好時 (HSY) 2010 Q1 法說會逐字稿

Good morning.

My name is Stephanie and I will be your conference operator today.

At this time, I would like to welcome everyone to the Hershey Company's first quarter 2010 results conference call.

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

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

(Operator Instructions).

Mark Pogharian, you may begin your conference.

Thank you, Stephanie.

Good morning, ladies and gentlemen.

Welcome to the Hershey Company's first quarter 2010 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 also 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 2009 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 Relations section.

Included in the press release are a consolidated balance sheet and a summary of consolidated statements of income prepared in accordance with GAAP, as well as an adjusted consolidated statement of income quantitatively reconciled to GAAP.

With that out of the way, I'll now turn it over to Dave West.

Thanks, Mark.

Good morning, everyone.

Hershey's first quarter results were strong and reflect the momentum of our core brands in the marketplace.

The global investments we have made in marketing and selling capabilities are starting to pay off and we see it in our reported results, retail take-away and market share.

While only a few months into the year, this high quality quarter has created the competence and environment to allow us to deliver on both our financial objectives for 2010, while also making additional investments in our business.

We'll have more on this in a bit.

In the first quarter, net sales increased 13.9%, driven by a balance of volume gains and prize realization.

Volume growth was a result of execution in the marketplace and the ramp-up of investments in core brand advertising and selling capabilities made over the last two years.

Base [unit] volume increased, especially in channels where we have focused resources at C-stores, food and select mass customers.

Price realization from carry-over seasonal pricing also benefited the the topline.

We saw the Easter performance also benefited from the previously mentioned shift in seasonal business from Q4 2009 into Q1 2010.

Looking at our retail take-away, where we benefited slightly from the timing of an earlier Easter, remember,in 2010 Easter occurred on April 4 and in 2009, it was on April 12.

Therefore, the reported IRI and Nielsen data as of March 20 excludes the last two weekends in the Easter period.

Our custom database and internal estimates of the flow with retail take-away figures closer to Easter and not yet released to you are in line with our first quarter sales performance.

We gained market share for the 12 weeks ended March 20 and while results are not yet final, Easter sell-through appears solid and we will again gain market share in this key season.

I'm very pleased with Hershey's marketplace performance.

Total CMG, that's candy, mint and gum, category retail take-away for the 12 weeks ending March 20 for our custom database in channels that account for over 80% of our retail business, so here I'm talking about food, drug, mass, including Wal-Mart, and convenience stores; that take-away was up 7.5%.

Excluding Wal-Mart, Hershey's FDMxC retail take-away was up 6.1%.

Both of these amounts include Easter seasonal sales.

So if you look at excluding Easter sales, given the timing changes, so let's exclude it from the current year and the year-ago period, Hershey's FDMxC without Wal-Mart, retail take-away was up 4%.

We gained market share, when you include Easter or exclude Easter, so both with or without seasonal Easter activity, we gained market share.

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

Our marketplace results were solid and improved across all channels.

We gained market share in all classes of trade, except drug, which as expected, was down, but did improve versus last quarter.

Our marketplace performance was driven by the core brands we have focused on.

Specifically, in FDMxC, the combined retail take-away on Hershey's, Reese's, Hershey's Bliss, Hershey's Kisses, Twizzlers and Kit Kat brands, these are the brand where ad spend is ongoing, take-away increased by 10%.

York, Almond Joy and Mounds, brands that we just started advertising in January, posted FDMxC retail take-away up in the teens.

Looking at the category, CMG continues to grow within the historical 3% to 4% range.

In FDMxC, excluding Wal-Mart, the category grew 4.4%.

Excluding future seasonal activity in the current and year-ago periods, the category, FDMxC, was up 3.3%.

And other than Valentine's, there's not a lot of pricing in that number.

Valentine's was a head wind for the overall category in the quarter.

Total category sales for the Valentines season, the smallest of the four seasons, were down mid single digits, as gifting was particularly soft.

The decline was primarily driven by the drug channel, where Valentine's category gifting sales declined double digits.

In the food and mass channels, Valentines category sales were about flat.

Hershey's overall Valentines retail take-away was down and resulted in a market share decline of slightly less than one point for the season.

Similar to the last few quarters, our marketplace results in measured channels were driven by our success in the food and convenience channels.

The results are a function of the core brand advertising and strong selling, retail execution and merchandising.

In the food class of trade, category growth was 8.1%, including Easter and a robust 7.3% excluding Easter seasonal activity from the current and year-ago periods.

Hershey retail take-away in this channel exceeded the category, both with and without Easter seasonal activity.

Overall, this performance resulted in the 0.5-point market share gain in the food channel.

Collectively, the core brands that we're supporting, such as Kit Kat, Reese's and Hershey's drove in growth.

And again, additionally, we got very good retail lift on York, Almond Joy and Mounds, driven by the new advertising copy I mentioned earlier.

Let me now talk to you about some C-store class of trades, where the category was up 2.3%.

In the first quarter, Hershey's C-store take-away increased for the eighth consecutive quarter and our take-away was up 6.2%, resulting in a gain of one full share point.

In the first quarter, Hershey C-store chocolate and non-chocolate take-away were up 9.1% and 5% respectively, driven by volume and mix.

Strong in-store consumer promotions and merchandising drove balanced growth across the core brands.

We believe the confectionery category will continue to see growth in the C-store channel, as confections remain a strategic focus for these retailers, considering that about 50% of candy purchases are made on impulse and that candy is the number one category for cross-merchandising opportunities in convenience stores, with over 80% of candy purchases made in conjunction with another category.

In candy remains very profitable, with the second highest gross margin in the C-store.

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

We will meaningfully add to and refine levels of advertising and support on many key brands.

Our net sales retail take-away and ongoing ROI analysis demonstrate the soundness of our advertising investment.

We have high quality copy that is working and it's made even more impactful when coordinated with in-store selling, programming and merchandising.

This strategy will continue to drive our business.

We have already benefited from the good programming I just mentioned.

