好時 (HSY) 2009 Q1 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Hershey Company first quarter 2009 results conference call.

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

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

(Operator Instructions) I will now turn the call over to Mr.

Mark Pogharian.

Please go ahead, sir.

Thank you.

Good morning, ladies and gentlemen.

Welcome to the Hershey Company's first quarter 2009 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 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 2008 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, our consolidated balance sheet and a summary of consolidated statements of income in accordance with GAAP, as well as our pro forma summary of consolidated statements of income quantitatively reconciled to GAAP.

As we've said in the press release the Company uses these non-GAAP measures as key metrics to 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 2009 results excluding the net pretax charges.

The majority of charges in both 2009 and 2008 are associated with a global supply chain transformation program announced in February 2007.

These pretax charges were $19 million in the first quarter of 2009 and $30.7 million in the first quarter of 2008.

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

And with that, let me turn the call over to Dave West.

Thanks, Mark, and good morning, everybody.

Hershey's results for the first quarter were solid and I'm pleased with the progress we continue to make.

Net sales increased by 6.5% and market share performance is tracking nicely.

With core brands responding to the investments we have made.

As we exited January, our quarterly profile changed slightly, commodities, while still up markedly year-over-year, were tracking a bit favorable to our expectations, driven primarily by dairy.

Bert Alfonso will have further details on how we're thinking about dare dairy for the remainder of the year.

In Q1, this dairy favorability gave us the flexibility to add some incremental Easter advertising.

Our decision was driven by our analysis of the holiday and Valentines seasons.

We gained market share in these seasons, but we noticed purchasing patterns were compressing with take-aways skewed closer to the actual date of the holiday.

Recall that in 2009, Easter occurred in April 12, and in 2008, on March 23.

Therefore we moved to increase Easter seasonal programming in advertising.

This included Reese's seasonal, as well as the classic Cadbury Creme Egg cock and bunny TV spots.

They ran in the first quarter to ensure successful sell through at retail.

While results are not final, we had a solid Easter and will gain market share in our fourth consecutive season.

We enjoyed strong sell-through at retail.

The timing of Easter obviously has and will impact IRI and Nielsen data related to the March and April quads and therefore the first and second quarters as well.

Easter timing aside, Hershey's marketplace performance continues to improve.

Total CMG, total category candy, mint and gum consumer take-away for the 12 weeks ending March 22, in channels that account for over 80% of our retail business and as a reminder, these include food, drug, mass, including Wal-Mart, and convenience stores, was down.

Frankly, this decrease is not a meaningful indicator due to Easter timing.

So excluding Easter seasonal activity in both the current and year-ago period, a better, yet still imperfect barometer, our retail takeaway in food drug mass, including Wal-Mart and convenience, was up 7.4%.

Specifically the Reese's, Hershey's, here excluding Bliss, Kit-Kat and Twizzlers franchises were all up high single digits.

Kiss' declines are moderating as we lacked the proliferation of flavors and field versions versions launched in prior periods.

We have seen some traction on everyday silver Kiss' takeaway, up slightly benefiting from the new advertising that began in the first quarter.

Perhaps the easiest way to assess performance given seasonal timing and therefore all the noise in the data is by looking at absolute market share results.

Hershey take-away in FDMxC excluding Wal-Mart and excluding the Easter seasonal activity was up 6%.

We gain market share, both with or without the Easter seasonal activity.

All in, including the seasonal activity, Hershey, market share and FDMxC increased 0.5 points.

Our marketplace results were solid across all channels, as we gained market share in all classes of trade on both an everyday and seasonal basis.

Despite the challenging economic times and necessary price increases due to higher input costs, the category is doing reasonably well.

Excluding the Easter seasonal activity and the current and year-ago period, in FDMxC excluding Wal-Mart, the category grew about 2.5%.

This is slightly below the historical growth rate of 3 to 4%.

A portion of the category softness is due to continued slowdown within the premium, gifting and novelty subsegments.

This is evident when you look at the Valentines results.

As expected in FDMx, Valentines category dollars results declined about 6%.

Channel shifting has impacted the FDMx performance.

However, Hershey had a solid Valentines with FDMx take-away up roughly 3% resulting in a solid 1.9 share point gain for Valentines.

Within the FDMx classes of trade, Hershey's total category performance was solid.

Excluding seasonal activity in both the current and year-ago periods, Hershey's take-away in FDMx increased 4.5%, resulting in a market share gain of 0.5 points.

Hershey's chocolate performance in the food class of trade was particularly strong as we gained 1.1 share points.

This was driven by higher levels of advertising across core brands, including Reese's, Hershey's, Kisses and Bliss.

Recall that aside from Reese's, the other core brands were not on air in the year-ago period.

Additionally, core brands benefited from strong seasonal execution and improved retail efforts.

In the C store class of trade, where Easter impacts are minimal, the category was up 5.5%.

Total Hershey C-store take away increased for the fourth consecutive quarter and was up 8.3%, resulting in a share gain of 0.7 points in C-stores.

I will remind you this the year-ago period C-store category growth was soft, up only 2.3% and Hershey's take-away had declined 2.2% in the year-ago period.

In the current period Hershey's C-store chocolate and non-chocolate take away was up 7.9% and 16.0% respectively driven by price realization, king size distribution gains and strong in-store merchandising.

Volumes were off a bit, but better than the elasticity models had predicted.

This was driven by successful programming, including a tie-in with the NCAA March Madness basketball tournament that featured on pack promotions across the Hershey's, Reese's, Kit-Kat and PayDay brands, as well as by a co-promotion with Coke.

We expect the convenience store channel to be a meaningful contributor in 2009.

However, performance will likely not be as strong during the remainder of the year, as we have now cycled the February 2008 pricing action and will be lapping the rollout of king size expansion that started about a year ago in Q2.

As we look to the remainder of the year across all channels, our efforts will focus on core brand growth.

Continuity levels of advertising will continue on Hershey's, Reese's, Bliss and Kisses to maintain the momentum on these brands.

We'll also be on air in 2009 with new Twizzlers and Kit-Kat advertising.

Twizzlers will start on air in Q2 and Kit-Kat, later on in the second half.

These two brands haven't been meaningfully supported on TV in over five years.

We're pleased with the strength of our advertising copy and believe that we coordinated with instore selling and merchandising it will generate excitement and drive consumers to the confectionery aisle.

Our program calendar for the balance o 2009 is built around high impact properties including a Reese's NASCAR tie-in, an NCAA football promotion, a big S'MORES summer promotion, featuring Rascal Flatts that includes two national episodes for purchases of Hershey's milk chocolate bars, Kraft marshmallows and Honey-Maid Graham crackers.

Consumers will also have an opportunity to win a personal block party with Rascal Flatts and VIP trips to their concerts.

Hershey's Bliss will be supported all year long.

Beyond TV, plans include Win Your Bliss and Unwrap the Bliss Life promotions, offering consumers a chance to win their ultimate Blissful vacation.

The Kisses brand will anchor our Q2 Night at the Museum promotion featuring Ben Stiller; additionally, Kisses will be the focus of the fall and holiday baking season.

We expect to improve velocity on our core Kisses franchise items.

However, this will be offset by planned SKU rationalizations of prior limited editions, principally filled and flavor extensions.

