好時 (HSY) 2008 Q1 法說會逐字稿

Good morning.

My name is [Tashanta], and I will be your conference operator today.

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

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS).

Mr.

Pogharian, you may begin your conference.

Thank you, Tashanta.

Good morning, ladies and gentlemen.

Welcome to the Hershey Company's first quarter 2008 conference call.

Dave West, President and CEO, Bert Alfonso, Senior Vice President and CFO, and I will represent Hershey on this morning's call.

We welcome those of you listening via the webcast.

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

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

Actual results may vary materially from those contained in the forward-looking statements because of factors such as those listed in this morning's press release and in our 10-K for 2007 filed with the SEC.

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

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

As we've said in the press release, the company uses these 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 2008 results excluding net pretax charges.

The majority of charges in both 2008 and 2007 are associated with the Global Supply Chain Transformation program announced in February 2007.

These pretax charges were $30.7 million in the first quarter of 2008 and $40.4 million in the first quarter of 2007.

Our discussion of any future projections will also exclude the impact of net charges related to these business realignment initiatives.

With that, let me turn the call over to Bert Alfonso.

Thank you, Mark, and good morning, everyone.

First quarter results were roughly in line with our expectations with a 0.6% growth on the top line, generating earnings per share diluted from operations of $0.37 or 27% below the prior year due primarily to higher commodity costs and increased levels of overall consumer investments.

Importantly, our 2008 plans are on track to deliver full year net sales growth of 3 to 4% and EPS diluted from operations of $1.85 to $1.90.

Let me provide some additional details.

Net sales performance was in line with our internal forecast.

As we stated back in January, the first quarter was impacted by an unusually early Easter that resulted in fewer selling days and the mid-January decision to cancel the rollout of the Ice Breakers PACS product line.

Net price realization of about 2 points in the quarter driven by the April 2007 price increase was more than offset by lower volumes as we lapped the Kisses 100th anniversary promotion and last year's launch of Reese's Crispy Crunchy.

Net sales for the quarter, excluding the benefit of the Godrej acquisition were down about 1 point.

The price increase we announced in January 28 had minimal impact on the quarter's results.

At retail, the price of a standard bar will still be below $1.

Post-price increase announcement discussions with our retail customers who have also experienced increased operating costs have been positive.

Consistent with past practice, we plan to honor a portion of the 2008 commitments related to plans promotions and merchandising events and will, therefore, only partially benefit from increase in 2008.

Lastly, inventory levels at key distributors are at normalized levels and we did not experience any abnormal purchasing patterns related to the price increase.

Turning now to market place performance, consumer takeaway for the 12 weeks ending March 23 and channels that account for over 80% of our retail business increased by 14.8%.

This number clearly benefits from Easter that was about two weeks earlier than last year.

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

Excluding seasonal activity, primarily Easter and Valentine, retail takeaway was up 1.8%.

Our takeaway in FDMxC, excluding Wal-Mart, was up 9% with market share off 0.8 points and reflects some improvement in the food class of trade as a result of increased retail coverage.

Excluding seasonal activity, retail takeaway was about flat, down 0.1% with share off 1.1 points.

Category sales for Valentine in FDMx classes of trade were up 0.7%.

As expected, Easter sales declined 12.3% due to the shorter selling period.

As a result, we lost 1.4 share points in Valentine as competitive premium gift packages recorded increased consumer sales.

In the Easter period, we lost 0.7 share point and maintained a 34% share this season, almost double that of the next leading manufacturer.

Easter [selter] was improved versus last year driven by Reese's Peanut Butter Eggs and Cadbury Eggs.

Reese's benefited from new advertising that both Ad Week and Advertising Age recognize as the most liked and most recalled spots.

Now turning to margins, during the first quarter, gross margin was down 220 basis points.

As expected, our total input cost basket was higher by 260 basis points in the first quarter.

A portion of this was partially offset by favorable price in mix.

Dairy costs were higher in the first quarter, as the acceleration of these costs in 2007 did not occur until the second quarter.

Our full-year outlook related to commodities has not changed.

As such, we expect input costs to be up about $100 million year-over-year.

We believe that we have good visibility to our costs for the remainder of this year.

Net obsolescence costs were at normal levels in the quarter and were slightly favorable year over year.

Outside the U.S., the Godrej Hershey business generated lower than company average gross margin and modestly impacted our gross margin in the quarter.

This impact dissipated as we lapped the Godrej acquisition in May of this year.

EBIT margin was down 510 basis points as selling, marketing, and administrative costs increased about 16.4%, or 290 basis point, as a percentage of sales versus the prior year.

Advertising was up 18% in the quarter, supporting Reese's, Ice Breakers and other core brands.

Consumer promotion was down slightly in the quarter but will increase during the remainder of the year to support new product launches in the U.S.

and in key international markets.

For the year, we expect combined advertising and consumer promotion to be up about 20%.

EBIT margin will also be affected by the cost of added retail coverage that began during the second quarter of 2007 and higher [OA]-related costs in our international expansions in India and China.

We expect EBIT profile to improve in the second half as we lap these prior year investments.

Now, moving down the income statement, interest expense for the quarter decreased, coming in at $24.4 million versus $28.3 million last year, driven by lower short-term interest rates on our commercial paper of about 100 basis points versus first quarter of 2007.

For the full year 2008 on a percentage basis, we expect interest expense to be down about single digits, mid single digits.

The tax rate for the first quarter was 34.8%, in line with the prior year.

Note that the reported tax rate is higher than the pro forma rate due to the effective tax rates applicable to business realignment charges.

We anticipate tax rate of about 39% in the second quarter and 36% for the full year.

Weighted average shares outstanding on a diluted basis in the quarter were 229 million versus 234 million shares for the first quarter of 2007 leading to EPS of $0.37 per share diluted from operations.

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

At the end of the first quarter, net trading capital decreased versus last year's first quarter resulting in cash inflow of $186 million.

Accounts receivable were down $107 million and remain extremely current and of high quality.

The collection of seasonal accounts receivable is a key driver in the quarter when comparing year-over-year receivables.

Inventory was lower by $45 million compared to the first quarter last year, and accounts payable increased by $34 million.

We expect working capital will improve in 2008, primarily driven by inventory reduction in the second half of the year, but not at the same rates achieved in the first quarter.

During the quarter, capital additions, including capitalized software, were $71 million.

For 2008, we are targeting total capital additions to be in the range of $300 million to $325 million driven by the Global Supply Chain Transformation program.

Depreciation and amortization was $68 million in the quarter.

This includes accelerated depreciation related to the global supply chain transformation of $21 million and operating depreciation and amortization of $47 million in the quarter.

In 2008, we are forecasting total depreciation and amortization of $250 million, including accelerated depreciation and amortization of approximately $60 million.

Dividends paid during first quarter were $66 million.

During the quarter, we did repurchase $18 million of our common shares in the open market to replace shares issued in connection with employee stock options being exercised.

