好時 (HSY) 2010 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Hershey Company's fourth-quarter 2010 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).

Thank you.

I will now turn the conference over to Mark Pogharian to begin.

Good morning, ladies and gentlemen.

Welcome to the Hershey Company's fourth-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 that are 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.theHersheyCompany.com, in the Investor Relations section.

Included in the press release is a consolidated balance sheet and a summary of consolidated statements of income prepared in accordance with GAAP.

Within the notes section of the press release, we have provided adjusted or pro forma reconciliations of select income statement line items quantitatively reconciled to GAAP.

As we have said within the note, the Company uses these non-GAAP measures as key metrics for evaluating performance internally.

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

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

We will discuss fourth-quarter 2010 results excluding net pretax charges.

2010 charges relate to the Project Next Century program, while the 2009 charges are associated with the Global Supply Chain Transformation.

These pretax charges were $7.9 million in the fourth quarter of 2010 and $26.5 million in the fourth quarter of 2009.

Our discussion of any future projections will also exclude the impact of these net charges.

With that out of the way, let me now turn the call over to Dave West.

Thanks, Mark, and good morning, everyone.

Hershey's strong fourth-quarter financial and marketplace results represent a solid end to the year.

We exited 2010 with good momentum and have plans in place that we believe will benefit the category and Hershey in 2011.

As has been the case all year, the CMG category, that's candy, mint and gum, outpaced other snack alternatives.

Despite lingering macroeconomic challenges and fragile consumer confidence, for the full year 2010, CMG category growth in channels measured by syndicated data increased 3.4%, solidly eclipsing salty snacks, cookies, crackers, and bakery snacks, none of which posted growth greater than 2%.

Overall, the confectionery category continues to grow, driven by a balance of investment in the category in the form of both advertising and innovation by most major manufacturers.

The CMG category historically grows at an annual rate of 3% to 4%, and we would expect the same in 2011.

Hershey's marketplace performance accelerated and sequentially improved from the third quarter to the fourth quarter.

I am pleased with our fourth-quarter and full-year financial and marketplace results.

For the full year 2010, organic net sales increased 6.1%, driven primarily by volume and a couple of points of net price realization, which occurred largely in the first quarter of the year.

Including the benefit of favorable foreign currency exchange rates, net sales for the year increased 7%, with gross and EBIT margin expanding meaningfully, and our balance sheet and cash flow very strong.

We built on the progress and momentum from last year, and we look forward to again delivering on our financial targets.

In terms of Hershey's marketplace performance, for the period ending January 1, 2011, for our custom database, in channels that account for over 80% of our retail business, total Hershey CMG retail consumer take-away was up a strong 6.2% for the latest 12 weeks and 5.3% for the full year, driven primarily by volume.

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

Within food, drug, mass, and convenience or FDMxC, here excluding Wal-Mart, the CMG category also continues to grow.

For the 12 and 52 weeks ending January 1, 2011, the CMG category and FDMxC increased 3.7% and 3.4%, respectively, for the 12- and 52-week periods.

Hershey's FDMxC retail take-away for the fourth quarter and full year was 5.5% and 4.5%, respectively.

As a result, our market share increased by 0.5 points in the fourth quarter and 0.3 points for the full year 2010.

As we look to 2011, we would expect historical growth rates to prevail in the category.

We are pleased with our marketplace performance in all classes of trade.

Market share improvement in almost all of our measured channels drove overall success.

The commitment and experience of our customer marketing and sales teams continues to be a valuable asset.

For the full year 2010, in the food class of trade, the category grew 5.3%.

Hershey retail take-away for the year was up 5.2% and our share was, therefore, flat.

Fourth-quarter class of trade CMG category growth in food was 4.4%.

A portion of this growth was driven by the timing of other major manufacturers' innovations, with launch merchandising concentrated in this channel.

Hershey's food class of trade retail take-away in the fourth quarter was up about 3.4%.

Yet, this resulted in a slight market share decline of 0.3 points in food in the quarter.

Note that in December, we launched Hershey's Drops and Reese's Minis.

Retailers are excited about these products and will reach our ACV distribution targets as we exit the first quarter.

Dedicated Hershey's Drops as well as Reese's [Mini] Minis advertising is now on air and should generate consumer excitement and solid retail take-away in the coming months.

By segment, Hershey's Q4 food class of trade chocolate take-away was up 4.1%, again, a bit lower than the category.

Our non-chocolate food take-away declined as we lacked the initial Twizzlers brand investment that started last year.

For the overall Halloween and holiday seasons, as expected in Q4, total combined seasonal category retail sales were up slightly.

Specifically, Hershey Halloween retail take-away dollar growth was up 3.6%.

Hershey FDMxC Halloween performance was solid, and we gained 1.7 market share points on Halloween.

Hershey's FDMxC holiday sellthrough was essentially on target and our retail take-away was up slightly.

As a reminder, Hershey is the leading holiday manufacturer with a 24-point share of the market, about 8 share points greater than the next largest competitor.

Better than expected performance from the gifting subsegment drove total holiday category sales growth of 4.1%.

Turning now to the C-store class of trade, where Hershey continues to leverage its outstanding customer relationships and industry-leading in-store sales force.

Here, Hershey's C-store take-away was up again in Q4 and has now increased for 11 consecutive quarters.

Specifically, for the 12 and 52 weeks ended December 25, 2010, Hershey retail take-away was up 6.8% and 5%, respectively, resulting in a market share gain of 0.7 points in the quarter and 0.6 points for the year.

In Q4, Hershey's C-store chocolate and non-chocolate take-away was up 7.8% and 9.6%, respectively.

These gains were driven by core brand advertising, in-store selling and merchandising, and solid programming, including an NCAA football tie-in, a co-promotion with Coca-Cola and a pre-priced standard bar program.

In the drug class of trade, we made very good progress in 2010.

Our initial IDP, or Insights Driven Performance, efforts were concentrated on this channel, and we made good progress with key customers to jointly identify the areas to improve overall drug channel shop-ability, driving both category and Hershey growth.

As a result, in Q4, drug category growth was 3.8% with Hershey retail take-away up 9.4% for a 1.2-point market share gain in drug.

As we look to 2011, we have many exciting products, promotions, programs, and merchandising in place across all channels, including various NCAA basketball and football promotions; a Hershey's Miniatures promotion, focused on NFL Pro Football Hall of Fame, where the winner will be deemed the first Family of Football and be honored at the Hall of Fame Game.

We will have the sponsorship for the upcoming Green Lantern movie; a Twizzlers summer landmark program for family trips to an American landmark of their choice, and the continued rollout of Hershey's Drops and Reese's Minis, as well as other upcoming new products which have yet to be announced.

Additionally, full-year advertising expense for the total Company will increase mid-single digits on a percentage basis versus last year, supporting new product launches and core brands in both the US and international markets.

We remain confident in our core US business, and advertising will be up in the US again in 2011.

The consumer-centric approach to brand activation that has worked in the US is being rolled out globally, and it's working.

In certain international markets, we are gaining momentum and expect it to continue in 2011, as advertising in these focus markets will increase double digits on a percentage basis, albeit off of a much smaller base.

During 2011 in the US, we will leverage our core competencies and the infrastructure investments we made in the business from 2008 to 2010.

As such, we would expect the year-over-year percentage increase related to other SM&A expenses to be at a rate lower than sales growth.

However, in a few key emerging markets, for example, China, this investment will be up double digits on a percentage basis in 2011 as we add selling capabilities and points of distribution and increase the level of sampling and brand support to drive brand awareness and trial.

We will also continue to advance our IDP work in the US.

Bert will get into the specifics on our balance sheet and cash flow, but obviously I'm very pleased with our financial position and our ability to again generate operating cash flow of about $900 million.

Our cash position and debt metrics allow us to continue our approach to disciplined global expansion, including organic investments and the opportunity to explore other strategic opportunities.

I'm also happy to announce that we increased our dividend about 8%.

As we look to the future, our financial position allows us to be flexible in our approach to creating value for all Hershey shareholders.

To wrap up my section, I am pleased with the way the confectionery category and Hershey continue to perform.

We have a solid position in the marketplace, and we are responding to retail customer needs to drive overall category growth despite macroeconomic challenges.

Our solid results and customer-centric approach to growth is evidence that our strategy is working.

We will continue to build on this in 2011 to grow in both measured and non-measured outlets.

We have a solid plan in 2011 and expect to drive top-line volume growth by a combination of market share gains, strong innovation, including Hershey's Drops and Reese's Minis, and other yet to be announced new products that we hope to share with you at CAGNY, as well as by continued faster-paced growth in emerging markets.