So through the first quarter and Easter period, we continue to build marketplace momentum.

While there is a lot of noise in the data due to Easter timing, in FDMxC, the overall category declined 1.9% for the 52 weeks ended March 22.

We would expect that when the Easter effects are sorted out, the 52-week category growth rate will be around 3%.

The category subsegments of premium and trade-up are soft.

Overall, seasons are flattish in the category, with everyday main stream growing, particularly within value-oriented formats.

Our strong brands -- strong position at retail, increased advertising spending and excellent seasonal execution should allow us to continue to hold our own in the marketplace.

Post Easter in the April quad our comps do get tougher and the consumer will see higher price points at retail on the balance of our portfolio.

We remain committed to higher levels of advertising and in-store programming to help the adjustment to new retail prices.

We'll continue to monitor consumer behavior and purchasing patterns and make the necessary adjustments and investment in brand-building initiatives to drive sales at both the Company and retail level.

This flexible approach will help us navigate the remainder of the year, as the consumer sees the higher retail price points.

While the category has remained resilient, the health of the US consumer, monthly retail sales, and comments from government officials continue to point to concerns related to the overall economy.

In the near-term, it is difficult to predict consumer sentiment and purchasing patterns over the next month, quarter and year.

We continue to expect our US volume to decline in 2009.

Outside of the US, the countries where we operate are also facing many of the same issues impacting the US economy.

Our international business will be challenged in 2009, as foreign currency exchange will negatively impact both the top and bottom lines as it did in Q1, particularly in Mexico and Canada.

On a local currency basis, we continue to make good progress with particularly good results in the India and Brazil JVs.

Overall, we still expect 2009 segment sales growth of 2 to 3% as our pricing actions and core brand sales growth will be partially offset by lower volumes and the impact of unfavorable foreign currency exchange rates.

We have good visibility into our cost structure.

To date, dairy costs are favorable versus our initial estimates.

If dairy spot markets remain at current levels for the balance of the year, we would expect the year-over-year annual commodity impact to be somewhat less than our initial estimate of $175 million.

Advertising will increase 20 to 25% in 2009 and we will make the necessary investments in select international markets.

Also, as previously communicated, our year-over-year increase in 2009 annual pension expense is $70 million.

We do continue to expect earnings per share diluted from operations in 2009 to increase.

However, at a rate below our long-term objective of 6 to 8% growth.

We feel good about our -- we do feel good about our momentum, but remain cautious about macroeconomic factors and the yet to be measured price elasticity impact on certain segments of the category.

I'll now turn it over to Bert, who will provide some additional financial detail.

Thanks, Dave, and good morning, everyone.

First quarter results were better than our earlier expectations with consolidated net sales of $1.236 billion, up 6.5% versus the prior year, generating diluted earnings per share from operations of $0.38.

The 2.7% EPS increase is primarily due to price realization, better than expected volume trends versus our original estimates, and supply chain volume efficiencies and productivity.

First quarter sales gains did benefit from a longer Easter selling period, as well as from price realization.

Partially offsetting these gains were lower sales volumes due to elasticity impacts related to our 2008 pricing actions, as well as about 2.5 points due to the foreign currency translation.

As a reminder, as we exit the first quarter, we have lapped the February 2008 price increase on the instant consumable portion of our portfolio.

Dave already provided details related to our marketplace performance, but note that our retail takeaway adjusting for the Easter seasonal activity is relatively in line with our net sales shipments.

As a result, inventory levels at key distributors and retailers are at normalized levels.

In addition, a good portion of sales over the last two quarters related to seasonal candy and our sell-through was solid.

Now turning to margins, during the first quarter, operating gross margin increased 130 basis points, driven by net price realization, supply change efficiencies related to fixed cost absorption, as actual volume was better than expected versus our initial estimates of supply chain productivity and savings.

These margin gains more than offset higher input costs of about 320 basis points, reflecting total consolidated cost increases for raw materials, energy, and packaging.

Higher employee benefit costs primarily in expense for our manufacturing facilities also reduced gross margin in the first quarter.

In the first quarter, commodity costs impact was a a bit better than we expected, due primarily to lower dairy costs.

As most of you are aware, there is not a developed futures markets for dairy products.

Our current expectation is that dairy prices could increase over the balance of the year, as there are now close to support levels and culling of the US dairy herd has begun.

If dairy spot prices remain at the current levels for the balance of the year we would expect the year-over-year annual commodity cost impact to be somewhat less than our initial estimate of $175 million.

We believe we have good visibility into the majority of our costs for the remainder of this year and all things being equal, gross margin will be up in 2009, but not at the rate we realized in the first quarter.

First quarter EBIT margin increased 70 basis points, as higher gross margin, primarily from price realization more than offset higher advertising, selling, and pension expenses.

As Dave stated earlier, we took a flexible approach to first quarter brand investment by increasing our advertising and programming to drive key take-away and seasonal sell-through.

As such, advertising expense increased about 40% in the quarter, supporting the ongoing Hershey's Pure and Reese's Perfect campaign, as well as Hershey's Bliss and the new Kisses Coffee.

Coupon redemption was also meaningfully higher, up 25% versus year-ago levels as consumers react to today's economic environment.

Now let me provide a brief update on our international business.

On a constant currency basis, sales were solid.

On a GAAP basis, total Company net sales were impacted by about 2.5 points due to stronger US dollar year-over-year.

Global currency results were particularly strong in Brazil and India, as distribution gains and our brand-building initiatives are taking hold.

Overall, international profitability improved versus year-ago, but margins are still pressured, as we continue to make the necessary investments to increase brand awareness and go-to-market capabilities.

Going forward, we continue to expect foreign currency translation to be a head wind in 2009, which would impact both top and bottom lines.

Lastly, in March, we acquired the Van Houten brand in Asia.

This acquisition complements our existing businesses in that region and gives Hershey a presence in several high potential markets, including Malaysia and Indonesia.

This transaction continues our disciplined global strategy of entering growth markets through acquisitions and partnerships.

While small, the Van Houten business is profitable and will be accretive.

The investment was about $15 million, or approximately one times sales.

Now moving down the P&L, for the quarter, interest expense decreased, coming in at $23.9 million versus $24.4 million in the prior period.

While interest was attributable to lower CP balances and related interest rates.

In 2009, we expect interest expense to be about flat to slightly favorable versus 2008.

The tax rate in the first quarter was 41.9% due to the timing of certain tax events and the related accounting.

This is greater than the year-ago, but roughly in line with the outlook we provided in January.

We continue to expect the full-year tax rate to be about 36% and roughly 30% in the second quarter.

In the first quarter of 2009, weighted average shares outstanding on a diluted basis were 228.3 versus approximately 229 million in 2008 leading to EPS of $0.38 per share diluted from operations of 2.7% versus year-ago.

Now turning to the balance sheet and cash flow, at the end of the first quarter, net trading capital decreased versus last year's first quarter resulting in a net cash inflow of $22 million.

Accounts receivable was up $32 million and remains extremely current and of high quality.

The year-over-year increase is a result of Easter timing.

We continuously monitor our accounts receivable and despite current conditions in the financial markets we have not seen an impact on our customers spending patterns to date.