Our goal is to repurchase all such shares.

We did not acquire any stock in the first quarter related to the current repurchase program.

There is $100 million outstanding on the current authorization that the Board approved in December of 2006.

Value-added share buybacks are an important consideration in our capital structure valuation.

In the current volatile credit environment, share repurchases are assessed against the company's short-term cash flow, financial requirements and investment alternatives.

In the near term, we will emphasize financial flexibility to satisfy our cash requirements, including higher levels of capital expenditures related to the Global Supply Chain Transformation program, dividends and existing joint venture investments while maintaining a strong credit rating that ensures ready access to the capital markets.

Progress continues to be made by our Hershey Godrej business in India.

We are producing Hershey branded milk mix locally and are working to build distribution and brand awareness, especially in the southern part of the country.

The hard candy NCC business is focusing on Nutrine's Mahalacto brand and expanding distribution in the West near Mumbai and in northern provinces.

We will [lap] the acquisition of the Godrej business in early May.

We expect the business to grow year over year and have a positive impact on net sales; however, we do not expect any meaningful contribution to earnings, given our investment plans to build the business.

In China we continue to make progress and now have a full manufacturing capability to support our portfolio rollout.

We are successfully manufacturing Hershey's chocolate products in China.

These products are specially formulated for Chinese consumers and will help us build a presence in the market.

While we currently have less than a 5 share in China, our brands are well accepted, especially in the larger cities such as Shanghai.

Similar to India, we expect net sales in China to grow; however, due to brand distribution investment requirements, we don't expect significant profits in the near term.

During 2008, the [Lotai] sales and marketing organization will begin selling and marketing Hershey products in Japan as well as Korea.

Now for an update on the Global Supply Chain Transformation that was announced in February of 2007.

During the quarter, we recorded Global Supply Chain realignment charges of $26.4 million pretax, including $25 million of accelerated depreciation writeoffs and cost of sales.

and $1.4 million reporting in selling, marketing and administrative expenses reflecting program management costs, these charges reducing earnings per share by $0.08 on a reported basis.

For 2008, our estimate is total pretax charges and nonrecurring project implementation costs will be in the $140 million to $160 million.

The total three-year ongoing savings remain in the $170 million to $190 million range with a significant savings increase in 2008 compared to 2007.

We expect cumulative savings to reach roughly $90 million in 2008, skewed to the second half of the year.

Our estimate of total pretax charges and non-recurring project implementation costs remain at $525 million to $575 million, including project management and start-up costs of $50 million.

Construction of the Monterey, Mexico, facility and relocation of manufacturing lines within our existing network are on schedule and initial production has commenced in Monterey.

Certain production line transfers to our [Stewart Strath], Lancaster, and West Hershey facilities have been completed while others remain in process.

We are very satisfied with our progress to date, although there's a lot to accomplish in the coming months to complete the project and remain on schedule.

During the fourth quarter conference call we announced the restructuring of our business in Brazil and the formation of a joint venture with Valduga.

As part of the restructuring, we recorded pretax business realignment and impairment charges of $4.3 million in this year's first quarter.

It should be noted that this is not part of the Global Supply Chain Transformation program.

The integration is progressing well and we have already initiated our go-to-market strategies to fully leverage the scale of Valduga's capabilities to drive growth from improved distribution and in-store brand execution.

Finally, let me now talk about the outlook for 2008.

For the full year, we continue to anticipate net sales [gross] of 3 to 4%.

Market place performance will sequentially improve throughout the year, driven by the launches of Hershey Bliss in Starbucks and increased levels of merchandising, advertising and retail coverage.

We expect that EBIT margin will be lower year over year, due to the higher input costs already mentioned and increased investment in advertising, consumer promotion, and selling expenses in the U.S.

and selected international markets.

As a result, for the full year 2008, EPS diluted from operations remains in the $1.85 to $1.90 range.

Now, let me turn it over to Dave who will provide you with additional commentary.

Thanks.

Good morning, everyone.

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

We made significant progress on initiatives that will benefit net sales and earnings throughout the remainder of the year and beyond.

Importantly, Hershey's Bliss and Starbucks products shipped to customers on schedule in mid-March.

Consumer and customer excitement around both product lines is high.

Consumer investment, including advertising, sampling and merchandising, accelerates in the second quarter to ensure the success of these launches.

We also invested in our core brands in the first quarter and will continue to do so throughout 2008 to strengthen our position in the marketplace.

Retail takeaway and market share in the quarter were impacted by an early Easter.

Last year, Easter was on April 8th, more than two weeks later than 2008; therefore, when we see IRI Nielsen data for the next quad, the four weeks ending April 20, it will show a significant decline in category in Hershey retail sales.

I would also expect softer chocolate market shares in the next period as the gum category will most likely have a disproportionate effect on the total confectionary category as it is not impacted by Easter seasonality.

Easter timing aside, Hershey's marketplace performance is improving, albeit slowly.

Specifically in the food class (inaudible), takeaway has sequentially improved in four consecutive four-week periods, driven by an increased retail coverage.

We expect to build on this as we work our way through the year.

In the convenience class of trade, there are also early signs of improvement, again, driven by additions to merchandising coverage.

After a soft January, the total category in C stores rebounded and was up about 3% in both February and March.

This translated to a 2.3% gain for the quarter.

Our performance in this important channel also improved.

For the 12 weeks ended March 23, our retail takeaway in the C store class of trade declined 2.2%, resulting in a share loss of 1.2 points.

While we certainly are not satisfied with this performance, it's markedly improved versus the fourth quarter.

Going forward, increased levels of core brand merchandising and unique programs, such as our Reese's with Coke partnership and Cash for Gas, where consumers can instantly win free gas when they purchase a candy bar, will result in further marketplace improvement in this channel.

Among the most exciting 2008 initiatives are the launches of Hershey's Bliss in Starbucks.

These additions enhance our premium and trade portfolio and will enable Hershey to build scale in these growing subsegments.

The products started shipping in March and we've achieved our introductory distribution targets across food, drug, and mass retail outlets.

Strong introductory merchandising and display activity is driving initial takeaway.

Hershey's Bliss advertising began airing March 31 and will accelerate in the coming months, driving awareness and trial.

We are pleased with the early results as Hershey's Bliss is tracking as planned.

In conjunction with the start of the Hershey's Bliss advertising campaign, we announced the unique promotion to generate some consumer buzz.

Specifically invited 10,000 consumers to host a Hershey's Bliss chocolate party over the weekend of April 25.

Targeting female chocolate lovers, the parties will celebrate every day bliss by gathering friends and family to share personal stories while sampling Hershey's newest indulgence.

We received an overwhelming number of requests and have garnered over 7 million impressions to date.

Every host will receive a party pack that includes three flavors of Hershey's Bliss chocolate and take home gift bags for guests, filled with various Hershey's promotional merchandise.

Starbucks is launched primarily in the food, drug, and mass classes of trade with on-air advertising scheduled to start in the next few weeks.