We also believe 2011 will get off to a fast start as we achieve ACV distribution targets related to the rollout of new products in Q1; and as the seasonal share leader, Hershey should also benefit from a longer Easter selling season.

And as we stated in October, Q1 will benefit from the shifting of 2011 Easter and Valentine's seasonal orders out of the fourth quarter of 2010 into the first quarter of 2011, as we continue the refinement of customer logistical requirements.

Commodity markets remain volatile.

However, we have visibility into our cost structure.

While we anticipate meaningfully higher input costs in 2011, productivity and cost savings initiatives are in place.

And at this time, we estimate that full-year 2011 adjusted gross margin will be about the same as last year.

We will leverage the investments in our brands and go-to-market capabilities we made over the past few years.

As a result, we expect full-year 2011 net sales and adjusted earnings per share diluted growth to be around the top of the Company's long-term 3% to 5% and 6% to 8% objectives.

I will now turn it over to Bert Alfonso, who will provide some additional detail on our financial results.

Thanks, Dave, and good morning, everyone.

Net sales and adjusted earnings per share diluted from operations for the full year 2010 exceeded the initial ranges we communicated at the beginning of last year.

Solid combined efforts from sales, marketing, and finance resulted in good execution at retail and another year of market share gains.

Overall, we are pleased with our financial results and marketplace performance in the US as well as the progress we've made in international markets.

Fourth-quarter consolidated net sales of $1.483 billion increased 5.4% versus the prior year.

Our strong top-line results allowed us to be flexible in our approach to category and brand-building investments throughout 2010, and especially in the fourth quarter.

As a result, Q4 adjusted earnings per share diluted was $0.61, a decline of 3% versus last year, reflecting significant investments in brands and capabilities in key markets.

For the full year, net sales increased 7% or 6.1% on a constant currency basis, and profitability improved significantly, resulting in adjusted earnings per share diluted from operations of $2.55, an increase of 17.5% versus the prior year.

Fourth-quarter sales gains were driven primarily by volume increases in both US and international markets.

In addition, lower levels of customer returns, discounts, and markdown allowances in the US, as well as the benefit of pricing in the US, Canada, and Mexico, generated net price realization of 1.6 points, while favorable foreign currency exchange rates contributed approximately 0.5 point.

Dave provided details related to our marketplace performance, so I will now focus on a review of the P&L and balance sheet, beginning with gross margin.

During the fourth quarter, adjusted gross margin increased 150 basis points, primarily due to improved net price relation; lower levels of obsolescence, driven by solid seasonal performance and targeted retail sell-through; and favorable net supply-chain efficiencies, including increased productivity.

These margin gains were partially offset by higher input costs of about 160 basis points, primarily reflecting total consolidated cost increases in raw materials and packaging.

Recall that we are lapping favorable fourth-quarter 2009 LIFO of about 100 basis points.

In 2010, the LIFO impact was not significant.

For the full year 2010, adjusted gross margin was 42.8% versus 38.9% in 2009, up 390 basis points, driven primarily by improved net price realization, supply-chain efficiencies and lower levels of obsolescence.

These margin gains were partially offset by higher input costs of approximately 90 basis points.

Fourth-quarter adjusted EBIT margin of 15.9% decreased 110 basis points versus the prior year.

This was driven primarily by advertising increases of about 85% in the quarter; higher expenses for our Insights Driven Performance initiative; greater levels of consumer promotion and market research; and increased investment in selling and distribution capabilities in key international markets.

Also recall that fourth-quarter 2009 included deal costs related to M&A of about 110 basis points.

Adjusted EBIT for the year increased 16.6% with adjusted EBIT margin up 150 basis points to 17.7% from 16.2%.

The increase was driven by higher gross margin, substantially offset by increased advertising and selling expenses.

For the year, advertising increased 62% to $391 million.

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

Meaningful sales growth occurred during the fourth quarter in many of our international markets.

Overall, including Canada, international fourth-quarter net sales increased to mid teens on a percentage basis versus the prior year and higher in emerging markets.

As we continue our disciplined rollout and distribution of Hershey's and Hershey's Kisses brands, we are gaining consumer awareness, trial and most importantly, repeat purchases.

We are committed to growing our international businesses and are making the required investments.

And we've made good progress in our focus markets in 2010 and we'll build on that momentum in 2011.

As we look to next year, we will continue investing in these strategic markets to increase our brand awareness and further develop go-to-market capabilities.

For the fourth quarter, interest expense increased, coming in at $28 million versus $22 million for the prior period.

For the year, interest expense was $96 million versus $90 million a year ago.

In December, the Company announced that it had commenced a cash tender offer to repurchase any and all of its $150 million outstanding 6.95% notes due in 2012.

Subsequently, we issued $350 million of 4 1/8 notes due in 2020.

The Company used a portion of the proceeds to redeem $58 million of notes related to the $150 million tender offer.

The remaining funds will be used for general corporate purposes, including increased levels of capital expenditures related to Project Next Century.

As a result of these transactions, both fourth-quarter and full-year interest expense was about $6 million greater than our previous estimate.

The adjusted tax rate for the fourth quarter was 32.6%, down 100 basis points versus year ago.

For the full year, the tax rate was 35.2%, down 30 basis points versus year ago, and within the range of our previous estimate.

For the full year 2011, we expect effective income tax rate to remain about 35.2%, excluding the tax impact of business realignment and impairment charges during the year.

In the fourth quarter of 2010, weighted average shares outstanding on a diluted basis were approximately 231 million versus 230 million shares in 2009, leading to adjusted EPS dilutive of $0.61 per share from operations, down 3.2% versus year ago.

For the year, shares outstanding were approximately 230 million versus approximately 229 million shares in 2009, and adjusted EPS diluted for the full year was $2.55, up 17.5%.

Now turning to the balance sheet and to cash flow, at the end of the year, net trading capital decreased versus last year resulting in a cash flow benefit of $129 million.

Accounts receivable were down $20 million and remain extremely current and of high quality.

Inventory increased by $14 million and accounts payable increased by $123 million.

We will note that approximately 25% of the 2010 working capital improvement was the result of year-end accounts payable related to the timing of capital expenditures, including a portion related to Project Next Century.

As a result, we would not expect this level of improvement in 2011.

In terms of other specific cash flow items, total Company capital additions, including software, were $78 million in Q4 and $201 million for the full year.

These amounts including Project Next Century -- capital expenditures of $15 million for Q4 and $34 million for the full year.

Hence the ongoing or normalized CapEx for the year, excluding Project Next Century, was approximately $17 million greater than our previous estimate.

This was due to capacity expansion of certain core brands that are experiencing higher sales volumes than initially expected, and greater than anticipated repairs and maintenance capital.

In 2011, we expect ongoing CapEx to be $150 million to $160 million, excluding Project Next Century.

An additional $180 million to $190 million of CapEx will be invested in Project Next Century, making our total 2011 CapEx estimate of $332 million to $350 million.

This is higher than our previous estimate for 2011, although the total CapEx for Project Next Century remains within the initial communicated range of $250 million to $300 million.

Depreciation and amortization of $51 million in the quarter -- this includes accelerated depreciation related to Project Next Century of approximately $6 million.

Adjusted operating depreciation and amortization was $45 million in the quarter.

For the full year 2010, depreciation and amortization expense was $197 million, of which accelerated depreciation and amortization was $12 million.

Therefore, adjusted operating depreciation and amortization was $185 million.

In 2011, we are forecasting total adjusted operating depreciation and amortization of about $175 million to $185 million.

Dividends paid during the quarter were $71 million, bringing the full year to $283 million.

For the fourth quarter and the full year, we repurchased approximately [$36 million and $169 million], respectively, related to shares issued in connection with stock option exercises.

We did not acquire any stock in the fourth quarter related to the current repurchase program and $100 million remains outstanding on that authorization.

Cash on hand at year end was $885 million, up $631 million versus the year ago, driven by our solid operating results, working capital gains, and the already mentioned $350 million bond issuance.

As we exit 2010, we are well-positioned to manage capital needs of the business, including higher capital expenditure requirements for Project Next Century.

As it relates to our capital structure, we exited 2010 with a net debt to adjusted EBITDA ratio of less than 1, and our long-term debt is at attractive fixed rates.

Our cash flow continues to be strong.

And as it relates to our short-term cash needs, the Company is currently well-positioned.

Now let me provide an update on Project Next Century.

I'm pleased to report that the West Hershey plant expansion is on track.

Facility construction work continues and all major equipment is on order with delivery scheduled for the third quarter of 2011.

We anticipated initial production line start-up during the fourth quarter of 2011 and continue to roll out an implementation throughout 2012.