Inventory declined by $47 million and accounts payable increased by $8 million.

In terms of other specific cash flow items, capital additions, including software, was $37 million.

2009, we are targeting total capital additions to be in the range of $155 million to $165 million, or about $20 million lower than previously communicated.

The lower level reflects tighter control of our capital spend and will not have an impact on our global supply chain transformation program and savings.

About $40 million to $50 million of the CapEx forecasted is related to the global supply chain transformation program.

Depreciation and amortization was $47 million in the quarter.

This includes accelerated depreciation related to the global supply chain transformation program of $3 million.

Therefore, operating depreciation and amortization in the quarter was $44 million.

In 2009, we are forecasting total depreciation and amortization of about $190 million, including accelerated depreciation and amortization of approximately $10 million.

Dividends paid in the quarter were $66 million.

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 2006.

During the quarter, we did repurchase nine million of our common shares in the open market to replace shares issued in connection with employee stock option exercises.

As it relates to our short-term cash needs, the Company's currently well positioned.

While the credit markets are volatile, to date, market conditions have not had an impact on Hershey's day-to-day operations, liquidity, or longer-term planning.

Our cash flow continues to be strong and will improve at the global supply chain transformation program is completed.

We have not accounted any difficulties in our short-term commercial paper funding and have been able to place our CPs at attract he have rates.

Now let me provide an update on the global supply chain transformation program.

Construction of our Monterey, Mexico facility continues and about 75% of plant manufacturing lines are installed and producing product.

Major US and Canadian plant closures related to the program have now occurred and the last of the relocated lines are currently in process.

Closure of the Artisan Confection plants announced last January are also under way.

Our progress continues and we are essentially in line with our implementation schedule.

During the quarter, we recorded global supply chain transformation programs of $19 million pre-tax.

That includes $3 million of accelerated depreciation and $1 million of project startup both in cost of sales, and $2 million of SM&A expenses reflecting program management costs.

The total project costs including likely additional pension settlement charges are in the range of $615 million to $665 million.

Based on employee withdrawals year to date, we now believe it is likely that pension settlement charges will be incurred in 2009 and estimate these noncash charges to be $40 million to $50 million.

In 2009, the Company expects to record GAAP charges of about $85 million to $120 million, or $0.24 to $0.33 per share diluted, primarily related to the global supply chain transformation program.

Now let me summarize.

In 2009, our goal is to maintain our current market place momentum, due to continued economic uncertainty and fluctuating consumer sentiment, we expect a challenging business environment for the remainder of the year.

As we have consistently stated since August, volume will be down in 2009 due to US sales volume elasticity of the price increase.

Over the balance of the year, consumers will see higher promoted price points on our seasonal and everyday take-home packaged candy.

In some cases, particularly Halloween, the largest of our seasonal businesses, these prices have not increased in several years.

To ensure we maintain our market share gains, we'll continue to invest in our brands and businesses in both the US and international markets.

Specifically, advertising will increase 20 to 25% in 2009.

As I mentioned earlier, commodity stock prices continue to fluctuate.

However, we believe we have good visibility into our cost structure at this point in the year.

In addition, as we stated in January, the year-over-year increase in our 2009 annual pension expense is $70 million.

These cost increases will more than offset the higher net pricing, ongoing operating productivity improvements and savings from the global supply chain transformation program.

As such, in 2009, we expect net sales growth of 2 to 3% and earnings per share diluted from operations to increase.

However, at a rate less than our long-term objective of 6 to 8% growth.

We will now open up to Q&A.

(Operator Instructions) Your first question comes from the line of Robert Moskow with Credit Suisse.

Hi, good morning.

Good morning, Rob.

How are you?

I'm good.

Good start to the year.

I guess my question is on second quarter, though.

You told us that the tax rate is going to be very low.

Is there some kind of a pull forward into first quarter and out of second quarter?

Can we expect, you have 6.5% sales growth, you're well ahead of your annual guidance.

Could second quarter sales be negative based on that?

No, I wouldn't read too much around the tax rate into the top line.

Neither would I.

What's happening is mostly related to the accounting requirements around FIN 48 and the timing of certain tax events, accounting recognition.

And so we initially have taken that into account when we talked in January.

We knew our tax rate would be somewhere in the 40 range with the compensation, if you want to call it that, in the second quarter.

But with a 36 rate to the year.

So there have been a couple of things that have occurred that have ticked the rate up a little bit more than the 40.

Some state actions, a little bit more state tax, but it's mostly around our assessment of -- compliance and the tax that will be recorded according to FIN 48.

So it really isn't that far off from what we anticipated the a little bit higher in the first and about where we thought in the second.

But no relationship to the top line.

The revenue, Rob, in the first quarter, is -- we had a good Easter period, which we knew we were going to have.

The pricing is pretty much as expected and then foreign exchange hurt us, probably hurt us a little bit more than we would have thought.

But nothing that significantly meaningful.

And then we had a little bit better volume on a couple of the different -- particularly on king size and standard loose.

So the first quarter, the first quarter stands on its own.

There's no timing effect across the quarters.

So there's no pull forward of Easter sales into first quarter and out of second quarter?

It's not going to--?

No, no.

All the Easter, all the Easter was certainly shipped in the first quarter.

Okay, and can you break out first quarter a little bit more specifically for us, how much was volume, how much was price, and currency?

Yes, let me give you a little bit of color on it.

As I said, pricing, the pricing is pretty much as expected on the list price increase that we took, we took an increase in the early part of last year, February of last year on, pretty much on standard bars and six-packs and then we took another price increase in August.

Those things at lift naturally flow through, so that's probably a high single-digit contributor, if you will, in the quarter in terms of sales.

Foreign exchange, as Bert said, was about 2.5-point to the top line head wind for us.

The longer Easter season, it was a benefit to us, similar number, maybe 2 to 3%, and then the rest of the -- then the volumes were down as we would have expected because of the elasticity, but they weren't down quite as much as we would have expected.

We were a little better in certain -- particularly in the instant consumable area, but we were still down on volume.

In the US.

In the US.

Some of our international affiliates did have volume growth.

Let me ask one more follow-up.

Your market shares were very strong in the quarter and I've noticed that you are on air all the time now.

You're on TV quite often.

I haven't seen much of your competitor other than Mars, other than in some outdoor advertising.

Do you think your share of voice has gone up substantially in first quarter and do you expect that to go up through the year?

I would say that our share of voice is up some and I'm glad that you're seeing the continuity effect on the brand, because it is something that we're certainly working towards.

I do think we've improved our share of voice, but in the scheme of things, Mars and Wrigley still have quite a bit of advertising out there on air, so we're making good progress and we're happy with the ROI and the returns.

The important thing for us is the way we're sliding our advertising this year and the efficiencies that the market allowed us to do in the up front buy, we've gotten really good GRP delivery beyond the increase of the spending level.

So I'm glad that it's becoming obvious out there and our team internally is working very hard to get the continuity levels on the big brands.

Okay, thank you.

Thank you.

Your next question comes from the line of David Palmer with UBS.

Hi, guys.

Hi, David.

Good morning.

One industry person commented to me that Hershey got the pricing in place in the US chocolate space, this is, heading into '09.