To drive excitement, variety and news, additional Starbucks SKUs will be launched throughout the year.

For example, in mid-May, we will launch the instant consumable lineup featuring milk, dark and mocha bars as well as chocolate-covered mini coffee beans in a tin.

In August, we will offer Starbucks 18-count truffle assortment gift box, and in the fourth quarter we come to market with Caramel Macchiato.

During our holiday season, the Starbucks lineup includes Eggnog Latte, Peppermint Mocha, and Gingerbread Latte Truffles in standup bags, as well as an assorted holiday gift box.

This lineup will help us to be more effective in the gifting component of seasons.

A combination of a variety of advertising and consumer sampling will bring excitement to this premium lineup all year long with our particularly strong Q2 investments.

As Bert stated, advertising will be up more than 20% in 2008.

Some of it supports Hershey's Bliss and Starbucks, but it also supports the core.

For example, the Reese's franchise will be on air all year.

This brand responds very well to advertising.

Retail takeaway on the Reese's franchise was up significantly in the quarter, including Easter specific advertising featuring the Reester Bunny.

The standard, loose, and king size businesses were up over 8% at retail, driven by higher levels of base business merchandising behind the on-air frequency.

During the quarter, Ad Age recognized our Reese's advertising as the second most liked new TV spot for the month of March; and Adweek named four of our upcoming Reese's spots as breakthrough and compelling, and listed them as favorites.

We were also pleased with the way the Ice Breakers franchise responded to our Super Bowl ad.

Results were immediate.

In FCMxC, our Ice Cubes gum business generated a 10 point improvement in trend in February and then again in the March quad.

Our advertising campaign complemented with national FSIs will continue throughout 2008 and we anticipate further sales growth as Ice Cubes gains additional contribution and increased retail velocity.

This reconfirms what we know about Ice Breakers.

When we combine unique, innovative and exciting ideas the brands respond.

We have other refreshment news in the second quarter and second half.

Investment on our core brands will continue throughout the year.

A combination of advertising, increased retail coverage and greater levels of merchandising will occur.

These include the Hershey's S'mores Brad Paisley promotion, Reese's sponsorship of the upcoming Batman movie, "The Dark Knight," the U.S.

Summer Olympics team sponsorship, and various Nascar events and promotions.

As investment in our core brands ramp up, new product launches gain momentum and retail merchandising gains traction, marketplace performance should improve.

As we look to emerging markets we are pleased with the progress being made in India and China.

In India, we are investing in go-to-market capabilities and consumer activities.

While costly in the near term we are building brand equity and awareness.

In country production of Hershey's branded milk mix is ramping up and obviously gets the trusted Hershey name out in front of the consumer.

This is the first step of several in the Hershey-branded chocolate expansion in India.

In China, our manufacturing JV (inaudible) in place.

We have built the capabilities to bring locally preferred products to market, building brand awareness, getting trial and repeatm and increasing distribution are the priorities we are focused on.

We are incorporating what we learned from our first Chinese New Year effort into the remainder of our plans for 2008.

The opening of Hershey's Shanghai Chocolate World will have a positive impact on generating consumer consciousness.

The store will be located in the center of Shanghai in one of the busiest pedestrian areas in the city.

Renovation work is progressing and we are targeting to open the store before the start of the Olympic Games.

The integration of the Hershey and Bauducco business in Brazil is off to a great start.

We are very excited about this move in our initial progress.

Bauducco brings a long track record of success in categories similar to ours, has a powerful distribution organization and shares our conviction about Hershey's opportunity in the $2.5 billion Brazilian chocolate market.

Our 2008 priority is to drive growth through improved distribution and brand execution in the store.

As Bert highlighted, the Global Supply Chain Transformation program is on track.

We expect to recognize the majority of the 2008 Global Supply Chain savings in the second half of the year as production in Monterey wraps up and we complete the relocation of manufacturing lines from closed plants into existing U.S.

facilities.

Let me wrap up.

We are making progress.

While it is slower than we would like, we do see the initial signs improving marketplace trends.

We will gain further attraction as Hershey's Bliss and Starbucks continue to roll out.

Increased retail coverage is working.

As we move further into 2008, I would expect new sales associates to be past the learning curve and delivering added value in the stores behind improved retail programming.

In-store programs will benefit from advertising that will be up double digits each quarter the rest of the year.

Our international businesses are gaining traction.

This gives us confidence that net sales will grow 3 to 4% in 2008.

While commodity futures and spot prices remain volatile, we have good visibility into our input cost basket for the remainder of 2008.

Combined with increased levels of consumer investment in both North American and international markets, we continue to expect earnings per share diluted from operations of $1.85 to $1.90 per share.

We will have more information to share with you at our June 17th investor update in New York City.

For now, we will open it up for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of David Driscoll with Citi Investment Research.

Thanks a lot.

Good afternoon, everyone.

Good morning, David.

I had a couple of questions here.

First question was on new product launches.

So Bliss and Starbucks launched in March, both of them.

Were they a net contribution when you look at the year-over-year comparisons on volumes or were new product launches in the year-ago period, in fact, a headwind in the quarter?

Is that question clear?

Yes.

The question is clear.

If you compared us to a year ago, total new products were somewhat higher when we launched Reese's Crispy Crunchy and a number of other products.

Having said that, we met and/or exceeded our internal expectations and forecasts for Bliss and Starbucks on a combined basis.

Do you see net favorability on new product launches getting better throughout the year or is it going to remain a headwind?

I think what -- as we look at the rest of the year, importantly for us, we think that the launches that we do have -- particularly Bliss and Starbucks, but as well as some of the other things in refreshment -- are going to be much more incremental than they were last year.

But I wouldn't expect us to have a big contribution from new products year-over-year for the rest of the way.

Okay.

My next major question is, Kisses and Kit Kat continue to show up in the Nielsen data pretty negatively.

Can you talk to us about what's wrong with those -- those two brands and what do you have in store for us through 2008 that would give us some insight as to how you are going to fix those?

Well, part of what's happening on Kisses is obviously because it is such a large component of the seasonal program.

With the shorter Easter you would expect to have less Kisses sold just based on seasonal compression year-over-year.

We also had the 100th anniversary event last year in the first quarter and so we had a lot of Kisses activity that we simply just didn't cycle this year.

So David, that's kind of the tactical answer.

The more strategic question on Kisses for us is positioning the brand, taking advantage of the brand equity to meet some unmet consumer needs, some areas where we currently aren't playing with the brand.

We will have some more on that to tell you about as the year unfolds but, for now, I don't want to go any further than that.

It's certainly something that's on our radar screen.

It's one of our best and most iconic brand equities and we know we can do a better job with it.

Any statements on Kit Kat?

Actually, it depends on where you are looking at the data.

The Kit Kat C store business is pretty good.

We have a great Kit Kat and coffee tie-in with a number of retailers in some end market-activated radio behind that program.