Again this year, in the first quarter, our Reese's NCA Final Four Basketball event was a big success.

In the second quarter, Reese's will be one of the main sponsors of the Iron Man 2 movie.

We'll also kickoff the summertime sports program in Q2 with Memorial Day promotions featuring Rascal Flatts.

And just in time for summer movie releases, the Hershey's Kisses brand will anchor our Kisses movie night, where we're giving away a movie ticket with --multiple purchases of 10-ounce bags of Hershey's Kisses, Hershey's Miniatures, Reese's Peanut Butter Cups or York Peppermint Patty.

I'm also pleased with the launch and rollout of our new products and more importantly, with the positive consumer reaction.

In Q1, new products were a net positive for the first time in a number of years, contributing almost two points to our overall sales growth.

The December launch of Almond Joy, Hershey's Special Dark and York Pieces is the primary driver of this growth.

These results reflect our new innovation approach and discipline.

Retailers were pleased with this line-up and we achieved our distribution and trial targets faster than anticipated.

Pieces will be supported throughout the year, not only by-product-specific advertising on Pieces, but also by advertising on the parent brands.

We expect innovation to continue to be a top line driver and we'll follow up the Pieces launch with the December introduction of Reese's Mini-Minis and Hershey's Drops.

As we continued to demonstrate, we remain committed to doing the right things for the business in both the short and long-term.

Investments we have made are paying off and that is reflected in our overall performance over the last 18 months.

Base business momentum in the first quarter was greater than we had expected.

As such, we now have the flexibility to deliver on our financial objectives, while also making additional investments in our business, both in the US and internationally.

Over the remainder of the year, primarily in the second half, we'll intensify our efforts on existing strategic projects related to consumer and customer insights, as well as category management techniques that will benefit the business over the long-term.

Additionally, advertising expense will now increase 35% to 40% in 2010.

We'll increase advertising levels on some existing brands and in some geographies.

We'll also test ROI thresholds, sliding techniques and expand our digital marketing capabilities.

These additional investments were not included in the initial outlook we provided on February 2.

Now to wrap up, we're pleased with our Q1 performance.

The strong start to 2010, similar to 2009, will fuel additional investment in the business in the second half of the year.

We believe the additional investments we make will ensure the category and Hershey continue to perform well over the remainder of the year and into 2011.

The category continues to grow.

We have now completely cycled the August 2008 pricing actions and we're seeing base volume growth.

The overall macroeconomic environment appears to be getting better, albeit very slowly, but it is still difficult to predict consumer sentiment and purchasing patterns.

There are also some Valentine's and Easter shifts out of Q4 2010 and into Q1 of 2011, and Bert Alfonso will give you more detail on this shortly.

We see net seems growing comfortably within our long-term 3% to 5% net sales target for the remainder of the year.

So for the full year, we expect 2010 net sales growth of at least 6%, including an approximate one-point benefit from foreign currency exchange rates.

For the full year, we have good visibility into our cost structure and expect to achieve growth and EBIT margin expansion that will result in a low to mid teens increase in adjusted earnings per share diluted on a percentage basis versus 2009.

This expectation includes plans to meaningfully invest in our business throughout the remainder of the year.

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

Thank you, Dave, and good morning, everyone.

First quarter results were better than our earlier expectations with consolidated net sales of $1.4 billion, up 13.9% versus the prior year, generating diluted EPS of $0.64.

68% EPS increase versus adjusted EPS from operations last year was driven by greater than anticipated base sales volume, net price realization and manufacturing efficiencies.

First quarter sales gains were driven primarily by balanced volume increases in focused channels, new products, carry-over seasonal pricing and price realization related to trade efficiency.

Several factors contributed to the volume gains and these include base business volume that exceeded expectations, driven by brand investment and retail trends discussed by Dave.

The successful distribution and the launch of new products, which exceeded expectations and contributed about two points of growth.

And the seasonal shift we communicated in our fourth quarter call in January, which moved volumes from the fourth quarter of '09 to the first quarter of 2010.

In addition, our international business was up and foreign currency exchange was about one point of benefit.

Dave already provided details related to our market performance.

However, again, I remind you that Nielsen data as of March 20 excludes the last two weekends of the Easter period.

For our custom database, the 12-week retail take-away figures closer to Easter are in line with our first quarter factory shipments, leaving inventory activity distributed to retailers at desired levels.

Turning now to margins, in the first quarter adjusted gross margin increased 630 basis points.

This was driven by net price realization, supply chain efficiencies, some of which is related to fixed cost absorption as volume was greater than year-ago and better than expected versus our previous estimates, and lower commodity input costs of about 130 basis points.

The favorable commodities are an anomaly in the first quarter, but are projected to be higher in prior year for the remaining quarters in 2010.

We have good visibility into our cost structure and will achieve the expected 2010 global supply chain cost savings of $15 million to $25 million by the end of the second quarter.

In addition, normal levels of productivity are on track and we expect gross margin to expand for the full year 2010, but not at the rate realized in the first quarter.

EBIT margin increased 410 basis points in the first quarter, as higher gross margin was only partially offset by advertising of 67%, or about 190 basis points, selling expenses, as we added more US in-store hours and continue to build global capabilities, higher employee-related costs, and legal costs and advisory services related to our consideration of the transaction with Cadbury.

We are planning additional increases in advertising for the full year and expect advertising expense to increase 35% to 40% in 2010, which is greater than our previous estimate of 25% to 30%.

Despite this increase, we expect EBIT margins to increase for the full year, driven by the first quarter gain, offset by higher investments that will primarily occur during the second half of the year.

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

Our reported and constant currency basis, net sales increased with solid performances in Canada, China, Mexico and Brazil.

Excluding Canada, our international sales increased 14% on an organic basis, including FX.

This is in line with our five-year CAGR that we shared with you during CAGNY presentations.

Profits increased in Canada, but the declined over the remainder of our international businesses as we continue to make necessary investments to increase brand awareness and drive trial.

Moving down the P&L, for the quarter, interest expense decreased slightly, coming in at $23.7 million versus $23.9 million in the prior period.