But Mars failed to take advantage of the pricing window, so to speak, so Hershey has been perhaps a little bit better position to maintain volume versus your key competitor and in addition, we've heard that Mars has been pretty distracted lately with some of the changes there.

Obviously you can't comment on Mars' distraction, but has the competitive dynamic been somehow different or easier for you than in this year versus your key competitor?

Any comment on that would be helpful.

Yes, it's a competitive category.

It's always been a competitive category I don't -- I wouldn't comment any further other than it's tough out there for everybody and we've seen nothing one way or the other unusual and that's about where I would leave it.

There's nothing that I would comment on that would lead me to believe that anything's really changed significantly.

And do you feel like your level of promotion activity is comparable across channels to last year this -- at the same time?

We actually, specifically in the first quarter with respect to our promotion, if you'll remember, when we priced the business in the fall, we held the pricing that already existed in the programming that already existed on Valentines and Easter.

That's principally what the, most of the activity is in the first quarter, so I would say it was comparable.

I think we had certainly a little bit more advertising and better retail coverage because our people are coming up to speed more.

If you remember, in the first quarter of 2008, a lot of them were relatively newly hired.

Now they have a full year under their belt, so I think that from our -- the perspective of our seasonal performance particularly at Easter, it's a little bit of it is better brand programming, but a lot of it is also better retail execution.

Great.

Thank you very much.

Thank you.

Your next question comes from the line of David Driscoll with Citi.

Thanks a lot.

Good morning, everyone.

Hi, David.

Hi, David.

Nice start to the year, congratulations on that.

And I too would add my compliments on the advertising.

Certainly it's on all the time and it's a nice change.

Thank you, David.

Thanks.

Question really here is the Nielsen data reveals that Hershey's chocolate candy prices at retail were up by double digits on both everyday chocolate and seasonal chocolate during the first quarter, thus given that volume trends came in ahead of your expectations during the quarter, it feels like there's a good probability that volumes throughout the remainder of the year should hold up, given that consumers experience significant price increases across the board for Hershey chocolate in 1Q and continue to buy the product.

Dave, am I thinking about this right?

And, just pointedly, I was surprised to see such large increases in price at the retail level on the seasonal merchandise, so I know you didn't realize it at the manufacturing level, but it sure looked like it showed up at the retail level.

Well, we did move list prices on, obviously on last August on the everyday.

So to the extent that there's everyday product that is kind of wrapped up in the Easter period, it would come through at a higher price point.

I think for us the real test for us is as we're now coming out of Easter, we'll start to see our packaged candy brands and our seasonal business around Halloween at higher price points for the consumer, particularly on a promoted basis.

So if you'll think about 2008 and really for the last several years, when you think about Halloween, for example, the opening price point for Halloween has been two for $4 and a lot of the season runs at two for $4 or two for $5, but we're going to move from two for $4 to two for $5 and at Holiday we're going to move it from two for $5 to two for $6.

So the consumer is going to see, while we took a pretty much a 10%-ish price increase, the actual price that the consumer's going pay is going to be up more like 20 to 25%.

So that's really what we'll see in the back part of the year seasonally and that's the real test for the business.

We think that we've got good execution and from a retail standpoint and we're going to continue to invest behind the brands to create some pull from a consumer standpoint, but it is a significant price increase on a large part of our second half business and really, we haven't done a lot of everyday promotion, so when you start to look in the second quarter and the third quarter when we run our Night at the Museum promotion for example, here in the second quarter, that's the first time that we'll see the higher promoted price point on our packaged candy businesses.

So we're watching those things as we go forward.

In C-store, we were pretty pleased with how the business held up in the first quarter, both king and standard.

But I do think as you go through the back part of the year, there are some significant, particularly the promoted prices, moving and we are cautious about the macroeconomic factors and the elasticity related to that.

Just a follow-up on that, Dave, could you give us like a range then for your expectation of full year '09 price realization?

We haven't given that.

I think if you think about what happened in the first quarter, high single digits because of the list price increase on average was around 10%.

We should see that similar kinds of numbers in the second and third quarter, but then remember, the price increase occurred in the latter part of August.

So when you get to the fourth quarter, there's not that much -- there's not as much price realization out in the fourth quarter.

We'll get a little bit of seasonal pricing, so you should see reasonably good price realization in the second and third quarters and then not quite as much in the fourth quarter and that will also show up in the gross margin line then as well.

So the gross margin in the first quarter certainly won't carry through for the full year.

But fourth quarter seasonal business is about half the business in that quarter, isn't that right?

Depends on the timing.

Depends on the timing of the shipment.

We've never really given that specific, but if you're thinking about take-away, the Halloween take-away happens in the fourth quarter, but the shipments really occurred in the third.

All right, great.

Looks like you're off to a great start.

Congratulations.

Thank you.

Thank you.

Your next question comes from the line of Judy Hong with Goldman Sachs.

Thanks, good morning.

Good morning, Judy.

Dave, I know private label really has never been a factor in confectionery, but obviously for the broader food category, you're seeing growth there.

I think some of the retailers have talked about maybe allocating some more shelf spaces to their private label chocolate products.

What are you hearing on that front and how do you think that that could impact Hershey going forward?

You are right.

Private label is a very small part of our category today and in the category it's probably more on the sugar side than on the chocolate side of the business.

We are hearing that certain retailers may, in fact, want to devote more space to private label throughout the store.

Your information on that is probably as good as ours in terms of reading which is in the press.

We are obviously very focused on creating and investing in our core brands, more so than we probably have been in the last few years and we think that's the right answer in the category.

And while we have taken some price increases, we still are at a relatively approachable price point for the consumers, an absolutely low price point.

We're going to continue to be diligent and watch what happens in the marketplace, but so far at this point in time, we haven't seen a lot of private label growth in the category.

Okay, and then just following up on the C-stores, you talked about how you're pleased with the business holding up there.

What other initiatives do you have in place to continue that momentum and specific to the C-store channel?

We've got -- we had -- we were very pleased with the programming we ran in the first quarter, the NCAA basketball tournament tie-in really seemed to work for us and our tie-in with Coke, where we ran some bundled programs with Coke and Reese's and with a coupon.

Really that activation was good.

We'll have a similar kind of bundling program later on in the year.

We have a very good shipper program lined up throughout the year.

The comps get a little tougher.

Clearly the first quarter year-ago comp was our easiest and we were lapping the February and August price increases.

So the comps get a little harder.

The important thing for us is that the things that we have, we've got really good I think merchandising programs in place.

We also are getting a benefit from retail coverage.

We added a lot of retail coverage in the, in the convenience class of trade and the latter part of 2007 and in the early part of '08, and we're very focused on distribution and getting the right items in the store.

So I think those three things are going to help us continue to drive conversion there.

But the comps get a little tougher as the year goes on, that's for sure.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Eric Katzman with Deutsche Bank.

Hi, good morning, everybody.

Hi, Eric.

I guess my first question is maybe a bit of a follow-up to Dave Driscoll's question about promotion.

Are you -- when you talk pricing, is that net of promotion or do you put promotion in terms of top line as another item because we don't really talk about that, but it seems like that's going to have a big impact as to kind of how, how the second half kind of rolls through with the higher pricing that you're implementing on the everyday product.

