好時 (HSY) 2011 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Hershey Company first-quarter 2011 results conference call.

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

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

(Operator Instructions)

I would now like to turn the conference over to Mr.

Pogharian.

Please go ahead, sir.

Thank you, Angie.

Good morning, ladies and gentlemen.

Welcome to those of you on the line and on the webcast to the Hershey Company's first-quarter 2011 conference call.

Dave West, President and CEO, and Bert Alfonso, Senior Vice President and CFO, will provide prepared remarks.

And then both of them, along with J.P.

Bilbrey, COO, and myself will answer any questions you may have during the Q&A session.

Let me remind everyone 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 2010 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 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 our first-quarter 2011 results excluding net pretax charges that are related to the Project Next Century program.

In the first quarter of 2011 these pretax charges were $9.7 million.

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

Lastly, there are broader peers reporting this morning and, out of respect to them, as well as to the analysts and investors who want to participate in those calls, we ask that you limit yourself to one question.

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

Thanks, Mark.

Good morning, everyone.

Hershey's first-quarter results were strong and I am pleased with our performance.

The investments we have made in our business over the last two years continue paying dividends as core brands continue to perform well in the market.

Our advertising continues to resonate with consumers and we are getting solid lift from our in-store selling, merchandising, and programming.

Our marketplace performance and strong start to the year give us confidence that we will deliver on our 2011 financial objectives.

I would like to start by spending a moment on the pricing action announced on March 30.

As you are all aware, commodities market prices have been volatile and we expect that volatility to continue in the coming months and quarters.

Prices for many of the primary and secondary commodities we use in our products have increased year-over-year and since our last conference call.

While we can hedge our future needs on most of our primary inputs, there are numerous secondary inputs where there is not a developed futures market.

Given category dynamics related to the pricing flow-through and the view of our future cost profile, a price increase was necessary to protect our margins.

This action was effective immediately on March 30.

However, during the 4-week period ending April 22, existing customers were allowed, based on historic order patterns, to order up to 8 weeks of inventory at the previous price if delivery occurs by May 20.

As expected, some of our retail customers have ordered product under this scenario.

Prior to the increase, as Q1 progressed, we saw a shift in order patterns by some customers who chose to carry slightly greater levels of inventory in the first quarter.

Given broad-based, upward inflationary pressure in many food and packaged goods categories, we suspect they were carrying additional inventory in anticipation of a potential price increase.

We estimate that about 1.5 points of net sales growth in the first quarter was attributable to volume which normally would have shipped in the second quarter.

Given the relative sizes of Q1 and Q2 that will likely result in about 1.5% less revenue in Q2 as inventories normalize.

Also recall that we do not expect seasonal net price realization until Easter 2012.

Additionally, the majority of non-seasonal merchandising will be offered at previous promoted prices through much of the third quarter of 2011.

We, therefore, expect a higher Q2 trade promotion rate which will further dampen revenue.

Consumers are starting to see higher everyday prices, primarily on instant consumables and on in-aisle, non-merchandise take-home items.

As such, we expect an initial price elasticity impact to result in lower volume over the remainder of the year and into 2012.

Therefore, we do not expect this action to materially impact our financial results this year.

While it is a bit early to measure consumer reaction and response to the pricing action, we feel that our brand support, innovation, consumer spending and investment in go-to-market capabilities will enable us to deliver on our full-year net sales objective, which remains around the top of our long-term 3% to 5% range.

Overall, the confectionery category continues to perform well as recent gains have been within the category's historical growth rate.

Investments in the category in the form of advertising and innovation are present for most major manufacturers.

Given the high household penetration and the impulsive nature of the category, as well as affordable price points, we believe retailers and consumers will continue to value the confectionery category.

As a result, we would expect the category to consistently secure key merchandising and programming space, even as price points may rise.

We are satisfied with our performance and customer relationships in all channels, measured and non-measured.

In fact, at one of our largest customers we recently secured the advisership or category captaincy for the entire front-end.