This was due to lower average debt balances.

In 2010, we expect interest expense to be approximately $90 million to $100 million.

The tax rate in the first quarter was 35.8%, considerably less than a year ago when this rate was 49.1% due to the timing of certain tax events.

We continue to expect the full year tax rate to be about 35% and roughly 36% in the second quarter.

In the first quarter of 2010, weighted average shares outstanding on a diluted basis were 229.6 million versus 228.3 million in 2009, leading to EPS of $0.64 per share diluted.

Now let me turn 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 $65 million.

Accounts receivable was up $80 million.

The year-over-year increase was a direct result of higher sales and Easter timing.

We continuously monitor accounts receivable aging and it remained extremely current and of high quality.

Inventory declined by $91 million and accounts payable increased by $55 million.

Over the last two years, we have made excellent progress on networking capital and at this point in time, we would expect it to trend about at current levels for the remainder of the year.

In terms of other specific cash flow items, capital additions including software were $36 million.

For 2010, we continue to expect capital expenditures to be in the range of $150 million to $160 million, in line with previous indications.

Depreciation and amortization was $47 million in the first quarter, and in 2010, we are forecasting total depreciation and amortization of $180 million.

Dividends paid during the quarter were $71 million.

We did not acquire any stock in the first quarter related to the current repurchase program and there remains 100 million outstanding on the authorization the Board approved in 2006.

During the quarter, however, we did repurchase 64 million of our common shares in the open markets to replace shares issued in connection with stock option exercises.

Cash on hand at the end of the first quarter was $304 million, up $50 million versus the year end balance.

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

Our cash flow continues to be strong and will improve as we grow earnings.

Now to summarize, in 2010, our goal is to continue the current marketplace momentum.

To support this objective, we'll continue to invest in our brands and businesses in both the US and international markets.

We'll focus our efforts on advertising, which we expect to increase 35% to 40%, as well as consumer insights and brand building initiatives that should enable the category and Hershey to grow this year and into 2011.

As a result, we expect net sales growth for the full year 2010 of at least 6%, including an approximate one-point benefit from foreign currency exchange rates.

Despite commodity stock price volatility, we have good visibility in 2010 cost structure and expect to achieve growth and EBIT margin expansion that results in 2010 adjusted earnings per share diluted growth of low to mid teens on a percentage basis versus 2009.

Before we go to Q&A, as you work your model, let's consider some of the unique first quarter drivers and there are many moving parts and factors affecting our business over the remainder of the year.

To be more specific, as we exited first quarter, we have completed and lapped the August 2008 pricing action.

The first quarter volume benefited from a seasonal shift from the fourth quarter of 2009 into the first quarter of 2010.

The December '09 to January 2010 seasonal shift in shipping patterns are likely to occur again at the end of this year, with respect to Valentine and Easter.

Also, Easter is later next year, April 24.

As a result, we expect a seasonal shift from the fourth quarter of 2010 to the first quarter of 2011 to be greater than the shift that occurred this quarter, as we continue to refine seasonal orders and adjusted requirements with our key customers.

The launch of Reese's Minis and Hershey's Drops is scheduled for December to align ourselves with retailer shelf resets.

The majority of the brand building initiatives which we mentioned will occur in the second half of the year.

We do not expect the first quarter commodity [favorability] will continue for remainder of the year, nor do we expect the LIFO inventory accounting to be favorable in the fourth quarter of 2010 as it was in the fourth quarter of 2009.

We expect favorable exchange rate gains to decline each quarter as the year progresses.

And finally, by the end of June, we expect to achieve all of the global supply chain transformation program savings that we mentioned.

With all that out of the way, we'll now open it up for questions.

(Operator Instructions).

Your first question comes from David Palmer with UBS.

Your line is open.

Thanks.

Congratulations on your quarter.

Question for you on two channels, convenience stores and drug, particularly on convenience store, perhaps you could speak to the category.

Were you seeing a general sequential improvement in demand through the quarter and perhaps heading into this most recent month?

That's certainly what we have heard.

I just want to sort of confirm that that was happening.

And with regard to drug, obviously there was some cutbacks on certain types of promotions that might have been hurting the volume there.

How do you think that will play outgoing forward?

Thanks.

Hey, Dave.

Thank you.

With respect to C-store, we saw the category growth rate in the first quarter, up about 2.3%.

We were up around 6%, or 6.2% so we gained a share point.

We did see -- we saw some reasonable growth throughout the month.

It was pretty balanced across the month.

Traffic was a little softer than we would have liked to have seen it, but overall, we were happy with our programming.

And obviously fuel prices versus prior year were up a bit higher so that might have had some cause in terms of the slower trips in traffic.

For the most part, we're pretty pleased with our business and, again, we really saw volume return in convenience in a big way in the first quarter.

With respect to drug, we mentioned it before.

As we achieved some of our go-to-market processes and some of the way we were approaching brand investment, we found ourselves a bit misaligned with our drug customers.

These are very important customers to us and customers where we enjoy long-term relationships that are very important.

We've been working very hard to come to a place where we're back in sync with those retailers.

I don't think it's appropriate for me to comment any further other than to say that we continue to work that and we did get sequentially better, and hope that as the year goes on, we continue to do that.

And, David, you said it was fairly balanced in terms of trends through the month, and maybe you meant through the quarter for C stores.

Was there -- was it one where the sales trends were fairly balanced through the quarter, but perhaps volume was picking up through the quarter?

Is that fair?

Actually for us, we had, we had already -- remember, in convenience, that that was where we had seen the pricing actions first.

We had very little price realization, if any, in C-stores, so I think we had already been through the pricing.

It was balanced through the quarter.

There's not really been much of a change in traffic --

Not really.

No.

Great balance for us.

Okay.

Thank you.

Your next question comes from Jonathan Feeney with Janney Montgomery Scott.

Your line is open.

Good morning.

Thank you very much.

Good morning.