During the fourth quarter, pretax charges related to the program were total approximately $8 million, consisting mostly of accelerated depreciation.

For 2010, pretax GAAP charges related to the program totaled approximately $54 million.

These charges reduced our 2010 reported earnings per share diluted by $0.14.

The forecast for total project pretax GAAP charges and non-recurring project implementation costs remains at $140 million to $170 million.

By 2014, we continue to expect ongoing annual savings to be approximately $60 million to $80 million.

You can please see Appendix 1 in today's press release for a detailed summary of Project Next Century by year and by line item.

Let me close by providing some context on our 2011 outlook.

As David outlined, we have initiatives in place that we believe will drive net sales growth in 2011.

Our businesses have responded to these investments and we have made -- and while we expect SM&A to be higher in 2011 driven by brand support, it will not increase at the rates seen in the last few years.

The CMG category continues to grow, and as the leader in the US confections, we take an objective and independent approach to category management and believe we have plans in place to grow our business and the category.

In addition, an emerging markets, where we have concentrated our efforts, we see net sales growth accelerating.

Currently we have visibility into 2011 input cost basket despite continued market volatility in commodities.

And while we anticipate meaningful input cost increases in 2011, productivity and cost saving initiatives are in place and we currently estimate that full-year 2011 adjusted gross margin will be about the same as last year.

We estimate that advertising will increase mid-single digits on a percentage basis versus last year, supporting new product launches and core brands in both the US and international markets.

Therefore, we expect full-year 2011 net sales and adjusted earnings per share diluted growth to be around the top of the Company's long-term 3% to 5% and 6% to 8% objectives.

We will now open it up to Q&A.

(Operator Instructions).

Jonathan Feeney, Janney.

Thank you very much.

Just two questions for you if you don't mind.

The first is, I'm a little surprised on the volume, particularly considering the magnitude and sort of excitement around the Minis and the Drops.

Why -- can you tell us sort of where we stand in sort of filling the channel with that, getting that out to customers and why maybe that wasn't more of a factor in terms of volume on the quarter?

Yes, I think if you'll recall, we had the Pieces launched in December of the year, the prior year, 2009, and so Minis and drops, while we expect them to probably be bigger and perform better, they lapped on top of that.

And so we really haven't done a lot with respect to display, yet, it really is just getting it out into the channel.

So not a lot of activity out there other than just getting it out to retail.

So you've seen it on front end.

It's in the early stages in the fourth-quarter numbers that you saw, and you will really start to see it ramp up in the first quarter here as we build the ACV out on the shelf.

So, we would expect it to build, but again, remember, it is lapping against the Pieces launch from the prior year.

That's helpful.

Thanks, David.

And could you -- I'm sorry if you said this before, but as far -- what would be a benchmark target for -- what would be a good market share for these products?

Like you'd say to your internal team, wow, it's a success if we get X market share with these?

We haven't said it, although I guess what I just said was I --

That was a trick question.

I'm sorry.

I know.

That's all right.

What I did -- what I just did say is we would expect it to be a bigger launch than something for example like last year where we launched Pieces because we think that the Reese's and the Hershey's equities are -- they just have a broader appeal than on the Pieces launch, where we were talking about York or Almond Joy, for example.

So we expect them to be bigger.

They will get better trial because the consumers know the brands.

We have dedicated advertising support on air.

So I would rather not really talk about specific.

I think the biggest thing for us on these is we view these as -- these are sustainable.

They're going to be in our portfolio forever, and -- or that's our hope, anyway.

And the other thing about them is that the way we are positioning them, we don't view them as cannibalistic of their core parent.

So, that's what we're really -- the measures for us are going to be more around cannibalization and incrementality.

We think we're going to get great trial and we will get great support on them, and we would expect that they would be bigger than the Pieces launch.

Thank you.

And just related to that, you have radically increased advertising spending here, even versus what you told us you were going to do in Q4.

It looks like there was like 20 points of variance there in terms of year-over-year growth.

Do you -- how can we measure that in terms of return?

Does that equate to like 30 basis points, 40 basis points of contingent market share gains?

Or what's a way that we could track that okay, there you go, there's a return on that sort of extra investment that Hershey is making?

Yes, I think what you saw in the -- if you think about in the fourth quarter, when you look at the overall take-away numbers that we talked about, we did accelerate category growth in the fourth quarter, the seasonal business overall; Halloween was probably a bit stronger for us; holiday, maybe a little bit less so; but overall the seasons were about where we thought they would be.

The acceleration that occurred in the fourth quarter in the category was really on the everyday business, which we think is a good sign.

The category continues to grow at the higher end of historical rates, so we think that that's one way to look at the efficacy.

The brands that we have worked in the last year, we continue to get good lift across the brand -- Kit Kat, York, Mounds and Almond Joy.

We started Hershey's Syrup and PayDay, so you should be able to begin to see and track those brands and their growth.

We track the ROI on a monthly basis.

I think we will share a little bit more about how we think about that at CAGNY with you.

And then, the other thing that's important to note is in the fourth quarter, we did quite a bit of advertising outside of the US.

And so, when you look at the US market share, we are pleased with the share gain in the fourth quarter and for the full year, but we also had some pretty strong spending in some other markets, China, notably, Canada, Mexico, just to name a few.

And we are happy with the business results there as well.

So I don't think you can look at that increase as specifically only a US phenomenon.

Great.

Thanks very much.

David Palmer, UBS.

Thanks.

Hi, guys.

Two questions.

On the Minis and Drops, as you lap the Pieces from last year with those platforms, is there anything you could tell us about the impact to price per volume or mix as you think about sort of the weighted average impact to channel and package type that we should be thinking about as we model the top line this year?

Yes, we actually had -- we saw reasonably good mix in 2010.

If you think about where the channel growth came in 2010, we did particularly well in convenience.

And when you talk about Drops and -- Hershey's Drops and Reese's Minis, they will be in an instant consumable king-size format on the front end.

And so, that should help us.

And on a price-per-pound basis in the aisle on a standup bag format, on a price per pound, it will help our mix as well.

So, we think the channel mix helped us quite a bit in 2010, we would expect that to continue in 2011 as well.

And when we look at these new items, we're looking at trying to improve the portfolio overall with the launches.

And then just one small question.

I know (technical difficulty) if you're limited and what you can tell us with regard to price.

And there seems to be a very good reason to believe that you could take price this year and the category could take price.

There's good momentum.

There's obviously a good bit of inflation out there.

Are there any things that you are watching out for that sort of tie your hands a little bit or make you a little bit more hesitant to raise price?

Maybe you are reaching certain price barriers and price points that we can't really see, or you're maybe concerned about the fragile environment of the consumer in ways that we don't anticipate.

Are there any things that would limit that ability?

Thanks.

Let me go back to the first thing you said, which is, we are very limited on what we can say about price.

And you are right, we just don't like to comment on it at all.

We do pride ourselves on the understanding of the consumer and the category.

We have built pretty sophisticated models, really starting with, in 2008, when we made a particularly big move in prices at retail and then we also saw the retail promoted price points go up, so we really modeled that carefully.

We are concerned about, obviously, entry-level price points, our opening price points.

We are blessed with a category that, in today's environment, has very good -- is very well positioned with respect to value perception, particularly on instant consumables.

But you know we do look at the consumer and the consumer sentiment is fragile.

And we look at the overall inflationary aspects that could hit the consumer.

And those are all things that we measure as we think about our modeling.

And that's I think where I'd like to leave it.

Okay.

Thank you.

Eric Katzman, Deutsche Bank.

Good morning, everybody.

A couple of -- well one detailed question I guess to Bert.

When I look at the different charts regarding Project Next Century, it actually -- granted you have a range, but it looked like the total CapEx cost was up maybe 5% to 10%, and yet the projected savings hadn't changed.

Am I just kind of doing the math wrong?

But it just seemed in particular that 2011 is up enough versus your previous forecasts that the overall is actually -- the actual cost is up, and I'm wondering what the reason for that is.

Yes, I think if you went back and looked at the last couple of press releases, and look at that same appendix, you would get a better sense of the changes.

What I would say is that in 2010, we had lower charges and lower CapEx compared to the ranges that we put out; we have not had any changes on the savings front.

If you look at 2011, charges are a little higher, and that reflects some lower charges in 2010.

And CapEx is a bit higher, which again, reflects some lower CapEx in 2010.

The other things that I would say, as I mentioned, the payables position at the end of the year had a component of CapEx orders or commitments not yet paid, and part of that was Project Next Century.

So overall, we are still within the ranges that we established at the beginning of the program, but there has been some shifting from 2010 to 2011.

Okay.

Thank you for that.