This includes not only candy, mint, and gum, but all general merchandise.

In the first quarter Hershey's net sales increased 11.1%.

Bert will provide you with additional details, but the growth was primarily driven by volume.

Core brands, on both an everyday and seasonal basis, grew in line with our expectations.

New product performance and pipeline fill was solid and contributed nearly 3 points to growth.

We also benefited from a longer Easter season.

Recall in 2011 Easter occurred on April 24 and in 2010 on April 4.

Therefore, the timing of Easter obviously has, and will, impact IRI and Nielsen data related to the March and April periods.

Preliminary analysis of Easter data indicates that we had a good season and that Hershey sell-through will be solid.

Our results by driven by Easter-specific advertising including both the Easter and Cadbury clucking bunnies as well as our sponsorship of the blockbuster Easter-themed movie Hop.

Easter timing aside, Hershey's marketplace performance was solid.

CMG -- that is candy, mint, and gum -- retail takeaway for the 12 weeks ending March 19 for our custom days database in channels that account for over 80% of our retail business.

So as a reminder, the channels here are food, drug, mass including Wal-Mart, and convenience stores.

We increased 3.7%, a very respectable growth rate despite the impact of Easter timing.

Excluding Easter seasonal activity in both the current and year-ago period -- a better, yet still imperfect, measure -- our retail takeaway was up 6.7%.

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

We gained market share, both with and without the Easter seasonal activity.

All-in, including the seasonal activity, Hersey's CMG market share and FDMxC increased 0.5 points for the 12 weeks ended March 19.

I am also pleased with the overall category performance in the first quarter.

For the 12 weeks ended March 19, FDMxC category growth, excluding seasonal activity in both the current and year-ago periods, was up 5%, greater than the historical category growth rate of 3% to 4%.

First-quarter food class trade CMG growth, again excluding seasonal activity in both the current and year-ago periods, was up 4.7%.

Hershey food class of trade retail takeaway the first quarter was up 2.5%, resulting in a market share decline in the food class of trade of 0.6 points.

Although down, our performance in food sequentially improved as we exited the quarter as we rolled out Hershey's Drop and Reese's Minis.

Also note that Hershey's Syrup performed solidly in the food class of trade in response to our new advertising.

However, the success of this brand is not included in CMG results.

In the C-store class of trade, where the Easter impacts are minimal, the CMG category was up 4.9%.

Total C-store performance for Hershey was particularly strong with takeaway up 10.2%, resulting in a share gain of 1.4 points.

These gains were driven by core brand advertising, in-store selling, merchandising and programming, including our successful promotional tie in with the NCAA March Madness basketball tournament.

The C-store class of trade also benefited from the king-size pack launch of Hershey's Drops and Reese's Minis.

In the drug class of trade, our performance sequentially improved from Q4 to Q1.

While some of it was due to easier year-over-year comps, we do feel it validates the Insights Driven Performance or IDP work that we started.

Drug class of trade CMG category growth, excluding seasonal activity in both the current and year-ago periods, was within the historical growth rate for the category.

Hershey Q1 drug class of trade retail takeaway, again excluding the seasonal activity in both periods, was up 14.3% resulting in a market share gain of 1.3 points.

As we look to the remainder of year we have many exciting products, promotions, programs, and merchandising in place across all channels, including the sponsorship for the upcoming Green Lantern movie, a Twizzlers summer landmark program where families win a trip to an American landmark of their choice, and the June launch of Hershey's Air Delight in both an instant consumable bar and Hershey's Kisses format.

We are also on track to increase full-year advertising expense for the total company mid-single digits on a percentage basis versus last year, supporting new product launches and core brands in both the US and international markets.

Advertising was up about 30% in Q1 supporting the launch of Hershey's Drops and Reese's Minis, new advertising campaigns on Hershey's Syrup and PayDay, and the longer Easter selling season.

We expect advertising to increase mid-single digits in Q2 and Q3 and then decline in Q4 as we lap the step-up investment that occurred in many markets in the last year's fourth quarter.