Considering the recent pretty considerable increases in advertising spending you've made and falling ad rates, could you give us a sense -- is there like an impressions number?

And I'm sorry if I missed it.

I was back and forth on PepsiCo.

Growth in total impressions you've gotten, particularly your core brands and/or increased return on those dollars, that's reflected in the results you've been seeing today and recently?

We're getting -- we talked about the increase in overall advertising spend on a rate basis and we're actually getting more GRP -- a percentage increase in GRP that's higher than the dollars, because we're becoming more efficient in the way we purchase and the way we flight.

I think what you're seeing is we'll get -- we'll continue to get a bit more increase in GRPs particularly this year than we got, certainly last year as we become a more efficient buyer and a better player of our media.

I thank that's part of it.

We're very pleased with the responsiveness of the brand.

Particularly, we saw some very good initial response, for example for Mounds, Almond Joy and York, when that ad copy came on in the early part of this year.

We continue to see it.

We continue to look at our ROIs on a going basis and then throughout the rest of this year, we'll look at it continuing to improve the way we flight, the way we purchase, and also start to look into some other areas a little more deeply, specifically I would say digital media for example.

Maybe this is a little bit too gray, but do you break down advertising spending and investments or GRPs as you mention them by brand family or by brand?

I'm trying to figure out where it is that you're seeing the most revitalization, if you will.

Yes, we do it by brand, absolutely, because the way the brands are positioned, you have to do it by brand because you're buying a different target, a different media outlook, different demographic for each of the brands.

We're doing it by brand.

We have different targeted levels of GRPs for each brand, and each brand is a little bit further along or behind in the curve.

For example, Reese's is further along in the curve with respect -- because we started Reese's advertising in late '07, and for Kit Kat which we started last year.

We do look at it by brand.

We think there are break-through levels for different brands so it is a granular question.

I could probably answer it if we add a lot more time in a very granular way.

And we run the ROIs by brand as well.

We continue to look at the spend and are very pleased with the results that we are getting.

When you look at a topline growth rate like we had this quarter and try to see base volumes come back, we think we're pretty pleased with how the advertising is working.

Great answer.

It's really Reese's that is in the lead.

Reese's continues to grow.

Again, it's also a very strong -- it's also been one of the things that we've been very strong with partnering and bundling where we use our retail capabilities, such as with the Reese's NCA March Madness sponsorship, where it's not just the advertising.

It's the advertising that gets the awareness and when the consumer shows up at retail, we also have great displays in -- NCA March Madness displays everywhere in store.

It's also the combination of getting that -- getting the consumer to the shelf and then having the brand there displayed appropriately.

Great.

Thank you.

I always gain about a pound a day you guys report.

Thank you.

Your next question comes from Vincent Andrews with Morgan Stanley.

Your line is open.

Thank you, and congratulations on your results.

My question, which would be related to -- I don't believe and correct me if I'm wrong, that you made any commentary on the mix between volume and price in the quarter, but I do know that you stated that you're basically done with price now in terms of the prior price increases.

It sounds like the balance of the revenue growth throughout the year is going to come from volume growth and obviously you had some volume elasticity last year, so it's not hard to imagine.

Just wanted to get a sense of where you were in the first quarter, what you thought -- whether you thought the trend going into the balance of the year was conservative relative to your guidance.

Then also, how we should think about the fixed cost absorption, the improvement there that's likely to come.

I'll take the volume part of that question and then let Bert talk about the fixed costs.

We were up 14%.

We have -- if you think about Easter carry-over pricing which was the end of the 2008 through to the last business that saw the price increase, seasons in the quarter, somewhere around a quarter to a third of business in terms of Easter shipments as factory shipments go.

On a weighted basis, we took a 10% to 11% price increase and it was one-third of the business in the quarter so roughly do the math, you wind up with something in the 3% range on price as a contributor.

We did talk -- when we talked to you in the fourth quarter of last year about some volume shifting out of the fourth quarter into the first quarter so again, a couple of points of shift.

And we would have expected to see -- our new product contribution from Pieces add a little bit to sales and we would have expected international to add a little bit to sales.

Our expectation going in would have been around that -- given the little bit of carry-over pricing, the Easter shift, some new products and a little bit international and foreign exchange gains.

Mid single digits would have been our expectations.

We had three, I think places where we exceeded our expectations.

One of them was the ramp-up of the new products, and the ACD and the distribution build probably added an extra point of growth in the quarter.

We were a bit more efficient between gross and net.

Our trade promotion efficiency was pretty good, but we were also very good with markdowns on saleables.

As we continue to get our inventories in line, we continue to do a little bit better sweating down from gross to net, if you will.

Then the rest of it is really base volume.

We had good base volume where we've invested.

In the brands we've invested advertising, particularly where we invested late in the year last year.

But also at the customers and the retail outlets, the convenience, certain maps and certain food accounts where we put more retail and selling resources in, we saw very good volume gains in the first quarter.

As you carry forward into the year, we'll continue to expect to see -- the new products will contribute and we continue to expect to see that, -- now that we're lapped through the price increase, we'll get base volume.

I hope that gives you an explanation of how we're thinking about the year.

I'll let Bert talk a little bit about the cost absorption.

In terms of the cost absorption, clearly we benefitted in the first quarter for the reasons that Dave mentioned, in terms of having our volumes be a bit higher than we anticipated.

As you think about the rest of the year, right now we're thinking more in line with what we would have planned.

And we planned for volume increase this year, as you would imagine, in terms of our total plan.

We had some pricing coming into the year and as you've already mentioned, that exhausts itself in the first quarter.

We were planning for volume increase.

We got a bit more in the first quarter.

We're looking out at the remaining quarters to be closer to the initial plans.

Even with the shift that occurs at year end, that product is largely produced within 2010.

Think of the shift not as an absorption shift, but more as a shift in sales, in terms of shipping.

Overall, cost of goods is favorable in the first quarter for the number of the things which you already mentioned.

Global Supply Chain Transformation being heavier in the first half, particularly the first quarter.