And then, maybe to follow up on Dave Palmer's question to Dave, the elasticity in the category -- I mean I think most investors and maybe even the companies in the category were surprised the last time pricing was taken and how much elasticity hit.

We just put out something with using IRI data that looked at a pretty decent increase in elasticity for chocolate, but I kind of -- to a certain extent, I've got to take that with a grain of salt because it's only measuring a certain part of the category, and you have much better visibility.

Do you think elasticity has increased for chocolate?

I think David -- I mean Eric, it's interesting.

I think David asked the same kind of question around pricing.

I think the challenges that you run -- we're going to run a micro model for the category, but it's in what context on a macro basis.

So, I think it's not as simple as just looking at our own category, which we obviously do, but you also have to look at the overall consumer, the consumer income, consumer inflation, the size of the basket.

And so I think there's an interaction and an interplay that you have to -- you also have to consider as you think about those things.

So, and you are right; we have much more information than you do with some channels.

We've got more depth in other data than you certainly are looking at.

But it is a twofold analysis.

One is a category analysis and it's an everyday and a promoted.

And then there's a macro analysis in terms of how our category is fitting in with the other categories across the universe and the consumer perception.

So, I think that that -- we were pleased with how quickly the category bounced back out of the price increase in 2008 and 2009.

We have grown -- our volume has grown up nicely in 2010, and we are very pleased about that.

We have some good things in 2011 ahead of us with respect to the longer Easter season which will help us and some good innovation.

So we feel pretty good about volume and where we sit right now with respect to the category.

And then just the last detailed question for Bert -- thank you for that, David.

The -- I think you said in the fourth quarter, the input pressure including raw materials and packaging was up 160 basis points.

And in your comments regarding 2011, you said it would be up meaningfully.

Can you give a little more idea as to what that means?

Are we talking 3 to 300 basis points of pressure that you are offsetting?

Yes, I'm not going to give you a specific answer, but I think you understood it the right way.

Certainly, the fourth-quarter input basket impact on a basis point was higher than the total year.

So you can -- you see the acceleration.

What we are saying about 2011 is that we were -- we will be able to maintain our margins where they are today, and that's a combination of some volume growth that we are anticipating, as well as productivity programs that we have in place.

But clearly, when we compare 2011 to 2010 from our perspective and what we're seeing in the marketplace, is that cost, the input basket or cost increases, we're categorizing them as meaningful in terms of the order of magnitude versus what would have happened in 2010.

Okay, thanks.

I'll pass it on.

David Driscoll, Citigroup.

Great, thanks a lot.

Good morning, everyone.

Congratulations on another good year.

Dave, you talked about the category growth rate for 2011 being somewhere in that 3% to 4% range.

Would you discuss what you anticipate from volume growth for the category in 2011?

What's your anticipation here?

Yes, I don't want to get into the specifics of vol/mix price, David.

I don't think that I would look at that.

We do think that the category will continue to be in that 3% to 4% historical range.

It has done very well over the past decade, and that's kind of how it measures.

As I said, I think you've seen some reasonably meaningful innovation from all of the major players in the category.

You've seen some pretty good advertising spend behind that.

We think that that's a continued driver.

We think also, as you look at this, the calendar for 2011 was a longer Easter.

What that means is the category gets an awful lot more display for a longer period of time.

And those are going to be drivers of the category with respect to underlying volume.

And, the channel mix within the category, consumers continue to look for good entry-level price points, which is tending to drive the instant consumable part of the business.

You see it in some of the convenience store numbers and front-end numbers, and that's a good underlying mix component for the category.

So those are some of the drivers that we're looking at.

Interestingly, in 2010, when you look across the category, when you look at chocolate and non-chocolate and mint and gum, gum actually was the lowest growth component of the category, and on a price per pound basis, it's obviously one of the more attractive ones.

So you also have to put that into your thinking as you go through the mix calculation.

I wanted to ask you just some specific questions on four of your brands.

Kisses is one that we've talked about over the years, and really since Hershey has seen its real resurgence here in the last couple of years, the one brand that still has been under a lot of pressure has been Kisses.

I think the declines are moderating, but can you talk about where that franchise sits, and what your outlook is for the brand in 2011 and beyond?

Yes, with respect to Kisses, I think what's interesting about it is it is the brand that we have that has the least instant consumable front-end and/or convenience presence because of the nature of the brand.

So I think what you would say is as we see that mix and channel shift and the strong presence that we've gotten in convenience stores, that brand has not participated as much in that.

We are seeing very good growth in Kisses on a global basis.

We will have -- I think we'll have a little bit more for you at CAGNY in terms of some of our plans going forward on Kisses.

But you are right, David, it's been -- as a brand -- because it carries a lot of weight in our portfolio from a seasonal basis and the seasonal business has grown, but not nearly as much as the overall business in that it doesn't have a front-end presence.

It's one where I think we've been -- we've seen a little less growth there.

And it also, frankly, had the most portfolio cleanup to do with respect to limited editions and some of the flavor extensions that we have now gotten out of the market.

Is the declines though -- really what I'm trying to get at here -- are the declines pretty much done and we would see this thing not being a drag on net sales?

I think as you look at -- if you look at the Kisses franchise, in the four- and 12-week period, it was roughly flat, and I think that that was during a pretty heavy seasonal period when you think about the fourth quarter.

So it is flattening out.

We've gotten back to the core items that we think make the most sense.

Final question.

Bert, can you just talk a little bit about the disposition of cash or really the structure of the balance sheet?

As you mentioned, you are below 1 times debt to EBITDA.

That's I think one of the lowest rates that we've seen on Hershey in a long time.

Can you discuss here what the plan is?

You've got a lot of cash on the balance sheet.

I know you said, what, $350 million for CapEx next year.

You still seem to have a lot of firepower on this balance sheet, so I think a lot of people are really interested in this.

Yes, in the fourth quarter, and I mentioned that we were in the market with a bond issuance, and we took the position that market rates were very attractive, and in some ways historically low and on a rebound, and so that made good sense to us.

We also, as you mentioned, anticipate some higher CapEx, certainly in 2011, a little bit in 2012 for Project Next Century.

Clearly, we are in a strong position from a cash perspective.

We just increased the dividend.

We have said in the past that M&A, particularly on a bolt-on basis, is interesting for us and something that we are spending more time on.

And then, the question that we get frequently around buybacks is something that is an active discussion with our Board.

So those are the things that we think about in terms of cash, in terms of how we deploy them.

We understand our responsibility to return cash to shareholders, and we appreciate the patience while we develop those strategic options.

Really appreciate the answers, guys.

Thanks a lot.

Good job in '10.

Thank you.

Robert Moskow, Credit Suisse.

I was hoping you could help me model first quarter a little bit.

You say that it's going to be a little stronger because of the timing of the seasonality, but I'm looking at that 14% growth a year ago where you just blew the covers, blew the doors off.

So should we expect a down quarter in terms of sales in first quarter?

No, don't expect a down quarter in terms of sales.

Generally, we don't like to talk about quarters, but let me take that one right away.

No, we would not expect a down quarter.

The category growth rate coming out of the fourth quarter was at the higher end of the 3% to 4% historical rate.

We would expect, obviously, some good investment that's coming, and the category, retail take-away-wise, to be pretty strong.

We've got a longer Easter season by roughly certainly two to three weeks, which means we will have, as the category continues to go forward.

And because Easter is a very strong season for us, we would expect to have more shipments and activity.

And we had some -- we actually had some timing of shipments out of the fourth quarter related to Valentine's and Easter as we continue to refine logistics requirements from some of our customers.

They're taking that inventory in different ways to get it to the shelf, and therefore, we've shipped some of that later.

That would be something that would be in the plan.

And then we also will have Drops -- Hershey's Drops and Reese's Minis which will fill the pipeline and get to shelf in the first quarter.

So we had some -- we had really a good top line first quarter last year.

But there is -- as I said, we have some things that we feel pretty good about in the first quarter this year.

Okay, thanks for taking that.

And then, just to follow up on emerging markets and also we've been hearing about more distribution even in the UK.

Can you help me -- can you help explain a little bit about how you are kind of piggybacking on some retailers and maybe some developed markets in Western Europe, and how substantial is it?

It didn't sound that big.

And then in China, how fast can you ramp up and what kind of distribution goals do you have for 2011?

Are we going from 10% to 30% or something?

You know, I think what I will tell you, Rob, is when we get to CAGNY, we will have a bit more time to give you a little bit more specificity around some of those global markets.

Let me just draw a distinction in the three buckets if you will to think about it.

One of them is, opportunistically, with some of the retailer partners that we have out there, you've seen something, that Wal-Mart initiative called the Global Brand Initiative.