During 2011, in the US we will leverage our core competencies and the infrastructure investments we have made in the business over the last couple of years.

We would, therefore, 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, such as 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 in these markets.

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

I am pleased at the way the confectionery category and Hershey continued to perform.

As we look to the remainder of the year, recall that we do not expect seasonal net price realizations until Easter 2012.

Additionally, previously agreed upon merchandise price points are essentially in place on non-seasonal items well into the third quarter.

However, consumers are seeing higher everyday prices on non-merchandise items; therefore, we do expect this portion of our business to experience a volume decline over the remainder of the year.

In the coming months and quarters we will monitor consumer behavior and purchasing patterns, and we will work with our retail customers to ensure that the implementation of the price increase is supported with customer trade promotion and merchandising that continues to grow the category.

While the category has remained resilient, the health of the US consumer remains fragile.

There are many external factors that CPG manufacturers can't control that can impact consumer purchasing power, psyche, and sentiment.

While we believe pricing and volume elasticity analysis is a core competency of the Hershey company, we can't predict future events that may occur and impact our elasticity assumptions.

However, we are confident in our merchandising, programming, new products, and the quality of our advertising.

Commodity markets remained 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 that we have made over the past few years.

As a result, we expect full-year 2011 net sales growth, including the impact of foreign -- currency exchange rates 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.

Thank you, Dave, and good morning, everyone.

First-quarter business results were solid with consolidated net sales of $1.56 billion, up 11.1% versus the prior year, generating adjusted earnings per share diluted of $0.72, up 12.5%.

The earnings per share increase was driven by higher net sales, manufacturing efficiencies, and SM&A leverage, partially offset by year-over-year increases in commodity costs and advertising spending.

First-quarter sales gains were driven primarily by volume.

Several factors contributed to the volume gains, which include strong sales of core brands driven by our continued investments; successful distribution and launch of new products, including pipeline fill which contributed about 3 points of growth; a seasonal in volume from the fourth quarter of 2010 into the first quarter of 2011; a longer Easter season enabling us to build on our number one seasonal share position; and a shift in order patterns by some customers who chose to carry slightly greater levels of inventory that we estimate was about 1.5 point benefit in the quarter.

We would expect this Q1 benefit to reverse in Q2.

And finally, foreign currency exchange rates were less than 1 point benefit in the quarter.

Turning now to margins.

In the first quarter adjusted gross margin increased 20 basis points, driven by supply chain efficiencies partly related to fixed cost absorption, as volume was greater than year-ago levels, and higher levels of productivity, both normal incremental as we discussed at CAGNY.

These margin gains were partially offset by significantly higher input costs of about $33 million.

Commodity market spot prices have been volatile and we expect that volatility to continue in the coming months.

We now estimate that our year-over-year commodity cost increase will be greater than our initial forecast.

Nevertheless, as previously stated, we have visibility into our cost structure and, despite these increases, we expect 2011 adjusted gross margin to be about the same as last year.

Our adjusted gross margin improvement was the primary contributor to growth and adjusted EBIT of 13% or 30 basis points.

As we communicated last quarter, SM&A, excluding advertising, is expected to grow at a rate less than sales in 2011.

SM&A ex-advertising decreased 120 basis points versus last year in Q1.

Offsetting a portion of these gains were higher advertising of about 30%, higher employee-related costs, and higher legal and other administrative expenses.

As Dave mentioned, we estimate 2011 advertising expense will increase mid-single digits on a percentage basis versus last year.

Over the remainder of the year we expect advertising to increase mid-single digits in Q2 and Q3, and then decline in Q4 as we lap the step-up investment that occurred in late 2010.

Now let me provide an update on our international businesses.

On a reported and constant currency basis, our international net sales increased double digits on a percentage basis versus last year.

Growth was especially strong in targeted markets such as Mexico, China and Brazil.

We are very excited about our businesses outside of the US and Canada and are on pace to achieve over $1 billion in net sales in our international markets by 2015.

We continue to make planned investments and necessary investments in these growth markets and during the first quarter of this year.