We have better commodities year on year, which we do not expect at the remaining quarters.

And our ongoing productivity is pretty spread out throughout the year, so that stays and has been coming in as we expected.

That was very helpful.

If I could just ask a quick follow-up, I just wanted to clarify to make sure I understand.

It sounds like there were some volume components in 1Q that won't recur because there were seasonal shifts or what have you.

But your assumption for the balance of the year that volume's going to come in closer to the initial plan, it does sound like the base volume in 1Q did come in ahead of that initial plan, so that does leave the possibility that that could happen during the balance of the year?

Or is there something I'm missing there?

No, I think that's correct.

There is some possibility.

Right now, as we're seeing it, we're projecting closer to plan.

Okay.

Thank you again.

That was very helpful.

Your next question comes from Eric Katzman with Deutsche Bank.

Your line is open.

Eric?

Good morning.

Good morning, Eric.

Okay.

I think I've been a critic and I think that your reinvestment in the business is good, both for the short-term and the long-term.

I have a brand question and a category question.

As a pretty long-term observer, it seems like Mars and Hershey have always very judiciously stayed out of each other's territory.

And what I mean by that is that Mars hasn't produced a bar.

You guys haven't produced a rogue product like a Snickers.

They haven't gone after peanut butter and you guys haven't gone after M&M's.

My sense is that's changing.

I'm wondering, why shouldn't I be worried about that?

The Pieces product looks like it's going right after M&M's and the Bliss product seems to go really right after Dove.

Dave, I'm just -- I just worry that what had been each other's territory and rarely, maybe playing around the fringes, but now it seems like you're going right up against some of their core products.

That's not how -- that's really not how we think about the business.

We think about the business by consumer usage occasions and by forms and then by how our brands are best positioned.

When you think about the Pieces lineup, what we're really doing, if you remember when we talk about loyalist consumers -- the [loyallest] consumers looking for the coconut experience that Mounds, Almond Joy provide or looking for the mint and chocolate experience that York provides, they are unable to get that in the category right now up until we launched Pieces in a hand-them-out format.

What we're really doing is taking some of our brands where consumers are the most loyal and providing that flavor experience that we think our brands uniquely capture and providing that to them in a different usage occasion.

When we think about how we segment the category, we really do look at it from the consumer's view and then that's how we also position our brands and think about investment.

The category growth is robust.

We've seen -- when you look at 52-week growth rates, we're up 7%.

I think that -- as people invest in the category and others including Mars, Wrigley, including Ghirardelli and Kraft Cadbury, it's an expandable category.

Consumers purchase it on impulse.

As people continue to invest in the category, the category will expand and grow.

And we think that's a healthy thing.

We're doing it based on consumer view and brand view.

And that's how we look at it.

Okay.

Whether debuted that way, the proof will be in the pudding.

The other question I had is in terms of trade-up, as the economy gets a little bit better, are you seeing any signs of the chocolate user moving back upscale at all?

Or is it still a pretty value-oriented mass market decision, which helps your brands a lot?

I'll give you two data points, Eric.

Valentine's Day was down, primarily a gifting and a little premium type of an event, and it was down pretty markedly.

We didn't see a real return to premium in Valentine's Day and the trade-up space for the quarter was pretty much flat.

Again, we didn't see much of a return.

We didn't see much of a return to trading up during the quarter at all.

Okay.

I think the last follow-up, and I'll pass it on.

The promotion that you mentioned, so you were more efficient on promotion, but was promotion still a hit to net sales?

Was it up year-over-year and you were just more efficient than you would have been otherwise?

Or are you saying that promotion actually dropped and therefore, it helped sales and your price realization?

We've actually -- on a rate basis, we actually -- because our volumes were so much higher on an absolute dollar basis, we spent more on trade promotion.

But in a rate basis, trade promotion was lower in the quarter.

Okay.

Thank you.

Your next question comes from Terry Bivens with JPMorgan.

Your line is open.

Thank you.

Good morning, everyone.

Hi, Terry.

Dave, two things, we're hearing from one large C-store distributor that both candy and snack volumes really started accelerating very recently, like within the last 4 to 6 weeks.

I think a lot of that is probably going to show up in that data subsequent to March 20th, I think, which you called out.

What's driving that?

Is that retailer driven?

Or do you have more specific programs with regard to the C-store?

Is it king size, for example?

I would like to get a better understanding of that.

I think it's the combination of a couple of things.

One of them is the category dynamic and the relationships.

We are very proud of our relationships and have built those relationships over many, many years and convenience with retailers.

I think what's happened as we've gone through some bumps in the road and the economy is our relationships and the relationship with the category has in that class of trade is very strong.

We've continued to provide solutions.

Again, I think some of the points that I mentioned, the highest or second highest margin category, certainly the highest margin category is something that adds a lot in the convenience stores.

I think there's probably higher margin in health and beauty, but not a lot of that gets sold.

We're a high margin category.

We are a very good bundled category, if you will.

Confections goes with a beverage often times, so you can incent a higher dollar ring if you will when you can bundle convections together and it's still a very much impulse-oriented category.

In a world where your trips are precious, if you're worried about the number of trips you're getting, you definitely want to have impulsive stuff right up close to the front of the register to take full advantage of those trips.

I think the category dynamics are very good.

Then on top of it, the programming has been very good.

I think we've all learned together, the retailers and us, particularly about what works and what doesn't work, what the right assortment is, where the aisle ought to be.

The category management expertise that -- for example, Max has helped their retailers with, has started to pay off for the category in terms of making it a destination.

We're pleased with it.

We've hung in there with it for years, in terms of building those relationships.

I think it's really paying off for us.

Okay.

Thanks for that.

And just one other thing.

It seems with your program -- savings program drawing to a close here, by our model at least, and particularly if you keep up the performance you did in this quarter, cash is going to start mounting up pretty quickly here.

Can you give us an idea at this point what shareholders ought to expect, just in terms of how you're going to deploy that?

Sure, Terry.

I think we have a pretty good track record, in terms of returning to shareholders in the form of dividends and buybacks.