Yes, Eric, when we internally talk about pricing, we talk about net pricing.

We talk about net price realization, which is list price, less trade.

And so, that's the way we like to think about it and that's when we have our conversations, obviously with our retail partners out there, that's the way we think about it, is net price realization.

So, we have a list price in effect and then we also have, certainly we're going to see also a change in the prices at promoted.

So it's a combination of both when we talk about it.

Okay, and then the -- I mean isn't it kind of -- isn't it fair to say that it's pretty critical as to how Nestle and Mars kind of react to this, rather than two for $4, two for $6, I mean, and when should we kind of know whether they're kind of following your lead on taking up the promoted price points?

Well, again, we, we -- we took a price increase because of our cost structure and our business.

And what Nestle and Mars look at in terms of their cost structure and what they do is entirely up to them.

We have had conversations at -- with our retailers.

We know what our intent is in terms of price points and I just gave you those.

And we kind of know what our, our expectation is for our own business.

We wouldn't be aware of what -- what other competitors in the category are doing about price points or advertising, et cetera, et cetera.

So what we're doing is really taking care of our business.

We're advertising aggressively into the price increase and we're making sure we have really good programming and retail activity to support the brand and to support the higher price point.

So that's the way we're approaching it, and you're right, Eric.

In any category, in any given week, if someone has a feature ad and someone else doesn't, you see the movement.

So that's, that's a wild card and a risk for our business out there and one of the reasons why we're cautious about what happens in the second half of the year in terms of promotion and promoted price points.

Okay.

Well, I mean that seems reasonable to be cautious because, if you go back to what General Mills did, I'm sure you examined it, but they kind of did the same thing with their everyday promoted price, similar kind of increase, and, unfortunately there was a pretty, at least initial kind of backlash from the consumer, because I don't think competitors followed.

But I guess we'll see kind of how it flows through.

Okay.

Next question, or last question, is can you just talk a little bit about cocoa and the fact that it's priced in pounds globally and the fact that the pound has collapsed and kind of what that might mean structurally for cocoa costs?

And is that something that you can hedge against, beyond just in the physical?

Sure.

I'll try to clarify a little bit.

Cocoa trades in New York in dollars and in London in sterling, which I think is what you are referring to.

Certainly there's a forward market and we trade in dollars in this case.

If you've looked at the fluctuation in terms of cocoa itself, it's had a bit of a wild ride.

It's certainly peaked around the same time as most commodities last year, around midyear.

It has not had the type of decline that something like oil has.

It's held up better than that, and we don't talk about our hedging strategy in terms of, in terms of how far out we are.

I think the 10-K is pretty specific in terms of providing a range of about 3 to 24 months or maybe 36 months.

And so we're conscious to be in that range.

But right now we, we don't think of it that way in terms of whether there's a currency play versus a pricing play.

But I guess just, beyond what -- where you are hedged, because I know you don't want to talk about that, that's fine, but are there, like, fundamental reasons in the Ivory Coast and other places as to why cocoa has stayed so high as opposed to what I understood was this collapse of the pound and the currency's influence on the pricing of the commodity as opposed to what normally would have been, let's say, a rollover in the price of it because of supply/demand?

Yes, my personal view is that the pound has collapsed much more around the UK economy versus any particular commodity.

We watch conditions in the Ivory Coast, which I assume that anyone that's a buyer does watch whether it's rainflow or crop quality and those types of things.

But beyond that, we don't see anything unusual in the marketplace.

Okay.

I'll pass it on.

Thank you.

Thank you, Eric.

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

Good morning.

Hi, Christine.

Just wanted to follow-up, I guess, on Eric's line of questioning.

Specifically on grain, in the latest data we've seen a pretty sharp decline, specifically on Asia with grain down about 80%.

Even here in the US, I guess grain is down something like 12%, Europe's down about 20%.

Can you talk about if that specific shift, I guess, in the marketplace is going to have any impact on Hershey?

Yes, getting a little bit beyond my expertise here, you're quite right.

The headlines have pointed out that grain is down in Europe and in Asia, as you mentioned.

And that's been a function of some lower demand in reaction to the marketplace.

I think there's been less of that in the US and then there's this whole dynamic, which some of our folks are experts in in terms of the components of what comes out of the cocoa bean, whether it's butter or powder or liquor, as they call it.

So those things all influence the supply and the price out there.

But right now there's, there's enough cocoa obviously to supply the marketplace and any long-term impact from lower grinds, know, we should see at some point.

Right now, we don't think that's a key driver.

Okay.

And then just on peanuts, because Reese's does have quite a significant exposure to that, clearly the indications are at this point the crop's going to be significantly smaller this year to kind of I guess adjust for demand.

I assume that that isn't a big deal for Hershey just due to your contracted production?

Is that a fair assumption?

The supply in the market is much more related to last year's crop.

And so anything that would be, anything that would be impacting acreage this year will have more of an impact on future peanut supplies.

So right now there's -- last year was a good crop and there's plenty of supply in the marketplace, but to the extent that acreage changes, it tends to have a future impact and not a current year impact.

Certainly.

I mean I guess just generally talking about the peanut recall and the overall impact on demand, can you provide any color on if Reese's had any kind of, I guess softness or any kind of impact at all?

No, we talked specifically, Christine, about the fact that Reese's was up strong single digits throughout the quarter and we haven't seen clearly that, any impact.

We never -- we've never bought from PCA.

That was never a supplier for us, and it's not affecting the Reese's brand at this point in time.

We watch acreage and a number of other things and they rotate -- the acres rotate between wheat, corn and peanuts and that's pretty standard stuff for us to track.

So at this point in time, we're not seeing any issue with supply and certainly the more important thing for us is from a brand standpoint, Reese's is really, is really doing very well.

That's fair.

I guess I'll just leave it with the expectation I think at this point is about a 30% drop in production.

That's, I don't think, ever been seen before.

Thanks.

Well, as I said, Christine, I think the important thing for us is we are a big purchaser.

We have always been a big purchaser.

It's an important commodity, which we track very closely.

The reality of it is we do -- we watch that, those predictions and we're pretty comfortable, as we said, about the cost visibility that we have.

Great.

I'll leave it there.

Thanks.

Thank you.

Your next question comes from the line of Andrew Lazar with Barclays Capital.

Good morning, everyone.

Good morning.

Hi, Andrew.

I had heard a couple things on the call, one being in the first quarter, volume was a little better than perhaps your initial expectations.

You've got some potential, varied flexibility as you go through the year and obviously no change to guidance at this stage in the year and I realize it's early and you talked about wanting to be cautious.

Am I getting ahead of myself, or does this maybe suggest that you probably realize you may well need or want to be somewhat more aggressive with some of that flexibility on the trade promotion side?

You talked about wanting to help consumers adjust to those new unit promoted price points.

If that's the case, and maybe it's not, is it something that you're already seeing from a, either a sort of consumer perspective, a competitive perspective, or a retailer perspective that has got you thinking that way?

Then I've got a follow-up.

Andrew, actually in the first quarter with the -- what we did with the dairy flexibility was actually spend on advertising at Easter.

So it was not a promotion story for us at all.

It was really running specific brand advertising around Easter.