Again, if you look at Kit Kat in FDMX, you are going to see some seasonal compression because of the packaged candy aspects around Kit Kat in the season.

Last quick question, does Easter have any impact on the second quarter, the Easter timing?

It should be minimal.

Great.

I will pass it along.

Thank you.

Thank you, David.

Your next question comes from the line of Christine McCracken with Cleveland Research.

Just wanted to touch on your comments relative to pricing.

It did sound like you were maybe facing a little more resistance to passing that through than I had expected.

You are remaining committed obviously to the ramp in product support, but maybe if you could just comment on whether or not you expect to see any retailers' [assistance] to the pricing initiatives you have already announced.

Christine, let me take that in two buckets.

If you'll remember, last April we announced the price increase, last April 2007, let me be clear on that since we are in April 2008.

April 2007 we announced a price increase on standard, loose and on King and on the six packs and some of the other vending packs, ice, et cetera.

When we did that, we also said last year that we would honor a lot of the promoted price points that we had planned out for the rest of the year.

We didn't see a lot of net price realization from that in 2007, although in the first quarter of 2008 we did get, as I think Bert said, roughly 2 points of price realization from that.

The price increase that we announced on January 28 on the same pack types or similar pack types as last year really didn't impact the first quarter.

So as we look going forward for the rest of the year, we would expect to continue to get better realization on the 2007 price increase and then also, while we'll spend back against that 2008 price increase to hit some of the price points, we should see price realization being a benefit to us the rest of the year.

And from a retail standpoint, it's an environment where pretty much across the store prices are higher, inputs are higher.

So I wouldn't say that there's any more or less customer resistances to pricing this year than there would have been any other period of time.

All right.

And then just on your launch of premium products into what is presumably a relatively weaker economic environment, have you seen any shifts in consumer preference between premium and your everyday business?

And could it, in fact, be a big stimulus to your everyday business where you've seen maybe some weakness in the past?

Christine, I think the price points on this in this category when you talk trade-up in premium versus mainstream.

The price premium and the differences aren't that significant when you look at package price points.

So, it's something that we are certainly watching, but it's just too early in the market to read Starbucks and Bliss.

We just shipped it in the middle of March.

So obviously, we will continue to monitor it, but the category tends to be one that consumers have a pretty high interaction with.

So regardless of the economy, we would expect it to continue to be a relatively good category for us.

All right.

I will leave it there.

Thanks.

Thanks, Christine.

Your next question comes from the line of Pablo Zuanic with JPMorgan.

Hello, Pablo?

This is Pablo Zuanic.

Hello, Pablo.

How are you?

I'm sorry.

That's okay.

Just on the ad spend, when you are saying that it's going to be up 20% this year, what is the base?

I'm just trying to calculate in terms of as a percentage of sales.

I'd [spend] on my numbers about 2.5%, 20% increase means about 50 basis points of sales.

We haven't been giving specific numbers.

I mean you can kind of glean them from a number of things that we either filed.

We are talking 20%.

We are talking --

Off the '07 base.

Which was in the K of close to $128 million.

I mean, you can start from that number and that's -- I don't want to get any more specific because you talk working, non-working, U.S., international, etc., etc.

I don't want to get into a lot more specifics than that.

Just suffice to say we are increasing and we are increasing it each quarter, and it's supporting our new initiatives but also importantly supporting the core brands and the Reese's advertising copy has proven to be very effective and is resonating with consumers.

That's great.

Just to follow up, operating margins down 500 basis points in the first quarter.

The way I've -- understand your guidance for the year, that guidance implies about 200 basis points lower operating margin for the year.

So based on your answers to previous questions, does this mean that we should expect the savings to come where -- mostly on the gross margin front or the SG&A side?

In the first quarter the gross margin is roughly down 200 basis points, SG&A up 300 basis points.

How should we think of those two variables as the year progresses?

Pablo, you should think of it -- I'm not going to comment on gross margins because we do not comment on gross margin specifically, but you can think of it as two major impacts.

One is the commodities, which we are pretty quantitative about that.

We said it was 260 basis points that impacted us in the first quarter and we've talked about the year-on-year being a similar $100 million from the input basket.

The other is that we do have a pretty significant ramp up in our advertising which we just talked about.

Our selling expenses, as well, as we get a full year of the impact of the additional retail sales folks.

And we do -- obviously we had some -- we have some SG&A which is higher.

So really, it's those two big buckets.

It's input costs which has some offset in price realization and supply chain savings which are back in SKU, as well as the -- as well as the additional SM&A investments we are making during the year.

There's some timing as well from the international investments which -- which largely took place in the back half of last year and so they have a disproportionate impact on our first half.

And just remind us, what are the savings this year from the Global Supply Chain Transformation?

Have you given guidance for the year in that regard?

We have.

I think in my comments earlier I mentioned that the cumulative impact -- so it would be last year plus this year, this year should be at a run rate of about $90 million.

And that total remains in that 170 to 190.

All right.

Those savings are back-end loaded into the year as well as if the manufacturing facility in Monterey comes onstream.

Okay.

Great.

And just a follow-up, when I think of your new [strategy,] your new products on the premium side, I understand what you are doing.

But in terms of single serves, in the past there was a big push in terms of single serves and I don't hear that so much anymore in your strategy.

How should we think about the single serves or do you find that in terms of single serves makes you already well developed in that particular segment?

No, actually, we certainly have very specific convenience store programming partnered with Coke.

We have a number of other initiatives going on.

We added a significant amount of retail coverage to help sell at the store level in the upcoming months and that's starting to get online and get ramped up.

And then as we execute our programming in the second and third quarter, specifically a lot of NASCAR and the Batman, the Reese's Batman "The Dark Knight" events, we have a lot of very specific convenience store activity there.

So, we still are very focused on that, Pablo, and also it's an area where we have taken some price increases and we would expect to see price realizations coming from out single serve business.

Thanks.

One very last one.

In terms of Bliss and Starbucks, can you just remind us of roughly what are going to be the price points?

You mentioned it will be (inaudible) on the distribution channels.

Just remind us [additional] how are the two products are going to different and who are they really competing with in which segments?

The Hershey's Bliss product is competing much more in the trade-up arena.

And we would expect to see promotionally usually a two bags for $6 price point on the Hershey's Bliss product line.

The Starbucks offering, you won't see it promoted as frequently.

The price points are going to vary.

It is going to depend on outlet and it is going to depend on retailers and a bunch of - [packs] (inaudible).

So I think we have given it before and why don't you give a call back and either [I] or Mark will give you some of the specifics?

That's fine.

The next question comes from the line of Terry Bivens with Bear Stearns.

Good morning, everyone.

Good morning, Terry.

Dave, just a couple of follow-ups on the top line.

As you look at -- I guess you began shifting Bliss and Starbucks, did you say, kind of mid-March?

Correct.

Okay.

Would your top line be negative without that pipeline fill?