We did recently increase our dividends by 7.5% and we have a 3% yield, and pretty competitive payout ratio.

And while we didn't do any buyback off the authorized program, we were in the marketplace replenishing stock options that were exercised.

We suspended that a bit last year, just in terms of -- as the market was at a critical stage with respect to credit markets and so we've resumed that.

We were pretty communicative in CAGNY around our continued look into the marketplace, particularly in the international space, around being inquisitive and seeing if there are opportunities there.

And with respect to more increases and dividends and/or share buybacks, it's a Board level discussion that we talk about frequently.

I'm sure that's a topic that we'll discuss in the coming near future.

Okay.

Great.

Thank you very much.

Thanks, Terry.

Your next question comes from David Driscoll with Citigroup.

Your line is open.

Thank you very much.

Congratulations on what could only be called stellar results.

Thank you, David.

Thank you, David.

Bert, you went through, and David, you went through a lot of different numbers.

And Bert, you gave some great factors, which I feel like I'm going to have to re-read this transcript.

But I would just like to try to ask you about the next three quarters.

As I just look at the comparisons, and I would say that just from -- if we used 252, which would be I believe 16% growth on your '09 figure, if we look at what the implication is for the next nine months, it would say that earnings would grow about 5%, which of course, feels a bit low, relative to both your long-term guidance and obviously the incredible results that we're seeing this quarter.

I understand that we have lacked the pricing, but I'm just trying to get an understanding on how we model out like these next three quarters, given the guidance and the factors that you're seeing.

Looks like it would be flat pricing and relatively -- it would be good, solid volume growth, 3-ish, 4-ish percent volume growth, and then you would get the margin expansion.

Can you help me out here, understand how the remaining portion of the year goes?

Yes, David, let me try and take that one on.

Let me talk first about the first quarter.

We clearly overdelivered in the first quarter, both on the top line and on the bottom line.

Q1 benefitted from some of the really difficult, but I think sound decisions that we made in prior months and years.

For example, the change in our business model in terms of pricing, now that winds itself up -- the August of '08 pricing winds itself up in the first quarter.

The Global Supply Chain Transformation largely winds itself up here in the first half, so we'll get the savings in the first half.

We start to benefit from the advertising that we've certainly been doing.

Not start, we continue to benefit from the advertising.

When you look at the first quarter, we got good benefits from the global supply chain and the carry-over pricing.

Those things tend to wind themselves up in the front half.

We had really strong earnings delivery in the first part of the year, the first quarter, and it will carry over a little bit here going forward, but really good earnings here.

The investment part where we're going to now take a look at based on the strength we have in the first quarter, reinvesting some of that -- some of that earnings momentum.

That investment comes in the second half of the year, where we're in a more normalized business model, if you will.

We're now more of a steady state model.

Once we're through the pricing and through the Global Supply Chain Transformation, we'll start to see a little bit more normalized volumes, if you will, going forward, once we're through the price increase.

We will invest significantly in the back part of the year in advertising and in capability.

I think that's the way to think about it is -- a more normalized business model going forward with some pretty strong investments for the future.

If I could just follow up on that one, I think I understand what you're saying, but I want to try one more direction on this one.

Over the last four quarters, pricing was absolutely massive and you had cost savings, and that clearly then was able to more than fund the advertising increase.

I think what you're saying is that over the next three quarters, you still have massive investments going into advertising, but we're not going to see that pricing component of it hit in the top line the next three quarters.

That really has to come from somewhere and that's why the earnings growth would get back to a much more normalized level.

Would you agree with that statement?

I think what I would say is that we'll -- we're going to continue to invest in the brands in the business and the capabilities.

We're looking at it on a full year basis.

We may be a little mismatched in the -- productivity might be a little more front-end loaded, so the global supply chain and some of the commodity favorability in the first part of the year, with some of the investment in the back part of the year,.

We may be a little mismatched, in terms of how the productivity flows into the P&L versus how some of the investment flows out.

But I think overall, we're through the pricing from August of '08.

We're starting to see the volumes return.

I think, as I said, we're comfortable in that 3% to 5% long-term sales guidance that we have out there for the rest of the year.

Then again, there's a little bit of a mismatch between the productivity and the margin expansion, and then the expansion of SM&A.

We spend a little bit more in the back half and we have a little bit more productivity in the front half.

Okay.

Understood.

Very good.

Just once again, absolutely stellar results.

Great job.

Okay.

Your next question comes from Alexia Howard with Sanford Bernstein.

Your line is open.

Good morning.

Good morning.

Just wanted to ask about the investments in the second half.

You mentioned advertising and capability building.

I wonder if you could tell us more about what the capability building means.

And also investment in emerging market expansion, it sounds as though that might be a big theme in the second half.

Can you give us any idea of how much more you're going to be spending as we look forward?

As we said, our advertising expenditure plans now look at 35% and 40% increase for the year.

That's up from what we had originally said, which was 25% to 30%.

That will go into certain brands in the US, but also other markets globally.

We had talked at our CAGNY Conference about inside driven performance and the investments we're making to make sure that we have state-of-the-art, if you will, leading edge category management in both consumer and shopper insight work that's in pilot with certain of our customers.

That work is ongoing.

I mentioned digital media as something -- an area where we're going to continue to also work on the forward basis.

We have increased in-store hours as well in certain channels.

That's the recurring theme.

Similar to how we thought about investment last year.

As we had good results through 2009, we continued to decide to reinvest some of that.

We did that throughout the balance of the year, particularly in the fourth quarter.

We feel very good that that fourth quarter '09 investment certainly has gotten us out of the blocks pretty quickly here in 2010.

We continue to see that as a pattern.

As long as we're making smart investments, we're going to continue to do that.

Thank you very much.

I'll pass it on.

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

Your line is open.

Good morning.

Hey, Ken.

When you guys came up with your long-term growth targets, I would argue and I think you would probably agree that Hershey was in a different place than they are now.

My question is, what would change your view, or what would cause you to change your long-term growth target and align them more with the rest of the packaged food group?