So we're using the Wal-Mart infrastructure in some of their stores in certain countries like Japan or the UK to get our US -- our well-known US brands into those markets.

And, that, obviously, it's in its very early stages, but we are very pleased about being able to participate with them on that.

That's kind of a very opportunistic way to get our product to market without building infrastructure in some markets where we normally wouldn't be.

That would be one.

We have some other markets where we see market opportunity.

Think about Japan, Korea, some markets in the Middle East, where we've been for a number of years, where we are using a distributor partner; and we actually make decent margin in some of those markets because, again, we're not building out a lot of infrastructure.

We're using a distributor's infrastructure.

And in some of those markets, we actually do have some brand investment.

And then there's some other markets where we clearly think that our brands can do very well, and we're building infrastructure.

Mexico, India, China, for example, are some of those markets where we are building our own sales and distribution capabilities; have been there for a number of years; are investing in our brands.

And we think that those markets have significant opportunity.

So those are the three ways to think about it.

We are certainly going to take advantage of any opportunistic way to get our brands out there, but again, with the appropriate balance of how much infrastructure we put behind it.

Thank you, Dave.

And I guess I would ask at CAGNY if you could give us a little bit more color on exactly how quickly you can build distribution.

What are the goals in India, Mexico, and China -- would be helpful.

We will certainly give you that view.

Chinese New Year is just closing the season in China.

We're pleased with the results we have had.

We expanded some cities this year.

We had some very unique product offerings that we are very pleased with our performance in certain of our lead market cities, and we will share some of that detail with you.

Great.

Thank you very much.

Ken Zaslow, BMO Capital Markets.

Can you just give us -- I know you don't want to tell us exactly how you're going to use your cash, but what is the timing from which you will actually outline your initiatives with the cash just because it is starting to build up.

Even if you take out the $350 million, you are talking probably a cash flow this year north of $700 million.

So I'm just trying to figure out when will you have a strategy willing to release to the investor community?

Ken, I would say that we have strategy.

It's not that we don't have a strategy.

It's a matter of how you refine that strategy.

Certain parts of it, M&A as an example is more opportunistic and it's hard to define timing on that.

Other uses of cash, obviously we can be more definitive about.

So I continue to think that we've been conscientious in terms of returning value to shareholders over the years, and it's an active Board discussion.

So I can't give you some very specific dates, but I also don't want you to think that we're going from no strategy; it's a strategy.

We certainly have one in place and it's a matter of when we trigger those.

Okay.

And again, I guess what I was trying to figure out is if there's a point in time that you don't see an opportunity maybe for consolidation, is there a timeline that you will think more about either repurchasing stock or -- I'm just trying to figure out -- it is a lot of cash.

That's why I just wanted to see if there was any more concrete timing to seeing how you see the opportunities.

And I know that you can't go into the acquisitions, but it does seem like if there was something to change with the acquisition front, would you redeploy -- giving it back to shareholders?

That's, I guess, what I was trying to get at.

Yes, I guess to really answer that question, our priorities haven't changed.

I've already gone over that.

And I would agree.

There's a level of cash that wouldn't make sense on the balance sheet.

Clearly that's a tipping point, Ken, to think about that.

I think there's a tipping point.

And the other thing is that in this interest-rate environment, which is historically low, clearly, you want your capital structure to reflect some of that low interest rate environment to the extent that you need it to, which is one of the reasons we did what we did in December with respect to issuing the bonds.

But there is a tipping point at which obviously you make some decisions.

And it's a strategic dialogue that we have within the company on a daily basis in terms of what to do with that cash; it's an issue.

You may call it a problem, but it's a high-class one to have is just what to do with it.

And we're -- you just have to believe that we will be very disciplined about it and we've been very shareholder friendly in the past, so we will continue to do that.

My next question is, what are the key eating occasions that continue to be white space for Hershey?

I think internationally in emerging markets as those economies develop, they continue to be -- there's white space in a number of markets around the world.

In the US market, there are still a number of places to go.

I think what you saw us, for example, Hershey's Syrup as an example is an eating occasion or a usage occasion where chocolate plays, one where we want to remind the consumer about that.

As we look at the consumer demand landscape for confectionery, there is a lot of white space on that with certain consumers and certain brands in terms of usage occasions.

I think food service outlets is another place where, on a branded basis, there remains a lot of opportunity.

I think there are still places to go with quick-serve restaurants, for example; cafeteria feeding; there's a number of places for us to be able to go.

So, we continue to see a lot of opportunity in the US, but really, in the emerging markets especially as these categories continue to grow, that's really where there's a lot of white space.

Great.

I appreciate it.

Thanks a lot.

Andrew Lazar, Barclays Capital.

First off, is, you said in your prepared remarks that you are expecting some continued share gains next year, and being at the high end of 3% to 5% on the top line versus category of 3% to 4% certainly suggests that.

And I guess I know you've got a lot going on around new products and some innovation that you talked about and some good merchandising.

Is it simply the level of confidence in those programs that allow you to feel good about the share gains?

Or I assume you have to take account some level of understanding of where the sort of competitive environment is as well, and so maybe it's a question around how do you see the competitive environment being different or not -- maybe versus this time a year ago, given some of the consolidation that's taken place?

And why does that give you confidence in the ability to continue to take share?

I think Andrew, what we have seen, actually, is the category -- there's been quite a bit of innovation in the category, not just from us, but from others.

That -- we view that as a good thing overall to the category because it means that these are -- not just ours, but brands across the category are good, strong brands and that means the category is going to get more attention, more display, more merchandising, space.

So there has been some good innovation across the category, which we are very pleased about.

I did mention that when you think about 3% to 4%, top line, the longer Easter season certainly helps the category and helps us because Easter is a place where we have disproportionate share, so we think that that will certainly help us.

And then international continues to add.

So if you look at 3% or 4% US category growth and we have done very well in chocolate -- within the space, chocolate has actually been the best subsegment of the category again where we have disproportionate share.

Those would be the things that I would say would give us some confidence around share.

And then the international business outside of the US, we saw another solid year of growth in 2010, and we would expect the investments that we've made to start to pay out.

And then Insights Driven Performance, as you think about what happens, our drug class of trade growth as I mentioned in my remarks was 9.4% in the fourth quarter.

That's a big turnaround for us after having a number of quarters where we struggled.

And so as we continue to work through IDP with our key customers in drug, we would expect to see some growth in that class of trade as well from a share standpoint.

So it's a number of those initiatives.

And then just good innovation.

All of those building blocks I think make us feel pretty good about 2011.

Okay, thanks for that.

And then, on IDP, and I think maybe you'll talk more about this at CAGNY as well, but how -- obviously it seems like the performance, at least, that came out of that in the drug channel certainly gives you a lot of confidence in the program.

How quickly, and maybe where next would we see that rolled out?

I mean, how quickly can you really activate that in other channels that obviously have far greater size?

Yes, we had talked about it when we started to build it out in the early part of last year and throughout 2010, we talked about piloting it with a half a dozen customers -- maybe 4 to 6 customers.

We've done that.

We're learning a lot from that.

And then, we've actually done a lot of the fundamental research, consumer research, segmentation work, shopper research, which is a really a new area in terms of the amount of analytical capability that we've built there.

We did a lot of that work in 2010.

You saw it in our SM&A expenses, and you start to leverage that as you build out.

If you think about the consumer demand landscape that we have been using the last two or three years, you build a similar one for shoppers and shopper trip missions, and you marry the shopper trip mission for the retailer to our consumer demand landscape.

And J.P.

Bilbrey will talk about this at CAGNY, as you are right, will share that.

In 2011, we think you will see it at some of our more major retail partners where we pilot it.

You will start to see some successes.

And then when you get really into 2012, it becomes a much larger part across the entire portfolio.

Okay thanks.

And just one last quick one.

Just in terms of the pricing that you had in the quarter, I think it was 1.6%, was that price and mix or is that solely price?

Or what was the combination of the two?

There is a little bit of -- as we said, there was a little bit of pricing in list kind of pricing in Mexico and in Canada.

And then in the US, between the gross and the net, it was really the reduction of unsalables and markdowns.

As we continue to do a good job with inventory and our seasonal business becomes much more efficient and effective, you see a reduction in unsalables and markdowns, which shows up as price realization because it comes between gross and net.

Great.

Thanks very much.

Terry Bivens, JPMorgan.

Dave, just to follow on Andrew's question a little bit more specifically, what we are hearing out of the Mar's Wrigley combination is perhaps there's not going to be that level of integration.

There were fears I guess initially that maybe these guys would come at you especially hard at the checkout counters.