Moving down the P&L.

For the quarter, interest expense increased coming in at $24.5 million versus $23.7 million last year.

In 2011 we expect interest expense to be approximately $95 million to $100 million for the full year.

The tax rate for the first quarter was 36.5%, slightly higher than last year due to the timing of certain tax events.

Excluding tax rate impacts associated with business realignment and impairment charges, we continue to expect the full-year tax rate to be about 35%.

Over the remainder of 2011 the tax rate in Q2 will be about the same as Q1 and about 34% in the second half of the year.

In the first quarter of 2011 weighted average shares outstanding on a diluted basis were 230.2 million versus approximately 229.6 million shares in 2010 leading to adjusted EPS dilution of $0.72.

Now turning to the balance sheet and cash flow.

At the end of the first quarter, net trading capital decreased versus last year's first quarter by $11 million.

Accounts receivable was up $22 million and remains extremely current.

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

Inventory increased $54 million due to finished goods increases in anticipation of customer buying resulting from the March 30 price increase, the build of inventory related to our upcoming launch of Hershey's Air Delight, and preparation for the gradual move of production into our expanded West Hershey manufacturing facility as part of Next Century.

And lastly, accounts payable increased $87 million.

In terms of other specific cash flow items, total company capital additions, including software, were $82 million in Q1.

These amounts include Project Next Century capital expenditures of $24 million.

In 2011 we expect ongoing CapEx to be within our previously communicated guidance of $150 million to $160 million, excluding Project Next Century.

Capital additions are expected to be an additional $180 million to $190 million for Project Next Century, making our total 2011 CapEx estimate $330 million to $350 million.

Note that the total CapEx for Project Next Century remains within our initially communicated range of $250 million to $300 million.

Depreciation and amortization was $51 million in the first quarter.

This includes accelerated depreciation related to Project Next Century of about $6.5 million.

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

In 2011 we are forecasting total operating depreciation and amortization of about $185 million for the full year.

Dividends paid during the quarter were $77 million.

The company repurchased $100 million of outstanding shares remaining on the $250 million repurchase authorization that was approved in December of 2006.

Additionally, we repurchased $93 million of our common shares to replace shares issued in connection with exercised stock options.

All $193 million of acquired shares were repurchased in the open market.

As noted in this morning's press release, the Board of Directors approved a new $250 million authorization to repurchase shares of common stock.

The repurchases may take place from time to time depending on market conditions.

This authorization is in addition to the Company's policy of repurchasing shares in the open market related to issues in connection with stock option exercises.

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

Cash on hand at the end of the first quarter was $752 million, down $132 million versus year-end.

As it relates to our short-term cash needs, the Company is currently well positioned to manage capital needs of the business as well as higher capital expenditure requirements due to Project Next Century.

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

Let me now provide an update on the Project Next Century program.

I am pleased to confirm that the West Hershey plant expansion remains on track.

We expect the new facility to be under roof by the end of the second quarter of 2011 with the first major equipment deliveries scheduled for third quarter of 2011.

We anticipate initial production start-up during the first quarter and continuing implementation during 2012.

During the first quarter, pretax GAAP charges related to the program totaled $10 million with the majority related to accelerated depreciation.

These charges reduced Q1 earnings per share diluted by $0.02.

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 $60 million to $80 million.

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

Now to summarize.

In 2011, our goal is to maintain our current marketplace momentum.

To do this we will continue to invest in our brands and businesses in both the US and international markets.

We will focus our efforts on advertising, which we expect will be up mid-single digits in 2011, as well as consumer insights and brand-building initiatives that should enable the category and Hershey to grow this year and into 2012.

Because of the US price increase, we expect volumes to decline over the remainder of the year.

In the upcoming months and quarters we will partner with our retail customers to ensure that the implementation of the price increase is supported with appropriate levels of trade promotion and merchandising.

Despite this decline in volume, we still expect full-year 2011 net sales, including the impact of foreign currency exchange, to be around the top of the Company's long-term 3% to 5% objective.