I'm not saying when or how, but what would be the impetus for you to actually rethink your long-term growth targets, given where Hershey is now versus when you actually laid out your plan?

It's a fair question.

I would say two things, Ken.

You're right on target.

We were in a different place when we did that.

We were at a place where we had struggled a little bit in '06 and '07 and realized that the business model need to change.

We needed to change the approach to the supply chain, but also the way we invested in the brand.

Then in the interim, obviously the world's changed quite a bit as well.

I think what we've really done is let our business model settle its way out.

And as I said, I think, as we get through first quarter here in 2010, from a supply chain and a go-to-market standpoint where we are through a lot of their moving parts, and I think the economy is getting a little bit better, although consumer sentiment may not show that all the time.

I think we're in a more normalized level.

We're still seeing commodity spot volatility as well.

It's something that we certainly look at.

I think what we're saying is -- what we're doing is making sure we continue to update you on how we're thinking about the current year versus that long-term model.

At some point in time, and obviously it's part of strategic planning exercise that all companies do, and we're in the middle of right now, when you look at that three or five-year, six-year and then making decisions about capital structure, growth rates, et cetera.

It's a fair question and hopefully, we've been transparent enough to give you a view when we're not going to be in that long-term range for now.

I'm not even talking about this year.

I'm talking about like -- again, 2011, 2012, 2013.

Is there an incident?

You need an acquisition?

Is it once you right size your business, is that where you want it?

Is there any impetus that we should think about?

Two or three things.

One is a more normalized business model, which I think we're starting to get towards.

Again, I think the financial markets, the commodity markets and some of the consumer sentiment I think -- watching that settle its way out is also -- would also be an impetus for us.

And just a quick follow-up.

When you said that the gross margins for the quarter were anomaly and you made reference of the commodity prices, is it just you had good hedges?

Is that the real simple answer?

Yes, I [would think] of it as good hedges.

We've said that we have good visibility throughout the year.

If you compare to last year, our expectations around dairy in particular, that was favorable.

And last year when we started to look at the year, we didn't change those expectations until about the middle of the year and that has an implication on the first quarter, came in.

Okay.

Great.

I appreciate it.

Your next question comes from Christine McCracken with Cleveland Research.

Your line is open.

Good morning.

Good morning, Christine.

I think you mentioned that your trade promotion spending for the quarter was down, but we've clearly seen a pretty big shift in the food channels towards lower prices, getting price competitive.

Is it that you're not being asked to participate?

Or is it a strategic decision on your part to, again, refocus on that advertising and brand promotion?

I think we showed an interesting chart at CAGNY, in terms of how we thought about shifting the mix of our spending between pull and push.

We -- and again, it's -- on a macro level what we've really done is invested in our brand, in advertising and consumer promotion.

We took a price increase in August of '08, because the commodity costs were very, very high.

The profile had changed in a step function way.

As part of that increase, we not only changed the list prices, we also saw promotional prices move up in the marketplace.

Part of that move-up in promotional prices is needing less trade promotion on some levels to hit what would have been historically lower prices.

There's a little bit of that that goes with the new pricing model and the pricing structure.

But overall, it's so customer and event-specific, Christine.

I think we saw -- overall, we're spending more absolute dollars in promotion, because we have just more volume.

But on a rate basis, we did see an improvement in the first quarter and we're pleased with that.

Although I'm not sure that we would tell you to trend that forward.

I think now that we're through the last of the 8-8 pricing, August 8 pricing, we're in more normalized volume level.

I'm not sure you would expect to see rate efficiency going forward.

But, again, it's so customer and event specific.

It builds up so granularly that I almost couldn't give you anything more specific than that.

And just one other follow-up, you mentioned higher fuel costs might be impacting your C-store sales.

I think you referenced your expectations that commodity costs would probably be higher over the balance of the year.

The expectation at this point is dairy will move a little bit higher.

What would it take to institute another price increase?

Is that even in your solution set at this point?

Or is it that you took enough in your last round that that wouldn't be in consideration?

We're not -- Christine, I wouldn't even -- I don't want to even go there.

As I said, we're comfortable with the market expansion that we've gotten and we're seeing the consumer volumes come back.

We have good visibility to 2010 costs and I would leave it at that.

All right.

Thanks.

Your next question comes from Robert Moskow with Credit Suisse.

Your line is open.

Just a niche question.

Mounds, Almond Joy, York, they are niche products.

And you're putting a lot of advertising into them.

It seems to be working for now.

How big is this business currently and how big do you think it could get?

I'm not a big coconut lover, but I'm a consensus of one in my household.

I'm not sure how much more coconut I can eat.

Can you tell me how big you think you can be?

Again, what I've been saying is when you look at the segmentation work, there are loyal followers and you're probably one of them, the loyalist, who -- while the brand overall may not be a huge, gigantic brand or huge brand.

When you find the loyal consumer they can be as much of a third of consumption on some of these brands.

It comes from a very small percentage of loyal users.

Remember that these brands are incredibly profitable, very high margin brands for us.

When you think about York and you think about Mounds and Almond Joy, these are brands that are not solid milk chocolate.

They have a lot of inclusion and they are in rogue bars.

They are very high margin for us.

We're not spending at the level we're spending on Hershey's or on Reeses on these brands.

We think with a modest level of brand investment, we can get really good awareness on these brands that have high margins and get them activated that way, and reengage the consumers who we haven't talked to in seven or eight or nine or ten years.

And that's how we're thinking about it.

We got really good lift initially, Rob.

These are ones that we'll watch very closely to make sure that we continue to see lift and run the ROIs on them.

It's a natural evolution once you get through getting the the big brands to the right place, that you now go into other parts that we talked about in the consumer demand landscape and see how you can activate the brands.

We're pleased to date with it, but it's only a quarter's worth of results.

We'll watch the ROIs carefully.

Just a follow-up.

One of your competitors in chewing gum, I know it's not a big business of yours, said that the chewing gum category is very weak.