So I guess the question would be, as, obviously, Mars has engaged in some nice innovation here near the end of the year, but are you seeing anything competitively beyond what you might normally anticipate in the US market?

I think what I said was there was quite a bit of innovation, particularly in chocolate.

And so we've seen quite a bit of innovation in chocolate.

That's, as I said, the gum segment of the category, subsegment of the category, for the 52 weeks ending last -- ending January 1, so if you think about it, calendar 2010, gum category growth was less than 1%.

And I think that's the gum segment of the category cycling innovation that had been out there prior.

Gum is -- we're a distant number three in gum, so, I think that that's -- but that's a part of the category that has not grown.

And clearly there's been some M&A activity between Mars, Wrigley, and Kraft Cadbury that's happened over the last couple of years.

Chocolate continues to grow nicely.

And then I think overall, as I said, I think the category continues to grow towards the upper end of its historical growth rates.

And it seems to be pretty multichanneled, which is historically what we would expect.

Okay.

I know the market share battle over here never really ends, but I guess what I'm wondering is, it just seems like maybe the strategic tone, given the fact that you do have ample cash, the balance sheet is in great shape.

It sounds as though you might be kind of strategically signaling that hey, we need to get a lot more serious about growing overseas.

Is that kind of one of the themes we should expect to hear if we ever get out of this winter and get down there?

Yes, I hope winter at some point in time does end for us.

It's not been all that much fun here in the Northeast.

But that aside, Terry, we have really focused, starting in June of 2008 when we talked about our long-term strategy, we talked about international growth as being additive to our strength in the US.

I think we've certainly put our money where our mouth is with respect to organic growth over the last couple of years.

We have built out distribution.

We have increased our investment in brand building.

We've done a number of things in traditional trade.

We really recently, if you think about what we did structurally to our organization at the end of last year which is effective January 1, we are much more focused on the regions.

We have put -- we have divided ourselves up.

We have an Americas region, an Asia region, and the US as a region.

And those three regions will get more resources directly in market, particularly Asia and the Americas.

And we have created two strategic business units, and one for sugar confectionery and one for chocolate, because as we see growth around the world and the way the confectionery category has developed around the world, sugar confectionery traditional trade approaches are much more important in some of the markets around the world.

So we've structured ourselves around that.

We've made investment around it.

And I think you -- what's been good for us is we've performed very well the last few years.

And as you look at our 2011 preliminary look here, we are able to organically invest in that business and still continue to put up pretty good numbers.

So we feel good about that, and then as Bert Alfonso has talked, the hope is opportunistically that we can then do something inorganic with our balance sheet and cash flow to also accelerate some of that growth.

So it's been a focus for us, and I think we've been very fortunate over the last couple of years to really build that out and invest in it.

Okay.

And just one last quick thing, can you just briefly update us, where do you stand over in Asia in terms of your agreements with Lotte?

Yes, I don't want to give you a whole lot of specifics, but you will remember they are our manufacturing partner.

We jointly own a facility just outside of Shanghai, which is the chocolate manufacturing facility.

And so we share that facility for the market in China, and we are also exporting from China to other parts of Asia from that facility.

They are also our distribution partner, our distributor in Korea and our distributor for certain products in Japan, as well where they have good market strength.

Okay, very good.

Thanks very much.

Vincent Andrews, Morgan Stanley.

Thanks and good morning, everyone.

And I just have two questions.

The first is on restructuring.

You guys obviously had another good year.

We're into Project Next Century following Global Supply Chain Transformation.

And I know that the amount of charges that we're to add back in 2011 is lower than what we've done for the last three years, I guess even the last four years.

But I'm just wondering, at what point do you think -- is this the last of the big restructuring programs, or are we going to be adding back $0.10 plus in perpetuity?

Or at what point do you think if you have those types of charges, you'll just actually start absorbing them and using the payback from the earlier efforts to reinvest in the business like some of the -- your other peers do in the group?

Well I would say that within the Global Supply Chain Transformation, we closed six manufacturing facilities and built a brand-new one.

Project Next Century is -- really deals with the 100-year-old factory that we have in Hershey that just, frankly, can't be nearly as efficient just given the structural limitations of the building.

And so, we will have dramatically changed our footprint over the last three years.

We've operated in the new footprint this year.

We talked a lot about the savings that have come -- the savings in freight, the savings in procurement that we have worked through productivity-wise.

In the face of meaningful cost increases from our commodity basket, we've been able to generate productivity in the new footprint.

So I think we've done -- if you look at the margin expansion over the last few years, our gross margins have grown nicely.

That's a reflection of really looking at our entire infrastructure and supply chain and redoing it.

And that will continue through the next few years as we implement Project Next Century.

And then we have an ongoing focus on continuous improvement which is really bearing fruit for us as well.

So I feel very good about what we've done with our margin structure and our infrastructure.

And importantly, what that has allowed us to do is invest in a significant way in advertising, in infrastructure, in Insights Driven Performance, and you see that in our top-line growth.

The category growth has been good.

We've been driving that.

We've been gaining some share.

And overall, I think it's been a virtuous circle for us in terms of taking cost out of the system and putting it back in the brands.

No, I wouldn't disagree with that.

My question was just at what point are you going to use those savings to get the next level of savings?

I think we already are.

If you think about the ability for us to work through the new supply-chain footprint and get the kind of procurement and logistics and freight savings that we've gotten this past year, we realized that $185-plus million from the first Global Supply Chain Transformation.

There's another $60 million to $80 million coming.

We've invested that in the business.

We talked about a differential $80 million to $100 million of productivity above and beyond normal inflationary continuous improvement that we are getting from 2010 and 2011.

So I think we are doing that.

We are gaining those and investing them back in the business, and it is showing up in our results.

Our advertising spending has nearly tripled, if you will, since 2006.

And so, you couldn't do that without investing the savings that we got back into the business.

No, I understand.

My point is just if we're going to keep adding back charges into perpetuity, at some point they become recurring, not recurring charges.

So I just wanted to know when those were -- if they were ultimately going to stop.

Well, I don't know that I would ever say that you're going to stop -- you are going to stop looking at your manufacturing footprint.

But as I said, we closed six facilities.

We're in the process of closing another 100-year-old one.

We're kind of running out of 100-year-old facilities.

And I think you get to a place where you feel good about the footprint and then you optimize within that footprint.

And that's where we started coming in 2010, and that's where we will go as we go forward here in 2011 and 2012.

I think if part of your question is around reporting and pro forma, clearly, any restructurings that we do in the future would have to be of magnitude to make it sensible to report separately versus GAAP.

And so it would be dependent on size of restructuring.

Okay, thanks; that was my question.

And just finally, on -- the question on the convenience channel, oil is pushing between $90 and $100 which ultimately is going to have implications for gas prices.

As we go through the year and assuming gas prices come up, do you have any thoughts on how that could affect demand and convenience for your products?

Yes, we've seen the volatility in oil and, therefore, gas prices over the last several years, if you go back over the last three or four years for sure.

Trips are flat to slightly up in the fourth quarter of 2010.

So, it's something that we continue to monitor.

We've made some pretty I think strong investments in convenience store coverage over the last two or three years to ensure that we are in the right places with respect to convenience.

But it's obviously something that we constantly monitor.

And right now, it looks like trips are holding.

But again, who knows where gas prices go, and it is something that the industry in total watches.

Okay.

Thanks very much.

I really appreciate it.

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

I wanted to ask about the premium segment of the chocolate market.

We've been hearing a lot about the concept of the bifurcated consumer and how (technical difficulty) people feeling okay are trading back out to things like restaurants and we're seeing that premium segment of the market coming back.

Are you seeing that in the chocolate segment yet?

And, if so, is that something that you're going to go after aggressively?

We did see a little bit of a bump back up in the fourth quarter for the first time with respect to -- I guess I would call it premium.

I would call it gifting more.

It manifested itself in the-fourth-quarter holiday programs as I think a little bit more gifting purchases than we had seen in the past couple of years.

So for the year, premium grew a little bit after a couple years of just decline.

And it was largely gifting in the fourth quarter.

Our premium efforts and the work that we've -- we've done a lot of work on premium and gifting.

We just chose in 2010 to launch that in China because we think that that was a much more meaningful initiative for us to launch it with respect to how the Chinese consumer shops and how the category works in China.

So we're very pleased about our premium and gifting efforts that we launched in China in 2010 and are selling through here in Chinese New Year in 2011.

A lot of those things will be applicable into -- think about duty-free and other of our international markets.

What we continue to see in the US market is we do see a bifurcation.

The large, vast majority -- 90% of the category is still kind of mainstream trade-up.

That's growing nicely, and there is a huge focus within that on value and opening price points.

