what potential areas of acquisitions?

Yes.

We certainly don't discuss that.

I think it's important that we have made some selected acquisitions in those segments where we believe that a brand currently exists that we can grow, particularly in premium chocolate with Scharffen Berger and Dagoba.

I think that's where our focus has been in the past.

There's certainly other opportunities in other parts of our business.

Certainly wouldn't want to get into any specifics at this point.

Thank you.

Your next question comes from [James Amerosa] of [Havia].

I wondered if I could ask a couple of questions going back to the Asian joint venture with Lotte, obviously the production is one thing, but distribution, sales, and marketing is another.

I wonder whether you could talk a little bit about how you're building your distribution strength in Asia and to what extent the joint venture with Lotte could be into that area.

That's one question the second question is on Cacao Reserve, whether you could give some indication as to your market share currently either in terms of relationship to the total market, relationship to dark chocolate, or relationship to the super premium segment?

With respect to Cacao Reserve, the brand really didn't launch in the latter part of last year, so early in its development, we don't want to get into specifics on market share brands, and individual segments.

Needless to say it's in its early stages and building and I'd like to leave that one at that.

In terms of the Lotte joint venture.

The Lotte joint venture in China is a manufacturing joint venture.

We have an agreement also to cooperate in other areas.

Our distribution I think we've said this in the past a number of times in China is with IDS as our distribution partner there in the modern trade and we're also building some traditional trade distribution as well there, but it really is with a distribution partner in China.

We will have dialog with Lotte about them functioning in particular countries where they have particular strengths such as Korea or in Japan, so that's really how we're thinking about distribution in Asia.

I wonder if I could sneak one last question in.

You said during the presentation that -- you have told -- midyear about the impact of the transformation project.

Is it fair to assume that you might make some announcement generally and to the investment community at that time?

Our policy has been and will continue to be that we're going to discuss the global supply chain transformation with our employees or their representatives first.

We're going to do internal communication.

We think that that absolutely is the appropriate way to do that and once we've had those communications we then have been making them public as we've gone along in terms of press releases and other communications.

So we're not waiting to make some big public pronouncement at one point in time.

We're communicating as we go along to infected employees first internally and then with the public after that.

Okay.

Thank you.

Thank you.

Your next question comes from Eric Serotta of Merrill Lynch.

Just about all of my questions have been asked and answered.

Thanks.

Okay, Eric, take care.

Your next question comes from Kenneth Zaslow of BMO Capital Markets.

In light of your first quarter sales growth of 1.2% is there any jeopardy to the sales growth for the full year?

In the back three-quarters you have to generate 3.5 to 5% sales growth to meet that.

Is there anything in jeopardy there?

Ken, I think we've talked about our merchandising programs really start in the post Easter period, convenience stores, S'MORES, our Elvis promotion, custom Kisses, our advertising ramps up.

We've got innovation coming, we talked about Whips today on Reese's coming later in the year.

Remember, we're cycling lower comps in the back part of the year and we also had the Canadian recall last year in the fourth quarter.

So there are a number of factors out there that are in the base that make the base a little easier to cycle, but the other thing more importantly is the acceleration of the core brand growth and the merchandising and support programs that come with that would give us the comfort at this point in time about where we are from 3 to 4% guidance.

So that's a resounding no.

Good.

In terms of global presence, which regions of the world beyond China and India do you think Hershey's chocolate would be most appropriate assuming Hershey had the necessary distribution?

Couple things.

We've talked repeatedly about the opportunities within China, India, other Asian markets and selected market within Latin America, and while it's appropriate to say Hershey chocolate but it's also appropriate to realize we will continue to adapt our brands and flavor variations to local taste preferences which is what we're doing with the Reese's franchise with different peanut type fillings with chocolate.

So those are really the markets that we've highlighted as the ones we're going to to discuss on.

What about Eastern Europe, like Russia?

Certainly strong markets with good growth but so far we're focused on the markets we've highlighted.

Thank you very much.

Take care.

Your next question comes from John McMillin of Prudential Equity Group.

Just a follow-up, what's the difference between last year's limited editions and this year's Elvis, which is obviously kind of a one-time item?

Do you see my point, Rick?

Yes.

We touched on a little bit at CAGNY, what the Elvis limited edition does for us, it gives us a 360-degree program with customers that have a lot of advertising, merchandising support, major consumer excitement, and it's not just a variety seeking limited editions is where some of ours might have gotten towards the end of their peak.

That's really the emphasis, it's integrating consumer and customer event around fewer items but a major promotional effort not just shipping in limited editions.

So that's major distinction.

Thank you.

Your next question comes from Pablo Zuanic of JPMorgan.

Good morning, everyone.

Rick, my question is more general in terms of your distribution strength on the single serve channel.

I've always been supposedly very impressed with it but when I look at the date, what worries me is that two years ago the CAGNY presentation, the strategy around snacks was the core presentation pretty much.

CAGNY this year snacks was only two or three pages.

I bought into idea that you have all this distribution strength in single serve channel at the front end of the store to sell cereal bars, and nutritional bars, not cookies, and you don't talk much about that any more.

So I'm wondering what happened?

Can you do a postmortem, and could I correctly or incorrectly infer from that, that at the end of the day your distribution strength in that channel wasn't that great to start with and that's why perhaps single serve performance recently hasn't been that good?

Help me understand and deal with that.

I wouldn't necessarily draw that conclusion.

We're still the leader in single serve and total single serve within the total snack market and certainly within confectionary.

Within snacks our single serve strength enabled us to get very good distribution.

On some of the snack business we didn't get the type of velocity that we would like to have a going business.

I think we've also said that two or three years ago had we been able to forecast the explosive growth in dark and premium chocolate and refreshment we would have seen a greater emphasis there.

We're doing that now.

The important thing as Dave articulated, the majority of our new items that we're introducing, certainly that we will be advertising and promoting aggressively, are in the single serve format.

So we're going to leverage the single serve leadership.

The issue with snacks had virtually nothing to do with any distribution strength or not of our single serve business.

Just a quick follow-up in the case of Cacao Reserve what percentage of the sales there do you estimate will be in single serve formats?

And related to that, besides the [Inaudible] do you expect more single serves around the Kisses brand?

We won't break that out but it's -- it will be a good portion of that will be single serve.

You think about the tasting squares and the truffles in tins, and your second question was regarding--?

Just Kisses.

In the U.S.

if I'm not wrong it's only Kissables, just one in single serves.

Are there plans to try to have more variety of Kisses in single serves?

Something in Mexico, something that you also key are in single serves.

Is there a bigger opportunity there?

[Inaudible]

What we did mention is that the Kisses chocolate truffle single serve we just launched it in March and it's off to a good start so that's another opportunity.

It's really the first true single serve for the Kisses franchise and we're looking forward to see how that business goes.

Thank you.

There are no further questions.

Gentlemen, are there any closing remarks?

Yes.

If there are no more questions we'll conclude today's session.

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

As a reminder our 2007 second quarter sales and earnings release and conference call is scheduled for July the 19th.

We'll release earnings at 7:00 a.m.

that day.

Our conference call will start at 8:30 a.m.

Thank you.

Thank you.

This concludes today's Hershey Company first quarter 2007 results conference call.

You may now disconnect.