I said comparatively, we had new product activity in the first quarter of last year that would have had some fill on it and we had some fill on Bliss and Starbucks in this quarter.

If we hadn't shipped that, it was in our plan to ship all along, yes, we would have had a lower top line.

Okay.

Are you getting incremental space at your existing accounts with those two lines?

I think, Terry, that it's -- it's actually hard to just say those two -- those two lines because the way category management works, you do a full review with the customer and you don't just specifically put one in and take -- put one initiative in and take one initiative out.

You look at the entire body of work, if you will, for the category.

We are getting, specifically with Starbucks, much better perimeter of the store racking for our entire premium lineup, including Scharffen Berger, Dagoba, and Joseph Schmidt.

It's hard to say.

It's not like a polling where one goes in and one goes out.

This was done with a lot of planning so you have category management doing these totalities of category at the same time.

Okay.

Well, from your answer it sounds like you did get some incremental with this.

Is that correct?

Certainly on Starbucks, the intent was to get incremental space around the perimeter of the store to get better premium display for our entire portfolio.

Okay.

And last thing, Dave, you just mentioned them then, but in terms of Dagoba, Scharffen Berger, Schmidt, you didn't seem to say much about those in the commentary.

How are you looking at those now?

Well, as I said, the important thing is as we come with more scale across the portfolio, and Starbucks certainly gives us that, it allows us to then activate our category strength and advantage, which is selling at retail and much better retail coverage because we now have enough scale to do a premium setup and put up.

So the brand Scharffen Berger and Dagoba and Schmidt particularly, as well as Hershey's Cacao Reserve will be part of our programming going forward.

And so we should help those businesses by getting some scale in the market.

Okay.

Thanks very much.

Okay, Terry.

Your next question comes from Eric Katzman with Deutsche Bank.

Hi, everybody.

Good morning.

I guess I have a question about input costs.

I know you have your hedging programs and you're reluctant to comment specifically, but I assume because you are -- because you are still comfortable with earnings and are still comfortable with the dollar amount of input costs that you must be fairly well hedged on cocoa given the run that it has had in the last 90 days, is that fair to say?

I think what we would reiterate was the comment that I had made which perhaps is what you're asking about is that we feel at this point we believe we do have good visibility through our '08 cost basket.

The market remains at very high levels for commodities and certainly there's volatility there that we haven't experienced in a while.

Having said that, there are -- there are parts of the market where there is no forward market, such as fluid milk.

We are monitoring that carefully.

We had an impact in the first quarter year-on-year because of when that escalated last year.

Yes, I mean I would just reiterate that internally we feel pretty good about '08 within what I would put into context as a volatile and above average price market.

How do you -- I mean, looking longer term, like how do you feel about, because we don't have a whole lot of visibility on it, but like how do you feel about just the basket of inputs given that on some of it I suppose, like peanuts and dairy, there isn't an ability to hedge and I guess there's kind of a multi-year cycle in terms of growth of the the cocoa beans and stuff.

How should we think about longer term?

I mean, is there as much of a bias up in your basket as for, let's say, a more diversified packaged food company?

Honestly, I couldn't -- well, I'm not going to comment on '09 or beyond '08 at this stage.

Needless to say, it's a volatile market and prices are high and I'm not sure different food manufacturers are impacted by different inputs.

We do look at it as a basket, obviously, and we are not just focused on the cost side, but we are very focused on the parts that we can -- that we can manage.

Part of that is how we manage our pricing and part of that is aggressively pursuing all the objectives of the Global Supply Chain Transformation which we feel good about.

We really have to look at both sides of it, not just the cost side from an external perspective, but how much we control internally and we feel pretty good about what we are doing internally.

Okay.

And then my last question, Dave, is a follow-up.

I think it was when you first were named CEO you made the comment that the company was going to need to look through its pricing and some of us maybe mistakenly thought that might involve decreases, but then you subsequently raised prices.

I think you had kind of talked about segmentation and adjusting prices to reflect segmentation.

Can you talk a little bit more about that and how does the price increase that you put through earlier this calendar year kind of play into that?

Yes, Eric.

I will give you just a little flavor for that.

I think when I -- we talked last year, we talked about price value.

And price value is still something that we are obviously constantly monitoring, how consumers are feeling about it, and in an environment with today's current macroeconomic situation, the price value equation is something that we really need to be concerned about and continue to monitor.

When I referenced that last year, for me it was much more a question of how do we bring value, how do we find unmet consumer needs, and then are there things that we can do to the product line either the product itself, the package, the packaging within the portfolio, the way the shelf looks for consumers to shop, and how that interplay happens.

We have a lot of consumer research that is fielded and is back.

We have segmentation work we are working through and we will be talking about that as we go forward here in the year about what things we see and think we can do to improve our top line as well as our price value perception with consumers.

So there's a lot of work, an incredibly large body of work internally going on and I will be sharing that with customers and consumers and you as the year unfolds.

That work is certainly ongoing and one of the most important things that we are working through.

Good luck.

Thank you.

The next question comes from Eric Serotta with Merrill Lynch.

I am just wondering if you can talk about C store take away in a little more detail.

The core chocolate business versus the refreshment business.

If I remember correctly, last year one of the areas that you were particularly struggling in in C stores was the gum and mint side.

And then as we look forward, your optimism about improving C store trends, how much of that is predicated on sort of improvement in the Ice Breakers franchise?

It seems that -- it seems that competition in that area is probably going to be increasing this year with Wrigley's increased focus on regaining some of their share that they lost to Cadbury and Cadbury's increased focus on their core confection business post the spinoff of beverages.

So broadly can you give us a sense of what you are looking for in terms -- what you saw in the first quarter in terms of C store take away for chocolate versus refreshment and then what you are looking at going forward?

Yes, I -- refreshment continues to do a little bit better than chocolate in convenience stores at the current time, although category growth in chocolate improved each month of the last quarter here.

So chocolate's take away from C stores improved through the first quarter.

We also improved our business, although we still lost a little bit of share and it's interesting the growth is more in king-size than it is in standard bars.

So that's about as much as I'll give you.

But why do we feel that the need to -- the reason that we continue to grow there.

One, our Ice Cubes business has responded to the program that we put in place.

So our gum business is doing a little bit better.

Mints still struggling a little bit and we have some things coming later in the year in our refreshment business, some news as well.

So I think we can get the refreshment business to perform a little better, better as the year goes on.

Importantly, we've got a significant retail coverage increase in convenience store this year which we think is going to help our distribution.

It's going to help us on shelf.

It's going to help us execute programming and sell in a number of new initiatives this year and I think our overall C store programming from a shipper standpoint is better than it was last year.

So we feel that we have the right programming in place.

It's building.

It's still a little bit early to assess, but what we have seen is spots of improvement, Eric.

Okay.

And then to follow up on Dave's question earlier about some of your other -- some of your core brand performance, like Reese's and Kisses.

Kisses, in particular, I had a pretty disappointing or alarming decline in the fourth quarter of last year.