We recently created a cross functional team, headed by a general manager focused on the value channels, if you will.

So we're talking about reverse engineering our product line to make sure we continue to hit those entry-level price points.

Premium is coming back a little bit in confectionary.

It's just not that large a part, and so when we think about the launch windows in the US, we would much rather spend our time and initiative of our sales force right now on the launch windows around mainstream chocolate like Hershey's Drops and Reese's Mini Minis.

Great.

Thank you very much.

I will pass it on.

Eric Serotta, Wells Fargo.

Most of my questions have been asked and answered at this point.

Just a quick question in terms of continuity levels of advertising.

Based on your guidance, you're slowing the rate of ad spending from the torrid rate that you had in 2010.

It looks like it will be increasing at about the rate of sales growth, more or less.

I'm just wondering, as you look out over the next few years, do you see an opportunity for another sort of a significant leg up in your ad spending ratios?

Or are you pretty comfortable with where you are now after, as you said, tripling ad spending from -- it was just a few years ago?

I think where we find ourselves now is if you look across our portfolio, we activated PayDay and Hershey's Syrup in the fourth quarter.

So if you look across our US portfolio, Eric, we have a good breadth of brands that we are now supporting at sustaining levels.

And, from a share of voice standpoint, we think we have reached a good place.

So now the focus really becomes much more on how to make sure we get the right ROI.

Are we in the right vehicles?

Are we getting the right level of GRPs?

Those are the things -- characterized at close enough, more or less in line with the revenue growth this year but much more focused on ROI and brand building within the US.

We will continue to invest in some of the emerging markets at reasonably strong rates, but again off a much smaller base.

So we think that we've gotten ourselves to a place now where the right brands are activated across the portfolio, and we learned a lot about how to position them.

And now innovation becomes a much bigger driver for us in the portfolio in -- certainly it did in 2010 and will be in 2011.

We were looking at much more of advertising as the biggest driver of volume and growth in late 2008 and 2009, more balanced in 2010 and certainly here in 2011.

So there are a lot of other levers available to us, and advertising will continue to be important, but we do think we've reached an equilibrium point, if you will.

Okay.

That's helpful.

And then, last year at CAGNY you talked a bit about the opportunity that if you just sort of grow in line with your end markets in your emerging markets or in your international business ex Canada, that you could essentially double the business over the next five years.

Having now being a year into that -- and maybe you're going to tell me that you'll get into this in another couple weeks -- are you more or less confident in your ability to achieve those targets for the emerging markets business?

We will talk a little bit more about it in a couple weeks, but we are certainly as confident if not more confident than we were.

We -- the growth rates for that non-US business were very good in 2010.

We continue to learn a lot about how to activate the brands and how to build out distribution.

So I was very pleased with our performance in 2010 in all of our markets.

We had a couple of places, obviously, where you'd like to do better.

But I think across the board, in aggregate, I was very pleased with that performance and we remain confident.

Okay.

Well we're looking forward to hearing the details at CAGNY.

Thanks.

Bryan Spillane, Bank of America.

Good morning and thanks for taking the question.

Just trying to bridge the gross and operating profit margin from 2010 to 2011.

And I think -- if I'm right, in 2010, the global supply chain savings for the year ended up being about $25 million.

Is that correct?

Yes, it was in that range.

And if you recall, it was pretty much first quarter.

Okay.

And then beyond that, the additional productivity that would have flowed through the gross margin line, the majority of that was related to the benefits you got from reduced obsolescence?

I'm trying to understand if there was anything more that was there.

Sourcing, freight, obsolescence.

It was really, as we talked about, operating in the new footprint when you think about taking a pause after having closed a number of facilities and building a brand-new one and looking at your footprint.

We really looked at everything from procurement to logistics.

And obsolescence was a large part of that because our portfolio continues to get better.

And we really did generate a lot of that productivity in 2010 that we talked about at CAGNY, and it showed up in COGS, but a little bit of it showed up in SG&A.

Okay.

And more of that was weighted to the back half of the year?

Yes.

Okay.

So then, if I think about kind of how that stretches into 2011, there shouldn't be any more incremental global supply chain savings --

No, no, there won't be, Bryan.

That program is in place.

We achieved the (technical difficulty) roughly [$180] million.

Not a lot of savings from Next Century in 2011.

Those really are 2012 and 2013 for the most part.

A little bit spills into 2014.

So, that is the right way to think about it.

Okay.

So if it's -- I think it's $10 million to $15 million of Next Century savings, and then, another $30 million or so of the sort of productivity savings from being in the new footprint because some of it should wrap around -- I'm just trying to get a sense that the total level of productivity flowing through cost of goods sold is going to be smaller in 2011 than it will be in 2010?

Yes, I think it will be somewhat smaller.

Again, the difference between the supply chain and the Next Century, as you mentioned, is roughly $10 million.

Dave mentioned earlier we have, year in and year out, continuous improvement within the four walls of the factory, where we try to at least cover what we think of as normal inflation.

And then, the program that we've talked about more recently with that $80 million to $100 million, where we're going after just optimizing the benefits that we got from Next Century in terms of line speeds.

Obviously the -- during or rather global (inaudible) obviously the real emphasis there was moving the lines, getting up and ready, customer-service.

We're able to optimize some of those things including logistics and purchasing.

And so those are the three components and they're roughly the same three components in 2011, but with the Next Century being smaller than supply train transformation.

Okay.

And then if I remembered it correctly, you were expecting to have some more savings flow through below the gross profit line in 2011 relative than to what you had in 2010.

Is that still right?

Yes, that's correct.

We did mention that before.

That was the -- that's the portion of the $80 million to $100 million that still has yet to come in 2011.

There will be more of that that is SG&A related than gross margin impact at the cost of goods, and it's really just a sequence of the programs that we're going after.

Okay.

So if you think about the net of those two items, right, what incremental benefits you will get flowing through cost of goods sold plus what you get on capture and SG&A, is that -- in just thinking about those savings the way to offset inflation, you have a little bit more in aggregate in 2011 than 2010 or is it about the same?

I guess -- I think what we're saying is that gross margin -- we've got meaningful cost inflation in the inputs.

We have normal productivity that we would always -- we always count on our supply-chain people.

They wake up every morning knowing at a minimum they've got to offset inflation with savings.

We've done that, plus the other continuous improvement initiatives.

So we think about gross margins around about where we would have been last year.

Advertising spending, we talked about mid-single digits, so roughly plus or minus in line with sales.

And then we've spent meaningfully in the rest of our SM&A over the last few years, and I think in my comments what I said was we would expect to have that be at a lesser rate than the sales growth this year because we are now -- we've actually built a lot of the infrastructure.

Now we live in it this year in our go-to-market capabilities and start to get some leverage from it.

So I think the drivers are a little different.

Last year you saw gross margin expansion pretty strongly.

Now I think what you will see this year is you will see much more of the margin expansion story somewhere between gross and down through EBIT margin.

Got it.

Okay.

That's helpful.

Thank you, guys.

Chris Growe, Stifel Nicolaus.

I just had two quick ones for you.

Can you give the international sales growth rate for 2010?

If you gave that, I'm sorry I missed it.

I think Bert gave you some pieces of it.

We don't really give the business that way.

I think what -- when we do come to CAGNY, I think we will give you a little bit more flavor for some of the individual markets and what we saw.

But we had talked historically about that kind of 14% compound annual growth rate on an organic basis over the last few years.

And it's in that range again.

It's in that range again in -- and it was in 2010.

Okay, so it grew as a percentage of revenue.

I assumed it did.

I just wanted -- and I heard the numbers that Bert gave, so just to be clear.

And then the only other question --

(technical difficulty) Canada.

Yes.

You gave Canada at 15% if I recall or mid double -- if I recall between -- mid teens, I'm sorry.

And then I think you said emerging markets up stronger than that.

Yes, because it's part of that 15% and doesn't grow as quickly as -- and grows much faster than Canada.

Yes, okay.

And then the only other question I had was in relation to Drops, and as we're -- just in particular is one interesting new product for this year, would Pieces be a good barometer or bogey for how this product -- in terms of share or progressions out there, how this product should look?

Is that a good kind of analogy to use?

I think what I said earlier was that when you look at Hershey's Drops and the Reese's Mini Minis, I think the Hershey's brand, obviously, is a flagship brand for us.

And the way we think about Hershey's Drops is it's delivering what the Hershey's brand delivers to consumers, which is a pure chocolate experience.

This is not a -- this is not a panned candy-coated product.

This is the pure chocolate experience that Hershey should deliver.

We would expect that with respect to Pieces, that just given the sheer brand size and recognition, that we would expect it to do similar kind of velocities to something like Pieces and hopefully better.