As we look through the year, out through the year, as I said, we're cautious about the consumer and the consumer reaction and, haven't seen increases in prices at Halloween or Holiday for some period of time now.

So -- and the moves are fairly significant.

We obviously will continue to watch and we want to make sure that we support the brand.

We don't have any intelligence at this point in time that would tell me that, that we need to be worried about trade promotion levels in the back part of the year beyond how we have them planned, but we're going to seriously be diligent about that to make sure that we don't need it.

Got it, and along those lines, as the summer kicks in and you start to get some of your early data from those higher sort of promoted price points, to the extent that you do need to make some adjustments, and again, you'll have probably some flexibility to do so if you need to, how quickly can you make that happen at the point of sale?

Is it something you can get, in terms of risk of missing the window, if you will, around sell-through for back-to-school and Halloween?

Yes, I think what we saw at Easter is, and this is one of the times particularly when it's great to have the kind of retail sales force that we have because we have the ability to flex fairly quickly at retail in terms of merchandising and even pricing and price points to get them executed if we need to do that.

So the retail sales force here is a really big advantage for us and one that I'm glad we have.

At Easter, we did dial the advertising back.

You can do in a relatively short period of time because the market is -- there's still enough spot available on the market because there's enough advertising inventory around.

I think the biggest issue is, for us, and for anybody for that matter, if you already own activity or have planned activity in a window, moving the price point up or down in the window is not all that difficult with a little bit of lead time.

If you don't own activity, it's much harder to get in.

So for example, we have activity planned all the way through Holiday and -- Halloween and Holiday at certain price points.

If we wanted to change those price points, we obviously could go to retailers and dial price points up or down with the appropriate spending conversation with retailers once -- as long as you have the activity.

So you can react to it to the extent you already have something planned, it's a lot easier to change it.

To go in and actually get incremental activity at the last minute's a lot harder.

That's helpful.

And very quick, last thing, I think at the June analyst meeting last year, you talked about the potential for much more meaningful innovation really not till the second half of '09.

Was more of that at the time, the thinking was more around all the premium and trade-up kind of stuff, which I understand wouldn't be as much the case or needed at this stage, given the environment we're in?

Or are there things that either I've missed or that you haven't announced yet that will be part of your innovation plan?

There are a few things that are coming in the back half, more towards the fourth quarter that we haven't announced yet.

But certainly closer in innovation.

In this environment, you're absolutely right.

The market has changed.

The consumer expectation has changed, as has retailer expectation.

If people are going to spend money in this market, they are going to spend money on something they really are comfortable with and know and like and certainly any innovation in the trade-up or premium space, we're very, very strongly supporting Bliss.

We think that Bliss is the right entry for us and we're going to stay with Bliss for as long as it takes to get it to work and it's working very well right now.

We have -- it's exceeding our expectations in terms of velocity and distribution, so we're pleased with that.

But beyond that, there's not a whole lot else we're going to do in that trade-up or premium space right now and I think we're going to stay very focused on the core because I think that seems to be resonating well with consumers right now.

Great.

Makes sense.

Thanks a lot.

Thank you, Andrew.

Your next question comes from the line of Chris Growe with Stifel Nicolaus.

Hi, good morning.

Hi, Chris.

Hi.

I just had two questions for you.

The first one, just in relation to kind of the conditions that occurred in the first quarter, Reese's, you had a little favorability from dairy costs and you spent some of that behind the Easter holiday.

Did you say it was advertising or promotion, or was it just a combination of both?

Advertising.

Advertising.

So I guess what I'm curious about, as you've seen the category being a little soft in terms of the overall consumption level and, perhaps as we go especially into the second quarter, seeing a little more elasticity and of course the pricing coming through, you have not really changed your outlook for, say, promotion and trying to get, maybe being a little more diligent about price points if we're going to be in a tough consumer environment.

Is that fair to say?

And isn't that sort of a washout for you, that you've got to see increasing levels of promotion just based on the consumer response?

That's not what we're saying at all.

I think what we're saying is if you go back to the fundamentals of it, our cost structure, we have $175 million commodity cost increase and a $70 million increase in our pension expense this year.

In order to keep our business model intact and be able to invest in the brands and advertise the way we want, we clearly needed to take a price increase.

We've done that.

And as we look forward, we just -- there's obviously always elasticity effects.

We've modeled those and we are cautious about that, particularly in this economy, in this kind of economic environment where the consumer sentiment is what it is.

We're just watching it.

So I don't think there's any -- there's no overhanging promotional issue here.

It's just we took a big price increase.

We understand it.

We needed it because of the cost structure of our business and now we're watching the elasticity and a large part of the portfolio has not moved yet and as it moves through the year, we'll watch it and monitor it.

I understand that.

I guess what I'm trying to understand is, as the elasticity changes, or if it changes, or if you see some weakness, are you prepared to respond with promotion, I guess is what I'm getting at?

At this point, I don't want to talk about our plans.

We want to continue to grow our business and gain market share, and we have a number of indicators and metrics we're going to track and I really don't want to get into that for competitive reasons in terms of what we're thinking.

Okay.

The second question, then, just a quick one in relation to trade deloading.

I heard about some trade deloading in the convenience store.

Did you see any of that activity in the quarter?

No, we have not.

I mentioned that our takeaway and our shipments are pretty balanced right now.

We're pleased with where we have -- where we track the distributor levels that feed into those C-stores and obviously our people are at many of the C-stores.

We are comfortable with the inventory levels that we have right now.

We are not expecting any form of trade deloading and we'll leave it at that.

That's an area we're particularly comfortable with right now.

Okay, and if I can do just one more, as we look at the degree of pricing in the first quarter, we look at the second quarter, you're going to have the price increase from a year ago rolling off and you're also going to have less promotion coming through as you kind of get those promoted price points up.

Without obviously saying something you can't say, or guidance, is it reasonable to assume that the second quarter pricing could be up a little bit from where it was in the first quarter, or does that rolling off of that price increase keep it down a little bit versus -- sequentially, sorry?

The second quarter is a nonseasonal quarter for the most part.

So, it's skewed more towards instant consumables and always has.

So the fall-off of the February of last year price increase, we've already lapped it.

That would tell you that it's probably, the quarter looks similar to the first, but it's mostly in consumable.

So we've already lapped that price increase.

Okay.

Thank you.

You're welcome.

Your next question comes from the line of John Feeney with Janney.

Good morning, thank you.

Good morning.

Dave, just wanted to dig into your better than expected sort of elasticity performance.

I wonder, do you have any data to indicate, or do you think that you're benefiting from maybe trade-down from, I mean the category, from some more expenses, snacking alternatives like maybe energy bars or something like that?

That might explain that.

Have you ever seen that in the past and could that be something that's going on?

Well, I think we did comment on specifically within the confectionary category is that there has been a slowdown in the premium space and in the trade up space and we would expect that those folks, if they're not exiting obviously, the category all together are trading down into our main stream brands.

So that's clearly part of the story.

I guess I'm just thinking, about I know this might be a -- it might be strange, but these are strange times.

Are there categories within snacking maybe that are more expensive, losing share to you, particularly in instant consumables?

Yes, we do track other categories, but at this point in time, I would rather not give away any of our own insights into the category.

Okay.