Commodity markets remain volatile; however, we have visibility into our cost structure in 2011.

And while we anticipate meaningfully higher input costs this year, productivity and cost savings initiatives are in place and we expect full-year adjusted gross margin to be about the same as last year.

During 2011, we will leverage our infrastructure investments made over the last few years and expect year-over-year percentage increase related to SM&A expense, excluding advertising, to be at a rate lower than sales growth.

As a result, we expect full-year 2011 earnings per share diluted growth to be around the top of the Company's long-term 6% to 8% objective.

Before we go to Q&A, and as you work your models, note there are many moving parts over the remainder of the year that we discussed this morning.

Specifically, prior to the March 30 pricing announcement we saw a shift in order patterns by some customers who chose to carry slightly higher levels of inventory in Q1.

This Q1 benefit to net sales is about 1.5 points and will negatively affect Q2.

Due to pricing elasticity beginning in Q2, we expect a higher trade promotion rate to reduce revenue.

Per our policy, existing customers can take receipt of up to 8 weeks of inventory at previous price points if delivery occurs by May 20.

Due to the aforementioned nuances, we would expect volume in Q2 to be lower than year ago pressuring adjusted gross and EBIT margins.

While commodity costs remain volatile and will be meaningfully higher in 2011 versus 2010, we expect adjusted gross margins to be about the same as last year.

Advertising, which was up 30% in Q1, will be up mid-single digits in Q2 and Q3 but lower in Q4 due to the roughly 85% higher advertising investment in the fourth quarter of 2010 versus 2009.

And finally, our Q2 tax rate will be about the same as Q1 at about 34% in the second half of the year while our full-year outlook remains at about 35%.

With that out of the way, let's open it up for Q&A.

(Operator Instructions) Eric Katzman, Deutsche Bank.

Good morning, everybody.

I guess my question has to do with the quarter's results to the extent that you had such strong top line, certainly well above what we were thinking and it sounds like it was about even what you were thinking, but there really wasn't that much leverage to the gross margin side of things or even the EBIT margin.

I guess the advertising explains the EBIT side of it.

But how do we think about the first-quarter performance and the lack of leverage to the gross margin and kind of how that affects the quarterly flow for the rest of this year?

And then -- I guess I will keep it to that one question, thanks.

Thanks, Eric.

With respect to the first-quarter revenue, net sales up about 11%, we were expecting very high single digits ourselves.

So we are only a few points, really, above where we would have expected to be.

And as I think both Bert and I said, some of that is inventory that kind of shifted into the first quarter from the second quarter.

So we are fairly much in line with what we expected to see and the growth is basically volume-oriented and it's roughly a third seasonal, a third core, and a third new items.

So pretty broad-based across the board.

We did have materially higher commodity costs in the first quarter.

That is going to be the case throughout the rest of the year, so the adjusted gross margin picture of about flat is -- plus or minus flat is consistent with what we have been saying.

So we did not expect to see a whole lot of leverage through the P&L and the advertising spending, as you noted, was higher.

I think as you go forward, as Bert just pointed out some of the nuances in modeling, you will see advertising spending more moderate in the second and third quarters, up mid-single digits, and then a decline in the fourth.

We would expect to see that cost and gross margin picture kind of maintain.

So I think what you see here in the first quarter -- a strong first-quarter start, although really not that unexpected to us.

But then as you look at the rest of the year, given -- as you will start to see elasticity kind of moderate and flow into the business a little bit here that the model is pretty consistent with what we have been telling you all the way along.

I think we are very pleased with the momentum in the business, 6.7% take away; FDMxC for the first quarter, which is an acceleration coming out of the fourth.

I think that is the most important thing for us is it's broad-based and we are very pleased with it.

Okay.

I will pass it on.

Thank you.

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

Just wanted to ask about the situation in the convenience store class of trade.

Your performance this quarter was obviously very strong.

If I remember rightly, the last time that gas prices spiked up to these kind of levels spending on non-gas items at C-store was crowded out by those high gas prices.