I know you cited a number of year-on-year factors that sort of distort comparability like the 100th anniversary in the year ago period and the like, but I'm wondering sort as you kind of cut through some of those items that impact comparability, can you talk a little bit -- in a little bit more detail about performance of the core Kisses franchise and what you are doing to revitalize that?

If I remember correctly, that was down something like 7% in consumer take away in the fourth quarter.

Yes, Eric -- and I go back to -- kind of go back to Eric Katzman's question, and the answer that I gave him which is essentially -- particularly on the kisses.

If you think of the role of Kisses and the category with consumers as premium and trade up growth has occurred it's -- a lot of that is in solid chocolate, which is what the Kisses franchise is also, and so we have to make sure that we continue to provide the consumer a reason to -- to interact with what is one of the most iconic brands in the the category.

And that will involve segmentation work, targeting.

May involve some changes to packaging, new uses for the Kisses franchise.

So we are working on that business -- on the Kisses business specifically as we look at consumer segmentation and portfolio work going forward.

Certainly it is a brand that we know can do better and we believe will do better in the future.

Right now, we are lapping a lot of activity in the year ago period.

That aside, the bigger question and the more important question for us is to -- is the price value, perception, the usage occasions and the interaction with the consumer and we have a lot of work that we are currently -- currently moving through here internally, but we are not ready to share that with the market yet.

Okay.

And finally, Bert, could you comment on contribution -- maybe I missed, it but can you comment on contribution of mix to top line and margins in the first quarter?

Was mix actually positive this quarter given the -- the shorter seasonal period or did you still have a drag from mix from continued weaker than targeted single serve performance?

Yes, I -- I won't comment on gross margin.

I mentioned that earlier when Pablo asked his question.

What I would say is that the -- the price mix combination was favorable to us but price was more favorable than mix.

Okay.

And, again, that was pricing from last year's increase?

Correct, that was pricing coming from last year's April.

Okay.

Thank you very much.

Okay, thank you, Eric.

Your next question comes from Andrew Lazar with Lehman Brothers.

Good morning.

Hi, Andrew.

Just a couple of things.

One, Bert, separate from the ongoing or the productivity, the supply chain realignment and such, you talked a bit in the past about your sort of base productivity, the ongoing year after year productivity on the core business.

Is there any way to get a better sense of how to quantify that, whether it's a percent of cost of goods annually that you try to hit?

Is it 1% of cost of goods?

2%?

I'm just trying to get sense of the numbers on that.

I won't mention it as a percentage of cost of goods, it's not as high as the productivity that we're generating from the Global Supply Chain Transformation this particularly year, but we have a pretty active continuous improvement program and at a minimum we try to offset the inflationary impact that we expect in our internal plans.

So we do have an active program.

It's does provide good benefit, not at your magnitude of the Global Supply Chain Transformation, but it's an important piece of how we manage our costs.

Okay.

And then I think, at least certainly in the last conference call, you talked about the competitive environment in various subparts of your business.

Was there any real significant change either way in a particular subcategory of note competitively that we should be aware of or not particularly?

I would say, no.

Nothing noteworthy.

Okay.

And then in terms of the way we should think about market share progress from a benchmark standpoint, is there any way to quantify, as you look at your business, maybe it's in a certain number of your key sub categories or a percentage of your category, the percent of sales where you are either gaining share, losing share and then what is sort of a reasonable goal or benchmark to think about even if it's two years out where you want to get to?

And how do you look at it?

Because you have so many different categories and channels and sort of subcategories.

I'm just trying to get a sense of overall how do shares look and where do you expect them to go and how do we track that?

Yes, I think there's a growth algorithm that is brand and consumer driven and then obviously that translates to customers and it's also a lot of it is driven with how we design our trade promotion program.

If you think about where we are investing on from a brand standpoint advertising and consume, the things we talked about back on the core, Reese's and Hershey's brand as well as a new initiative with Bliss and Starbucks, we expect the growth to come from there.

And then within the -- within the -- if you look at it -- if you want to slice it on class of trade, we obviously expect to get improvement from our retail activities, specifically where we have coverage in food class of trade and convenience class of trade.

We clearly don't talk much about Wal-Mart but we are very pleased with where our business is with Wal-Mart and then there are a couple of other places where, frankly, some businesses are challenged and have been for a period of time.

The vending business is a challenging business and we have a couple area classes of trade where we have some issues that we are working through.

I think when we get to June, on June 17, we may give you a better answer to that question.

Okay.

And then last thing, this may be how you are shaping your thinking around your June meeting, but as you go back, perhaps, Dave, to your experience even with the turn around that you were a big part of at Nabisco, I'm just curious, are there any parallels there that you had that would help in this prospect?

In other words, you had large, dominant brands there that were losing share to competitors at the time that probably shouldn't have been.

There are a lot of differences, but I don't know if there are any parallels that make sense in thinking about it as well.

Andrew, certainly focusing, we have some phenomenally good brands, core brands.

The limited edition line extension strategy on some level, while created news on those big brands it also may have distracted consumers from what is at the core of those big brands.

And that's certainly one learning that we have is focusing on that kind of, that core SKU, those power SKUs and doing a little bit less around the perimeter and the periphery, getting the consumer back to the core 2-cup Reese, for example, and just fundamental advertising around the essence of that brand is certainly working.

We are looking to do that across the other brands.

I think the other thing that you have to also say is the maniacal focus on cost to create the affordability to spend what you need to spend in our brand and with our customers.

So there are always parallels and I have been fortunate to have worked for and with some very smart people along the way.

You learn something from every one of them and I hope I can bring that to bear in the market here.

Thanks a lot.

Thank you.

Your next question comes from Jonathan Feeney with Wachovia.

Dave, I wanted to follow up on I guess Andrew's line of reasoning there.

I mean, your advertising spending plans for the full year, was that -- could you parse that for us between, if it's possible, between say core brand support and I guess the kind of advertising that is going to be the backup these pretty significant Bliss and Starbucks launches?

Yes, we are obviously going to support Starbucks and Hershey's Bliss and we also firmly believe that the Hershey's Bliss advertising has a halo effect back to the entire Hershey's portfolio and franchise.

Reese's, we have continuity on Reese's.

We are on with an all-year with Reese's and we have some copy development on some of the other businesses.

The obvious question on a couple of core franchises is until we fix some of the underlying kind of either price value or positioning, it doesn't make a lot of sense to necessarily advertise a lot on something like Kisses until we have some of the core consumer proposition in a better place.

So we are obviously picking our spots.

We are banking on particularly in the second quarter you are going to see a lot of Bliss, a lot of Starbucks and a lot of Reese's.

We are up all year long and we are committed to spending that money.

If you weren't launching Bliss and Starbucks this year, would you say ads would be up mid single digits, double digits, I mean, X that advertising spending.

Actually, I think that's not really the way we obviously look at it, but from a portfolio standpoint, I think we have to -- we have to continue to increase the brand spending, particularly behind new news.