And just finally, when you look at the convenience channel, I know that's a big part of instant consumables.

It's going to become more important this quarter.

That -- the comparisons for convenience store traffic in aggregate get much easier in the second half of this year, yet there's I guess a lot better execution by Hershey and some Hershey-specific factors that make your comparisons more difficult.

If you just think about the convenience channel, do your comps get easier or tougher from here in that channel?

As we said, the comps clearly get tougher for us going forward.

We had the first quarter of 2008 was our softest take-away quarter.

We were actually down 2% in the first quarter of 2008.

Our retail coverage in the channel really kicked in in the early part of 2008 and those folks are now up to speed and doing a very nice job in terms of gaining distribution and selling in at retail.

So that's a benefit for us, but as we go through the rest of this year, that benefit was also in the prior year and as I said, we had price increase in February of 2008 and we will -- we got a benefit from lapping that in the first quarter and we don't have that benefit the rest of the way.

So the comps are tougher for us as you go forward.

Okay.

Thank you very much.

You're welcome.

Your next question comes from the line of Bryan Spillane with Banc of America.

Good morning.

Good morning.

Just want to understand your market share performance in the first quarter a little bit better.

Would it be possible to break out, or at least give some color on were your market share gains more pronounced in promoted or seasonal items, or was it with everyday items?

Pretty much we, we parsed it about three or four or five or ten different ways.

As you would expect we would, we looked everyday, we looked with seasons, without seasons.

We looked across multiple channels.

Any way you slice it, we're up and we're up, pretty much around the same amount.

So there's nothing, there's nothing I would say that we were up more everyday or more seasonal.

I think it's pretty comparable across the board.

We gained a solid 0.5 share point.

When you look at it all in, FDMx, or FDMxC, for that matter.

When you look at it with Easter in it, it's a little better probably when you take Easter out, but I'm not sure that's meaningful.

It's really hard to measure.

I would say we're pretty pleased because it was broad-based and solid everywhere.

I guess what I'm after is, if gifting is, has been a little bit more elastic, I would assume that that also -- that's related to people -- consumers gifting fewer premium items.

Does the price gap between your seasonal items, which hasn't seen an increase yet versus the premium items given you some advantage in terms of market share gain and is that something we should watch going forward as the seasonal items begin to go up?

I think that you might say that at Valentines, but certainly not at Easter.

Easter doesn't have a whole lot of premium in it, and so I think as you go forward, I mean holiday doesn't have a whole lot of premium in it either.

So I wouldn't say it's a big driver.

It's not a large part of the category.

And as I said, I think overall, we feel pretty good because it's broad based and pretty solid everywhere.

Okay, great.

Then finally, on that same topic, space allocation, has that changed at all in terms of the amount of shelf space being allocated to mainstream versus premium confections?

Yes, we talked about that I think back in the conference call in January and so we've seen that happen.

There are parts of the category, particularly the premium and the trade-up sections that are giving away and losing some space.

The velocities, as they drop, it's hard to hold those kind of items on the shelf and some of that space is finding its way to the main stream items and that certainly benefits our brands.

Okay, great.

Thank you, guys.

You're welcome.

Your next question comes from the line of [Eric Serotta] with Consumer Edge Research.

Good morning.

Thanks for taking the question.

Hi, Eric.

Hey.

Digging into the gross margin improvement a little bit, you cited two factors that were positives in terms of the cost side, one being the better fixed cost absorption from the improved or better than expected, but I guess still down volumes in the quarter.

And the other from the supply chain savings.

Just wondering whether you could -- if, in whatever detail you're comfortable with us, give us some, some measure of the balance between those two factors as one -- as certainly the latter would seem more sustainable than the former since you don't have the benefit of the extra Easter volumes this quarter?

Yes, Eric, in terms of the gross margin, obviously we're very pleased with the increase, 130 basis points.

And we explained it's a little higher than we anticipated.

I would say that the better volume in terms of our elasticity would have been more of a contributor, although that's very related to the volume in terms of the absorption going through.

It's hard to -- it's hard to project either of those going forward and that's part of our stance in terms of will we be able to maintain that level of elasticity as we see different price points coming into the market and they are both very correlated in terms of the pricing.

The supply chain savings are, in terms of those that are related to the supply chain transformation program, are a bit higher in the second half.

You would expect that, because the last couple of plants that we've shut down were in the first quarter.

And while, right now with the visibility that we have to our cost basket, we certainly expect that we will expand margin this year.

We don't expect it to be at the same level that we're able to achieve in Q1.

Okay.

Thank you very much.

You're welcome.

Your next question comes from the line of Vincent Andrews with Morgan Stanley.

I just want to reconcile one thing, which is that you stated that volume in the first quarter was coming in better than you expected, but at the same time, it sounds like you spent back some of the dairy savings on increased advertising.

I just want to reconcile whether the improved volume was a function, you think was a function of the increased advertising or if those things do not have much to do with each other?

I think what I would say is the decision on the advertising was as much as we did our analysis of the Holiday and Valentines periods and saw a compression there and the category -- the category declined, although we gained share and grew at Valentines, we wanted to make sure given the longer Easter that we got -- that the Easter product that we had already shipped sold through well.

And so I don't really think it was a driver necessarily of more Easter, shipping more Easter.

It certainly was a driver of having the Easter sell-through be particularly good.

And that was -- you said that the Easter purchasing pattern was somewhat compressed closer to the date, so was the ad spend--?

No.

The Valentines and purchasing patterns were compressed closer to date.

So we expected to see something similar in Easter and we wanted to make sure we accelerated and sold through our Easter inventory.

Then lastly, is there a scenario where, let's assume dairy costs stay where they are and you do have a dairy cost benefit for the balance of the year or less an increase, however it would turn out.

Is there a scenario where that savings falls to the bottom line, or would you expect to spend it back in one form or another?

I think what we would need to do is make sure as we go through the year, we're watching what happens from a consumer standpoint.

I don't know that I would earmark it any one particular way.

We're going to make sure that our brands grow and that we continue to maintain our momentum and we'll spend appropriately to do that.

It's probably very premature for us to determine what that looks like, and as I said, dairy prices are certainly bouncing around at the low.

They are pretty much near the support level, so they can't certainly get any lower.

And so it's probably premature to make a call on that, too.

Okay.

Thank you very much.

You're welcome.

Your next question comes from the line of Alexia Howard with Sanford Bernstein.

Real quick question, on the outlook for advertising spending, you obviously saw a 40% increase his quarter, it's been stepping up over the last couple of quarters as you've been rebuilding the brand support.

By the time -- I mean is this the year where you really are stepping things up and by the end of the year, you feel as though you may be where you want to be?

I guess I'm just asking for 2010 and beyond, are we going to continue to see kinds of step-ups, or is the idea to get as much of the heavy lifting out of the way in 2009?

We haven't made a comment on that going forward at all.

I think what you'll see from us in '09 is getting to continuity levels on Hershey's, Reese's, certainly on Kisses, starting on Twizzlers and Kit-Kat, continuing on Bliss.

So I think on those core brands, we're starting to get to continuity levels and we'll continue as we go along here to run mixed modeling and doing ROI analysis and as long as the spending is generating good returns for us and good growth, we'll make those decisions as we go further on.