Are you seeing that as well?

Do you think that maybe what you're doing on the candy and chocolate side might be taking a little bit of attention away from chewing gum?

I don't think -- I think the category overall has grown nicely.

There's -- you get shifts in mix all the time.

It looks like right now for whatever reason, gum and mints, the refreshment parts of the business, are probably growing a little less than chocolate and non-chocolate.

I think some of that programming, not just us, but others.

Some of it's timing and innovation.

I think it's a number of those things.

Over time, these things tend to ebb and flow, based on how people calendar their business.

But you're right, gum and mint, the refreshment part of the portfolio, is probably growing a little slower right now.

But that's not to say that you won't see a swing sometime later in the year.

But it is the fact right now.

Okay.

Thank you.

Your next question comes from Bryan Spillane with Bank of America.

Your line is open.

My question is just around your -- the effect -- your sales force effectiveness.

You've spoken a bit about how much the increase in advertising is helping to drive some volume and it's made your pricing effective.

But I'm also just curious, this was the fall of '07, you started to increase the size of your sales force, mainly in -- or at least especially in convenience stores.

I just had the impression that it really wasn't until last year that you had a lot of these people fully trained and in place, and with all the tools they needed to do their jobs.

My question is, first, how much having more feet on the street has made you more efficient in terms of promotions and ability to maybe be more efficient with your pricing and trade promotion?

And also, in terms of reinvestment, is that on the table as well, increasing the size of your sales force, making a bigger investment in your sales force?

Good question, Bryan.

Thanks for it.

We continue to believe and have always believed that our selling capabilities, our sales force if you will, so I'm talking not only about feet on the street, but also our category management capabilities and our headquarters capabilities.

We think we're very good within our category.

We think -- we actually like to think of ourselves as pretty comparable in consumer packaged goods because we had a pretty efficient cost, because we're so focused on one category, can deliver pretty good benefits.

You are right.

We started in '07, specific to retail, investing in certain classes of trade, mass -- certain mass customers, a little bit in food and certainly quite a bit in convenience stores.

We're at full complement, but we are also actually adding again this year in terms of in-store hours.

There is an investment -- if you look at our SM&A line, there is an investment inherent in this line this year for more sales coverage.

It is paying out.

One of the things that I would also tell you is it's not a static sales force, if you will.

We can reroute that sales force on a monthly basis, based on activities by customer, based on who is running promotional activity and where we need to sell at retail.

And so we do that and we continue to look at how to continuously improve our routing to be more efficient and productive.

Also as the economy has shifted in the last 12 to 18 months, we've certainly shifted and grown with the growing customers, if you will, and made sure that our resources are in the right place.

I think it is a strong competitive advantage for us and one that we continually invest in.

I think it makes the advertising investment that much more efficient and effective when you actually get to retail and the product that you're advertising is in the right spot with consumer promotion and merchandising vehicles that tie to the advertising.

The NCA March Madness promotion, for example, we ran great Reese's copy throughout March.

At store level, you saw, walls of orange if you will.

When you came into store, in terms of display, so that the consumer, once they got to the store, we could activate.

We think it works very well together.

We've invested in both sets of capabilities and we're going to continue to do that.

And David, if you were to benchmark just your sales coverage relative to some of your competitors, do you think that you've got greater sales coverage, whether it's measured through people relative to revenue or the number of hours they are able to spend in the store?

Do you think your sales coverage right now is comparable or more than your competitors?

I think we're a little different than everybody.

I'm not -- that's not to say that being different or unique is always better, but I think in this case, I would like to think we are.

We have our own dedicated direct people.

We're not using brokers, so I think that's the most unique part of it is that we are -- we tend to control our own destiny, if you will.

Other folks may be getting similar types of hours or minutes or coverage in-store, but they may be getting it through a broker or maybe not with the same frequency.

Overall, we offer -- we're dedicated to one category.

We offer a total confections solution.

It's integrated all the way back to being -- to category -- to account planning to retail wherein we tend to be very integrated and focused on one category.

I think that's an advantage for us.

Okay.

Great.

Thank you, David.

Your next question comes from David [Colbert] with UBS.

Your line is open.

Thank you very much.

Seems like Mars, your major competitor in C-store channels, getting more into the new product game lately, maybe not to the level of the old Hershey limited edition strategy, but certainly they seem to be trying to stimulate new demand with new products, or at least we hear that's going to happen with M&M's with pretzels in them and stuff like that.

What fascinates me is the rumble of the new product news seems to be happening in the wake of a period which Hershey has been gaining share through just advertising behind the core and having virtuous cycle going.

Do you think it's appropriate for Hershey to stay the course here, very limited new product news for a while and that this cycle can continue?

Or do you think it's appropriate maybe for Hershey to fold in more new product news here through particularly the competition and perhaps consumer being ready for it?

Thanks.

Dave, thank you.

We again -- as you pointed out, we had a period where we were probably less disciplined in innovation and new products than we would have liked.

There is a role for news in this category.

It is a variety-seeking category.

And consumer have more than one brand that they are willing to sample.

There is a role for innovation.

I look at our business right now and for the first time in a couple of years here, innovation is additive for us.

We've done it in a way that works for our supply chain and for our business model at the current time.

Other people have their own view of how to go about their brands and their business.

There's no one right answer.

The answer for us right now -- we had a very strong first quarter coming off of a good year last year.

The model is working.

We continue to run the ROIs on all of the marketing mix, advertising, consumer promotion and trade promotion.

We'll continue to dial as we go along.

For us, right now, we think we're in a good place.

As I said, we don't have the only model.

There are any number of models to make things work.

We think investment in the category overall, regardless of how people are doing it, is good for the category and good for growth.

We're pleased with where we are.

We're pleased that innovation is at it again for us.

Thanks for your thoughts.

Thank you.

There are no further questions at this time.

Thank you very much for joining us on today's conference call.

Matt Miller and myself will be available to answer any follow-up questions that any of you may have.

Thank you.

This concludes today's conference call.

You may now disconnect.