As I said, I would view the Hershey Bliss advertising as much Hershey's as it is about a new item.

Sure.

And we will deploy that differently, yes, we would.

Reese's is going.

And you have to also realize there's a lot of consumer promotional spending that goes into the mix as well as trade promotion spending.

So I think in the absence of any one initiative, you know, would you do something differently?

Probably.

But we're committed to investing behind the businesses and the brands and you might -- you might dial it a little differently here and there, but we have a lot of work ongoing to determine what the optimal level for each of the big brands is and we are going to get there.

When you -- and just as a follow-up to that, when you look at the back half acceleration I guess clearly you are spending a lot more in brand support in these brands, you are hoping and have every reason to expect it's going to accelerate.

I guess I'm trying to solve that to how much of that back half acceleration would come from core brands.

Like you mention Kisses, you are going to come to piece at where the positioning is and you will spend behind that and that's going to accelerate.

When I look at your plans for the second half, how much of that, how much of an acceleration and how quickly of a response to the increased brand support do you need to sort of get to the kind of targets that would support your outlook for this year.

I don't think you can -- you can look at it that way.

I mean, I guess I shouldn't tell you how you can look at it.

You can look at it anyway you want.

I will tell you how I'm looking at it.

Okay.

I think you are in a little better position.

I do eat a lot of candy, though.

I'm actually quite a good consumer as well.

Remember, we had a lot of net price realization that's coming.

We took the price increase last April and we spent back quite a bit of it last year and we have a second price increase that's on top of that one.

We will get quite a bit of net price realization as we go through the rest of the year.

We have a significant increase in core brand support, be it advertising and consumer promotion on Reese's, but we also have it on the Olympic sponsorship around some of the brands.

We have the Reese's Dark Knight.

We have a bonus movie event that goes across all the brands.

We have really good merchandising kind of program in the second quarter, which is going to work well because we added the sales coverage which is up nearly 20% year-over-year as well.

It's a combination of better merchandising programs, higher advertising level, the new items in premium and trade up as well as price realization and on top of that we also, don't forget, we have international growth, particularly coming out of Asia but our Mexico business is doing very well as well.

So it's all of the above and the good news it's not any one lever.

It's three or four levers that we think we have to pull on this year.

We feel much better about our programming and our prospects going forward because we are not reliant on any one thing.

We have a number of good initiatives going on.

Hopefully that kind of gives you the way we are thinking about it.

It's not any one bucket.

It's actually all of the above.

Okay.

Thank you very much.

Thank you.

Your next question comes from Robert Moskow with Credit Suisse.

Just quickly on Starbucks.

I imagine one of the challenges you are going to face is that Starbucks means coffee to most consumers and your launching a line of chocolate.

Starbucks launched a line of ice cream years ago that kind of had a blend of chocolate and coffee.

I think it ended up polarizing a lot of consumers because a lot consumers just don't like coffee.

So how are you going to market this as a Starbucks chocolate when the perception of Starbucks is different.

It's -- it may not -- it may not -- it may be a pure chocolate product that you have, but consumer perception might be different.

Yes, I think -- you are absolutely right, Rob.

And it's -- it is -- it does mean chocolate and it's going to get an incredible amount of trial with a very core, loyal user.

There are people who will not try it simply because it is coffee, but we have also, in the line we have a signature milk and a signature dark chocolate which are not necessarily coffee flavored.

So there is an opportunity for someone to enter, but we frankly don't expect a non-coffee lover to enter, although there are some tea flavors and some other things.

Caramel macchiato is a flavor, frankly is a great confectionary flavor.

We have some other flavors and tea flavored and some signature milk and dark in the line.

But you are right, it's going to be a coffee -- probably a coffee lovers trial and we sized our expectations of the business appropriately because we know kind of who that target is.

They are easier to find, frankly, when you think about what else they might purchase and where they might purchase.

It will help us from a targeted marketing, but we do know -- we do recognize that going in.

I mean, if you think about the Frappucino business that is in food, drug and mass now and how big that business has become, I mean that is going to be just as equally as "polarizing" and that's become a pretty nice-sized business.

As long as we go in with the expectations and target the marketing, we think we will be fine.

Another question, on premium.

Everyone is doing premium, Nestle, MARS and you said your benefit is that you have scale and sales distribution.

So how -- can we look at like a typical grocery store and a convenience store is that going to look like entirely different four or five years from now with maybe an entire section of the store dedicated to premium chocolate and maybe better positioned as such?

Because right now I look in that chocolate aisle and I just see a mess of dark chocolate and milk chocolate and it's not very well -- it's not very organized, I guess.

Yes, I think -- I think we absolutely know we can do a better job in the aisle and actually out on the perimeter with confections.

And we -- we as a category have done very little in terms of innovation on the packaging front in the U.S.

market.

And we haven't done nearly as much with aisle architecture.

Both of those things are certainly on our radar screen.

We are working on them.

Stay tuned through the year and subsequent years we will have a lot more to say about it.

You should expect that the store ought to look different.

I'm not saying that there still won't say be a confectionary aisle, but the shopping in the aisle ought to look different.

I think consumers are becoming a little bit more savvy and demanding and we need to meet their needs.

Think about the soup section and what they have done and the spice and seasoning sections and what they've done.

They have been very creative in making that an easier aisle to shop.

Do you have an opportunity to go to your retailers and say, let's make the chocolate aisle easier to shop, too.

We do and we have and we are in the process of, as I said, looking at the right way to think how the consumer shops the aisle and thinks about the category and that, I said, that work is well underway for us.

Thank you very much.

Thank you.

Your next question comes from Alexia Howard with Sanford Bernstein.

Good morning.

A couple of really quick ones.

We've obviously had a fairly major overhaul in the composition of the board since late last year.

Could you comment a little bit on perhaps what the main agenda items are or how you are using that resource for you?

Is it really looking at international growth, more joint ventures, pushing the organic platform that you already have?

Is it maybe bolt-on acquisitions or are you more focused on reinvigorating the core products here in the domestic markets?

That's actually really strategic planning.

You just basically mentioned all of the strategic planning, which is what the board obviously engages in every meeting.

We had very good dialogue with the board.

The directors have come on and have come up to speed obviously very, very quickly.

We've had very good dialogues about the business.

I think we will share a lot more about where we are headed and kind of give you more flavor for that in June.

So we are very pleased with how it's going.

And they are engaged in governance of the company, approval of capital, and strategic planning like any board of directors of a public company is and we couldn't be more pleased with the progress we are making.

Okay.

Great.

I will look forward to hearing more about that in a couple of months' time.

And then coming back to the new Starbucks launch.

As I understand it, at the moment it's hitting a lot of the retail stores, I guess has already hit a lot of retail stores as we speak, but it's not yet in the Starbucks stores themselves.

Is that right?

That is correct.

Is there a plan that somewhere further down the road those products will actually get into the core Starbucks retail chains themselves as well?