But we haven't made any kind of statement about 2010 or beyond.

Okay, great.

Thank you very much.

Your next question comes from the line of Ken Zaslow with BMO Capital markets.

--question.

Hello?

Hello?

I just have one question.

What would it take for Hershey to generate earnings in line with your long-term growth algorithm for this year?

I mean I guess what are the key layers?

I think, improving volume -- improving volume trends versus our elasticity model would certainly be one thing, or getting sustainable advantages in some of the commodity costs.

But again, it's pretty premature to say that because we do have a lot of moving parts in the business, particularly with respect to the consumer.

So very premature to make any kind of statements about that, but any of the levers that are in the model moving in any direction.

Just seems like you've hit all the levers this quarter and it just seems like things are not -- seems things are still going in your direction.

I just -- I know it's early.

To me it seems like things are progressing the way you would want them to progress to be able to start to think about generating your long-term growth targets maybe a little bit earlier than expected.

That's all.

Yes, there's a large part of the business that has yet to see the number of segments, chocolate packaged candy on an everyday basis, Halloween business, holiday business, that have yet to see the increases in prices and consumers haven't had the chance to react to that.

So, it is very premature.

All right.

Thank you very much.

Your next question comes from the line of Ed Roesch with Soleil Securities.

Good morning.

Last year in the first half you were building your SG&A spending around, I think some international additions, infrastructure there and also the sales force buildout.

And -- but if you go back into '07 and '06 and prior years, the first quarter and second quarter, your SG&A spend on a dollar basis was pretty similar.

So I guess I'm just wondering if you could help out on this year, whether the first half, the SG&A spending should be pretty similar in the first two quarters there?

I mean if you -- I'm not going to comment on going back several years.

If you contrast it to last year, there's a little bit of impact, although not a lot as we were building the retail sales force.

So we still had a little bit of that.

Certainly the year-on-year pension expense is significant.

We've mentioned that that's about at that $70 million, which, which cuts across the quarters fairly evenly during the year.

The higher advertising rate of 40% in Q1 versus what we're projecting to the year in the 20 to 25%, does impact this year's results in Q1 and part of that is having the incremental advertising.

We didn't have Kisses advertising on last year.

In fact, Hershey's Bliss, I think we've advertised Hershey's Bliss, but the Hershey's Pure campaign didn't come on until the second quarter last year.

So we did have a higher run rate than the annual rate.

The pension is a meaningful difference and a little bit from the sales force.

So those are really the drivers that contrast from first quarter last year.

That's helpful, thanks.

And one other follow-up.

If you look at the gross margin line, does your standard costing system imply that you're essentially putting the same cost burden as soon as you hit Q1, based on your assumptions for all of '09, are you basically applying the same cost burden to all of your product based on your assumptions for the total '09 increase throughout the entire year?

Is that the way to think about it?

That would be correct.

A good example would be savings that we captured last year through the global supply chain transformation do become part of the standard.

And projected savings from this year's become part of the standard.

And so while we are a little bit back end loaded on this year's savings program, because the plants, couple of the last plants closing in the first quarter, the way you're thinking of it is the right way to think of it.

So you're already seeing some of those benefits?

That's correct.

Okay.

Thank you very much.

Your next question comes from the line of Terry Bivens with JPMorgan.

Dave, I know it's a little bit late in the call, but I did want to ask you kind of a strategic question.

Our understanding is one reason Mars has maybe been relatively a little bit more restrained lately, is they are installing SAP.

It seems to us that where they have innovated the velocities have been pretty good, particularly when you compare them with Bliss.

So the question is this.

I mean clearly in this kind of economy, it's been a good move to advertise more behind your core brands, but it seems to me at the end of the day, it's still very much an innovation-driven business.

So assuming these guys begin to get much more aggressive about innovation, what gives you the confidence that you can kind of shift gears in that direction with them?

Well, Terry, I think the reality of it is the category has always had some level of innovation, be it close in line extensions or flavor news, it's a variety-seeking category and there are a lot of brands and consumers are fairly promiscuous.

They will try a lot of new things.

So that's not new.

I think our past strategy created way too much churn and didn't generate the incrementally.

We're being very thoughtful about our approach to innovation.

We have changed our internal processes and we are certainly working and we won't talk about anything more specific than that on innovation, which we believe is more sustainable and incremental.

The question obviously of what's the right time to launch certain items and certain initiatives, that depends on marketplace conditions.

And this is certainly a time when focus on the core is a good thing.

It seems to be serving us well.

We have underinvested on some of the brands in the past and so as we're investing in them, now we're seeing good returns on the core and we're going to continue on that path, but it's not to say we're not working against innovation.

We're just not in a position right now to say it's the right lever to pull.

Looking forward, are you happy with what you see coming down the pike?

You made a reference in response to Andrew's question later this year, into 2010 and beyond, do you feel pretty good about that?

We had some items and some initiatives that we have yet to announce that will be coming in the latter part of fourth quarter this year, first quarter of next year that, we think are going to be very good performing items.

Again, we have taken a different approach than we have in the past.

It's a different business model for us.

We think it's appropriate.

It appears to be working on the core right now.

We're going to stick with that in this economy is the right thing to do.

Okay.

Thanks very much.

You're welcome, Terry.

Thank you.

Your next question comes from the line of David Driscoll with Citi.

Thanks for taking the follow-up.

I realize the hour here.

Just a quick question, Bert, on cash flow guidance and if you could just talk a little bit about working capital.

And then a second question on share repurchase.

You mentioned you really didn't exercise any of the $100 million authorization that still remains outstanding.

What is the plan on that?

Are we going to see some repurchase start happening in the second quarter or in the third quarter?

David, in terms of cash flow, I mentioned our working capital was good in the first quarter.

We had a net cash inflow of $22 million.

A lot of it came from better inventory management.

Our receivables were a little bit higher.

Some of that was related to the Easter timing and we also improved our payables a little bit.

We're happy where our cash flow is.

Given the market conditions these days, you can't have enough cash flow and so we've taken a look at our capital budget and have made a decision that, prudently we can manage that a bit better and so we've made a decision to bring CapEx spend down by $20 million this year and that will fortify our cash flow for the year.

So we're tracking well against cash flow.

We expect the supply chain transformation to continue to help us in that area and two fronts, capital spending with fewer plants will come down and obviously we'll have the improved, the improved savings which help our business.

Getting back to the buyback of shares, that's really a Board level decision.

We revisit it with the Board periodically and there's no doubt that we will revisit that with the Board in the coming quarters.

But right now we're not giving any particular guidance on when that might start to happen.

But Bert, if there's a $100 million authorization from the Board, does it not become a management decision at this point, whether or not to go ahead and consume that already given authorization?

Well, it's an authorized level in terms of we can execute against it, but we still confer with the Board in terms of the timing of that buyback and how that impacts our capital structure.

So we do have a discussion despite the fact that it's already authorized.

Okay, thank you.

You're welcome.

At this time, there are no further questions in queue.

We thank you for joining us for today's conference call.

(Inaudible) and myself will be available for any follow-up questions that you might have.

Thank you, again, for joining us.

This concludes today's Hershey Company first quarter 2009 results.

You may now disconnect.