Is this happening again?

And if it's not happening this time, do you have any views as to why it's not happening this time?

Yes, I think the real telling quarter and/or period -- it's really not a quarter -- the period will be the summer dry season when you tend to see a lot more driving miles and folks out on the road on vacation.

If you will recall, we are basically almost three consecutive years now of share gains.

We have Drops and Minis in the king-sized format, the Hershey's Drops and the Reese's Minis launch, which I think will help us create news and continue to merchandise.

Overall, traffic still feels reasonably good to us.

Our business, and the category, is up.

We had a great 10%-plus takeaway.

But I think if you think about where -- certainly where we are from a confectionary standpoint, the last time you saw this spike we had much better merchandising and selling capability at the convenience stores.

And I think we have got better innovation than we did then in terms of -- we were actually pulling back on innovation when that happens.

So we look at the Reese's Minis and the Hershey's Drops as well as our merchandising capability.

We think it will carry us through that period.

So we obviously are watching it the same way everybody else is though.

The consumer -- really the consumer period that will tell us a lot more is in the summer.

Great.

Thank you very much.

I will pass it on.

Terry Bivens, JPMorgan.

Good morning, everyone.

Dave, just in terms of your allocation of capital, clearly you have got a bigger share repurchase here.

But if you look at the numbers it doesn't get you all that much accretion so I am just kind of wondering -- obviously one of the big issues on Hershey is what you are going to do with that balance sheet firepower.

Could you just give an indication of how you are thinking about that right now?

Our thought process, Terry, hasn't really changed.

It's pretty consistent.

We have always talked about one of our larger cash needs this year is Project Next Century and the investment that we are making in the new facility here in Hershey, Pennsylvania.

So that cash, as well as the inventory build and the capital associated with that, is something in the very short term that we are dealing with.

We did increase the dividend in January.

We repurchased $100 million on the old 2006 authorization in the quarter and it creates almost another $100 million with respect to options replenishments.

We do have a bond note that comes due later on in year that we will be dealing with as well with respect to the capital structure.

And then we have always talked about share buybacks as a lever in our capital structure dialogue and as a way of returning cash to shareholders.

We did some of that obviously here in the first quarter.

We have, if you will, reloaded to do that going forward.

So I don't think we have really changed what we have been saying.

M&A, certainly bolt-on, fold-in kind of acquisitions which we think are -- makes sense for us as we grow our global footprint still remains a high priority.

So it's all about balance and flexibility, and I think we have, certainly in the first quarter, between the dividend increase and the buybacks have demonstrated that.

Okay, thank you very much.

Judy Hong, Goldman Sachs.

Thanks, good morning.

Couple of questions on the input costs.

I think you called out that your input costs are coming in higher than you initially anticipated.

So first, is there any way to quantify how much higher you are looking at your input cost increases this year?

And then how much it really hit first quarter just in terms of the phasing of the input costs on your P&L?

And then thirdly, just one of the key inputs, peanuts costs, seemed to be soaring here.

So if you can give us any color in terms of what you are looking at as far as the pricing outlook on peanuts concerned and then how your supply situation is on that commodity.

Sure.

In terms of commodity costs, and you are right, we mentioned that they are a little bit higher than we anticipated when we would have been on the fourth-quarter call.

In the first quarter I mentioned higher commodities of about $33 million.

And in terms of the impact we had pretty good productivity against those, and because it was a high-volume quarter we also had an absorption benefit, which, as Dave mentioned, we are a little bit higher on volume in the quarter.

Most of it, really the 1.5 points that we talked about on slightly higher inventories, but we expected high volume.

And so there was a pretty big offset, I would say, from the volume and the productivity programs against those commodity cost increases.

Going forward, we will see a little bit more impact I think.

As volume comes off a bit, you can even -- a little bit as it relates to the price increase and commodities have continued to rise a little bit more.

Dairy in particular is one that we have seen increases in the first quarter.