Okay.

That's very helpful.

Thank you very much.

John Baumgartner, Telsey Advisory Group.

Bert, quick question, 2011 interest expense, and any guidance there at this point?

Pardon, what was the question?

2011 interest expense guidance?

Yes, I don't know if we gave specific guidance in the prepared remarks, but we would expect somewhere between $90 million and $100 million.

All right, great.

And then, Dave, thinking about the drug channel, I guess a nice acceleration over the back half of the year.

Can you talk a little bit more about some of the fundamentals going on there?

Do you attribute a lot of that acceleration towards just pure advertising?

Or was there something more on a distribution or product side that you can kind of point to?

I think we did talk about our Insights Driven Performance initiative, which is really working with a couple of those key retailers in that class of trade to really understand -- do a better job, really for us doing a better job with them of understanding shopper insights and shopper patterns and trip missions.

And so I think what you saw was us doing a better job of tailoring programming working with them in the back part of the year to accelerate some of that growth.

I think the business model that we had had a few years ago, which was largely driven around item expansion and proliferation, given the number of stores they operate and the way their logistics systems work, that was not a great model for them.

It didn't prove to drive category growth over an extended period of time.

And so I think what the Insights Driven Performance work did with them was to change the model a little bit and be more focused on delivering to their shoppers what they want, and hopefully simplifying some of the product offerings.

Great.

Thank you very much.

Judy Hong, Goldman Sachs.

Thanks.

Good morning.

Dave, you've talked about the growth of CMG category outperforming some of the other snack alternatives like salty snacks, cookies and crackers.

Can you maybe just talk about some of the drivers?

Clearly the innovation has been pretty strong in CMG.

You guys obviously have been spending a lot of money in advertising, but is there sort of an economic component to CMG outperforming other snack alternatives in an economic downturn?

Is there a change in terms of consumers' behavior or preference for chocolate versus some of the other snacks within kind of the macro snack category?

I think, Judy, what I would say, and we've talked about this probably every time we get together as a larger group, the structural advantages of the confectionery category.

We just believe it's an advantaged category.

The data would tell you, if you look at a regression of category growth, in a downturn, that confections is one of the better categories with respect to that.

I think a lot of it is because the nature of the category.

We offer instant consumable at a below $1 price point in most instances, and I think that's an attractive opening price point in this time.

We are a seasonal destination for consumers, so Easter, Valentine, Halloween, holiday, consumers might give up a lot of things, but that's not something that they're going to give up.

The category, therefore, gets a lot of merchandising.

And then they're just great brands.

And so, we just think the category structurally is advantaged.

We've always thought that.

We continue to think it.

And I think the good news is, on some level, that we've managed to back up our belief in that category advantage by performing.

But we do just think it's, on some level structural, and then we've really invested significantly in infrastructure and brand building to make sure that as we have gone through the cycle here, that the category is front of mind and top of mind with consumers.

Okay.

And then just a quick follow-up on the input cost, Bert.

You've talked about having good visibility to your cost structure this year.

Is there any component of your input cost that is actually vulnerable if the spot prices were to go up?

And how much at risk would your gross margin guidance be in the event that happens?

Yes, I won't comment so much on the at-risk factor, but certainly dairy, and I don't think I did mention it during the prepared remarks, but dairy is a component which is an important component for us.

We think we have a pretty good sense of where it's going and have included that in our planning.

But, increases beyond what we are anticipating today because there's not a ready forward market the way there would be for some of our other commodities would certainly be an impact for us.

Got it.

Thanks.

Robert Dickerson, Consumer Edge Research.

Yes, good morning.

This is a couple of easy questions, hopefully, to clarify everything -- a lot of the questions that have been asked so far.

So, it sounds like you just said that interest expense, you would expect to be somewhere around $90 million to $100 million in fiscal 2011, which, for the most part, is basically flat year over year.

So then it would -- if so, I guess it's fair to assume that excluding any buyback activity, any increase in buyback activity, that essentially operating profit should be growing around let's say at least 5% to 7%.

Is that fair?

Yes, getting back to the interest question, I think characterizing it as approximately flat is probably a reasonable way to think about it.

We did have some higher interest expense in the quarter that we talked about, and, because of the tender offer and so that doesn't repeat.

But we have slightly higher fixed debt because we borrowed the $350 million, excluding the portion that we used for the tender.

So, flattish characterization is fair.

Dave I think already commented earlier and tried to put some perspective around it that there's certainly more leverage between gross margin and operating margin than in 2011 versus gross margin expansion, which was the primary driver in 2010.

Right.

Okay, great.

Thanks.

And then also, just to -- I just wanted to get a little bit better of a sense -- obviously there have been a lot of questions asked around your leverage ratio and cash on the balance sheet, but what was the thought process in Q4 as you did the tender -- I mean for the $150 million in debt?

Obviously, you took up debt a little bit; you raised $350 million, you paid down the $150 million I believe it was, plus the $58 million.

But as we go into fiscal 2011, as that leverage ratio comes down, and interest is flat, if we just looked at basically like a run rate of 1.4 times leverage EBITDA over the past 10 years, then why -- why wouldn't you increase your debt level at the time of the offering a little bit more than you did instead of having to go back into the market just in case rates rise?

Because it would seem like -- and obviously they're at the optimal point of the capital structure, and it just seems like a lot of food companies, honestly, they have tapped the market a little bit but not that much.

And I would have thought that they would have tried to increase their debt levels if they could and take advantage of the lower interest rates.

Can you just comment on that?

Yes, I think we've tried to balance our -- first of all, I mentioned that our fixed-rate debt, which is really all the debt we have right now, is at reasonably attractive rates.

And so, it really depends, when you compare companies, what their average debt cost is.

We decided that we would tender the 2012 based on the premium we're willing to pay to tender that, and the approximately 7% interest rate on that one.

As far as how much leverage, it really is a matter of what our anticipated cash needs are versus how we plan to redeploy that cash.

So, every company is going to be slightly differently in terms of how opportunistic they're going to be in a low interest rate environment.

We think we've reached a pretty good balance.

Okay.

Fair enough.

And lastly, and hopefully this is an easy one, I may have missed it on the call, but I know in Q3 you were calling for essentially a 1% benefit from the timing of seasonal shipments.

Was that -- did you state that on the call?

We actually didn't talk specifically about it.

Roughly in the fourth quarter, seasonal shipments were kind of flat if you will in terms of -- we did have some stuff shipped out of the third quarter in the fourth quarter, but we also had things shifted when we talked about Easter and Valentine's out of fourth into first, so that overlap was kind of washed itself out.

Okay.

So then -- and then just to get some clarity, boy this might seem like a stupid question, but how -- why is the Easter period longer?

The lunar cycle I suppose.

Yes, it's the lunar calendar, the lunar cycle.

I mean it's normally like there's normally a shift or there's -- but you actually expect people because of the lunar cycle to buy more candy ahead of the actual holiday or what?

It's the calendar.

Think about that; Valentine's Day is always February 14.

That one, we get right, but Easter because of the way it's set based on the lunar calendar moves.

So Easter last year was April 12 and this year it's April 20 something.

It's two or three weeks longer, so what you wind up with is two or three weeks more of display of candy and consumers will shop Easter candy longer.

It's just (multiple speakers)

Okay, okay, okay, yes, no, I get it.

I just wanted to make sure.

All right.

Thanks a lot.

Todd Duvick, Bank of America.

Good morning.

Thanks for taking the question.

Just -- not to beat a dead horse here, but obviously you've talked a lot about the balance sheet and the flexibility you have, which is, as you stated, a high-class problem to have.

And I guess as you consider the potential share buybacks and acquisition activity, I'm wanting to know if you can tell us what governs just how aggressive you might be?

Is it your credit rating?

Are there certain balance sheet metrics you can point to, or the desire to maintain investment-grade rating?

How do you look at that?

Yes, I mean that's certainly part of the consideration set.

We are an A-rated company.

And certainly that's approximately where we think we ought to be.

I think we've mentioned in the past that for strategic reasons, we would be willing to move within that investment-grade category of ratings, and so there are certain metrics that we follow, and the rating is one of those metrics.

When we speak to the board with respect to how we redeploy our cash, we invariably get involved in those conversations in terms of how we stack up to the peers, and what the most likely uses of cash are over the strategic plan period.

So, it's exactly the way you've described it.

Okay.

All right.

That's helpful.

Thank you very much.

There are --

Thank you for joining us today on the conference call, and we will see all of you in a couple of weeks at CAGNY.

Thank you.

This concludes The Hershey Company fourth-quarter 2010 results conference call.

You may now disconnect your line.