We've had a -- we've had a number of conversations.

That is the intention, and in terms of timing and what that will look like, we are not really going to be in a position to say right now.

Okay.

Great.

Thank you very much.

I look forward to seeing you in June.

Okay.

Take care.

Your next question comes from Vincent Andrews with Morgan Stanley.

Just a quick question on the balance sheet.

I know you referenced a difficult credit market.

But what is the argument really for not being an aggressive repurchaser of your stock at this point?

I will just go back to the earlier comments and maybe something on the stock purchase.

We do believe that the stock repurchase is a viable way to return value to the stockholder and I think the management has shown over the recent past that it is part of the strategy.

I would tell you that this year we have additional cash flow requirements.

The one that's most significant is the Global Supply Chain Transformation.

We have quite a bit more capital that we are employing against that project in order to derive the savings we have in our plans going forward.

Other needs for cash, including our current JVs, which we are investing in.

So it's really more -- I think we are looking at it more of a priority of timing aspect and that we changed philosophically a view around the buyback value.

Okay.

All my other questions have been answered.

Thank you so much.

Thank you.

Your next question comes from Ken Zaslow with BMO Capital Markets.

Good morning, everyone.

Just two, hopefully quick and easy questions.

I think last quarter you said that you were assessing your margin structure and just kind of if you could comment on that, where that is.

And do you think Hershey has stabilized its performance in 2008 will form the base for which you can grow earnings or how do you think about it in the future?

Well, we'll have a lot more news for you on both of those fronts come June 17, but I think the -- the assessment of the margin structure, I think Bert did a good job answering that.

We have not only the Global Supply Chain Transformation, which I think we have been specific about our expectations of that over the next few years, but we have an aggressive continuous improvement program and given the input cost pressures that everybody has been feeling, we need to continually look at our cost structure and make sure that we are squeezing as much cost out of the system as we can.

We are no different than anybody else in the industry, in terms of where we go mine for costs and we continue to do that very aggressively.

So, we have priced the business here and that's some new news since I think we last talked in January.

So we will continue to look at making sure that we have the appropriate -- that we are passing along the appropriate level of these costs to the consumers where it makes sense.

And I think with respect to our business performance, we see improvement, albeit slowly.

We are starting to see some stabilization of trend here and I think that that bodes well for us as we look not future, but it is very, very early in the process here and to make a comment on forward growth rates or anything like that, I think we'll defer that until the June conversation as well.

And actually one more.

I'm sorry.

When do you expect international to actually start contributing to operating profit?

I think you said that the recent acquisition is not going to contribute to operating profit.

Is there a timing that you think that this will start being incremental?

The international actually does contribute to operating profit what we are saying, though, is in the -- in the initial phases of the joint ventures that we launched in Brazil and India as well as the manufacturing joint venture and the market investment in China, that we are making the appropriate investments to make sure that we get the right levels of distribution and brand awareness.

As you look at 2008, clearly they are not contributing to growth in profit this year.

Not that they are not contributing to profit, but I think that as we go forward and get some scale and get some establishment in the market of the brand identify and the brand equity, we would expect the businesses to become more profitable over time, but we think it is prudent, particularly in the first year of this joint venture agreements, to make the investment to get the brands established in the market.

Okay.

I appreciate it.

Thank you.

You are welcome.

Your next question comes from David Palmer with UBS.

You mentioned your overall C store programming from a shipper standpoint, I think is the way you put it, is better than last year.

I was wondering if you could perhaps elaborate why that is.

What are you doing different and, for instance, I remember you used to have promotions that were tied to sales and in kind of a buy-in to the overall annual programs whereas some of your competitors I heard they pay more promotion dollars up front.

Could you maybe speak to any changes you are making in terms of how you are doing your promotions, which might be affecting this, your shipper uptake?

Thanks.

It's a much better -- it's a much richer program in terms of content, not in terms of dollars.

So we are -- it's not a change in our promotional dollar strategy.

It's more of a change in just having better programs across the year based on our back door core brands, not focused on a bunch of limited editions, but really focusing on core brands and having some activity to tie in with Coca-Cola and the Reese's brand has gone very, very well.

We also have much better merchandising support at the store level.

We have just feet on the street.

Those folks are going to sell very hard to make sure that our programs get better execution and better placement.

So it's not anything in terms of the way we are changing trade promotions, structure or dollars.

It's really all about retail sales and then obviously the higher level of consumer support should create more suction.

Right.

Okay.

And then just a second one on commodities.

I'm was just doing some rough math.

I think you said the commodities would be $100 million of headwind for this year and if I'm doing my math right, that's roughly 200 basis points of inflation for the year and a little bit less than that, maybe 180 basis points for the last three quarters of the year given the fact that you did 260 basis points of input hit in the first quarter.

I guess my first comment is, it's hard to believe that you won't do much better than 180 basis points for the last nine months give the fact you have easier comparisons presumably in the second half.

Maybe it means that you are expecting another bad hit here in the second quarter maybe as bad as the first quarter.

Not going to comment on that.

If you look at it on a year-on-year basis and I'm sure your math is right.

I didn't quite follow the way you laid it out, but if you looked at the first quarter there's certainly a year-on-year dairy impact.

Last year the dairy prices escalated in -- last year the dairy prices escalated in the second quarter and so we have seen a much bigger impact in Q1 from dairy, and as that goes through the year, we expect that we would -- that we would see less of that.

So there's some impact if you look at on a year basis from that.

The other thing is that as we, as we translates last year's costs into this year's costs, our standards reflect much more of the prior year cost increases as well as the estimates that we expect for this year.

Again, not going to comment on your math.

I would say in terms of first half, second half, certainly first quarter, yes, has a higher impact of dairy.

I mean, is it generally would we think of it as the tale of two halves because of the dairy influence being the major, major swing factor here and maybe the second quarter might be darn near as bad as this first quarter and then from there you have a nice step change into 3Q.

Is that reasonable to have guessed?

I don't know if I would look at it that way.

As I said, terms of tale of two halves that are so remarkably different.

Clearly, the first quarter has the dairy impact and that's substantial enough for us to make that commentary.

There are other elements that affect first half versus the second half.

I wouldn't pin it all on commodities.

Obviously, we are lapping the Godrej acquisition because we are reinvesting pretty heavily there.

Those margins are lower than the company average margin.

As we lap that, it starts to be less of an issue in the back half.

Our savings programs, in terms of the Global Supply Chain Transformation, some of the plants closed and we ramp up production in Monterey, and so those savings will be more beneficial to those second half of the year versus the first half of the year.

And those are the types of things that you might think about in terms of looking at margins first half versus second half and not as much only the dairy aspect.

Okay.

Thanks very much.

Thank you.

At this time, there are no further questions.

Are there any closing remarks?

Yes.

Thank you for joining us today and we look forward to seeing you all on June 17.

Thank you, ladies and gentlemen.

This concludes today's conference call.

You may now disconnect.