So while we don't provide a specific number in terms of guidance around the total increase, I would tell you that commodities were up in the first quarter.

Pretty much a lot of it muted by the higher volumes in the productivity program.

They will be a little bit less so going forward to some degree because of the lower elasticity on volume that we are anticipating after the price increase.

Your question on peanuts; you are right, peanuts are very high.

For us I think that is more of a future issue versus a current year issue.

Okay, thank you.

Chris Growe, Stifel Nicolaus.

Hi, good morning.

Just had a question for you.

In relation to the price realization that you are going to bring -- start to see, I guess really kind of in the third quarter, I guess I just wanted to get a better sense, if we could, is it percentage of customers that bought forward or --?

I guess I started modeling some pricing kind of midway through the third quarter.

Is that a realistic assumption the way you see it today, especially on the instant consumable type products?

You get no seasonal price realization at all.

And so if you think about the second half of the year, the size of the Halloween and the holiday seasonal business and even into Valentines of early next year, you don't get price realization on that portion of our portfolio until Easter of next year.

You will see -- the shelf price on instant consumables has moved up fairly quickly.

It usually does move fairly quickly.

And you will start to see elasticity affects on the stuff that is moving at regular price on the shelf on the instant consumable part of the business already.

Then really on promoted, everyday promoted business, for the most part, as you work through with the customers, we have already programmed out through, let's call it, September, so roughly that time frame.

And so we will honor the previous promoted prices and the programming at the previous promoted prices for the most part.

So you really -- I think you are thinking about it correctly that you would start to see some realization, maybe a little bit on the instant consumable part of the business, right away but not really until you get out into that September/October time frame.

So it's really -- it really is -- the second quarter is largely a volume-driven quarter as well here.

So you would have to get past -- I guess there would be some price realization in certain weeks or periods where you did not promote.

But other than that it's Q4 then when that really starts to come through in instant consumables, correct?

Well, you will start to see some of it now.

You will start to see some of it now, but for the most part, because of the way the category works with the seasonal business and the way we plan it out because of the merchandising intensity of the category, it takes us a while to get the price increase through.

And that is why we continue to say it's really a 2012 event for us in terms of the realization of this.

So the bit of realization that we get in 2011 really offsets some of those kind of secondary inputs that we can't hedge forward on where we have seen some price inflation on those, certainly in the last 3 to 6 months.

And so those two things kind of offset each other.

Okay, that is very helpful.

Thank you.

Andrew Lazar, Barclays Capital.

Good morning.

Just a quick clarification, Dave.

I think you said earlier that you would expect volume to be down year-over-year for the remainder of the year.

Was that just on the piece of the business that you just spoke of, like instant consumable piece of it, but overall your seasonal business, obviously, doesn't get impacted by the pricing till next year?

So I assume on that piece, which is a very large piece, you still expect reasonably strong volume through the year.

Maybe a little help on clarifying that.

Yes, I think if you look at the first quarter -- let me make sure, to be clear.

The first-quarter volume increase was up double digit so we won't expect to see double-digit volume the rest of the year.

The seasonal business in the back half of the year, again, doesn't really get affected so, you are right, we would expect to see year-over-year volume growth in the seasonal part of the business.

Then you will start to see everyday instant consumables tail off in terms of volume fairly quickly, because that has already been priced.

And then you don't see the rest of the everyday part of the portfolio really start to get impacted until you get out in the latter part of the year, September on.

So, overall, you are right, there is a blending of volume across those pieces of the portfolio.

Okay.

And your elasticity assumptions, like relative to 2008 I guess, is there any reason to think they will be meaningfully different one way or another?

Or just based on, I don't know, different consumer environment or anything else you are seeing or generally you think about it the same way?

Actually, they may wind up -- we actually do it by brand, by pack, by class of trade on some level in terms of the way we think about elasticity.

So they will be -- if they are actually the same as 2008 it will just be dumb luck.

There is so many things that are different versus the last time we did this.

Our brand strength is much greater than it was if you think about the advertising that we put in the business since then.

I think our retail sales force is much more effective selling and merchandising, so that is a strength.

I think the chances are that as you take this kind of increase you might cross a decile here or there that you didn't the last time is another factor that is put in there.

I think the biggest factor for us is just consumer sentiment and the fact that the inflationary environment is broad-based across a number of categories.

And so I do think that -- I think you will see -- I think that is why it's going to be much more important to think about and watch carefully what is happening in other categories and the size of the basket.

Especially fuel as a part of it as well.

We talk about core inflation, but the average consumer out there for our product in the mainstream part of the portfolio is feeling food and fuel pretty significantly.

And we will watch it carefully.

But I think it will be different.

Remember, the last time we took a price increase it was a fall price increase.

This is a spring price increase, so the seasonal impacts are a little different too.

Great, that is very helpful.

Thanks a lot.

Bryan Spillane, Bank of America.

Good morning.

Just a follow-up on the phasing to make sure I understand this correctly.

In the second quarter you are going to expect revenues to decline because you will have some of the seasonal impact on volumes plus there is trade promotions.

Gross margins will also, I guess, decline year-over-year because you won't have as much -- because of the increased trade promotion.

So I guess if I am hearing that correctly earnings could actually be down year-on-year in the second quarter, but then up in the fourth quarter more because you are going to spend less in advertising.

Is that, at least directionally, the right way to think about it, kind of shifting from 2Q to 4Q?

I think if you think about Q2, one of the big factors obviously in Q2 you see a little bit more trade promotion in Q2 as we spend -- on a rate basis as we spend back to honor some of the previously agreed to promotional price points.

You will also remember we had 1.5 of volume that kind of came out of Q2 and wound up in Q1.

So Q2 will be somewhat pressured, but also remember Q2 is largely an instant consumable quarter and, therefore, it's a reasonably good quarter for us and we have decent momentum.

But Q2 will bear some pressure here because of those factors.

Then when you get out in Q4, obviously we have a huge move in our investment in the fourth quarter last year.

And so I think that, you are right, when you get down into the SM&A you get a lot more leverage in the fourth quarter coming up.

But I think you are thinking about the parts right in terms of what is moving around.

I think we had a good Q2 a year ago.

I think we were up a little bit over 5% on a net sales basis, so there is some moving parts off of that.

Remember, we have Drops and Minis and some other things that are in the numbers, but overall I think you got it right.

Okay, great.

Thank you.

David Palmer, UBS.

I just wanted to talk a little bit about consumption, because you had a plus 7 or so number there multi-channel takeaway.

It looks like your base trends are fantastic.

So there is a lot of noise here around the volume and the pricing, but from a consumption standpoint, from an innovation standpoint, it really does look like the bed is made for strong takeaway trends all year.

How are you thinking about that?

Are you really, in effect, trying to play conservative as you think about repeat levels, see how these products play out all year?

As you think about gas prices and the C-store channel, how are you thinking about ongoing consumption?

Thanks.

Yes, good question.

I think one of the things you do have to remember is the second half of the year seasonally it has got Halloween and holiday in it and we wouldn't expect to ship -- our take away in the first quarter FDMxCW is 6.7%.

We wouldn't expect to ship 6% to 7% more holiday and Halloween into the retail customers in the back half of the year, so there is a natural moderation because of the seasonal component of the business in the back half.

That said, we are very pleased with the programming, the strength of the business.

We were up 6.2% takeaway all-in in those FDMxCW channels in the fourth quarter that accelerated the 6.7%.

It's broad-based, it's base brand, it's new product, some of it is international, so we feel good about the business.

That said, it's a difficult environment for the consumer.

It's a very inflationary environment.

We haven't sold case one really at a new price point yet so I think we need to be prudent about how we think about the year.

And with that seasonal mix coming in there will be a natural moderation of that top-line trend.

Okay, thank you very much.

Kenneth Zaslow, BMO Capital Markets.

A lot of questions have obviously been asked about the pricing, so instead of that the new product innovation.

Can you talk about your successes right now, what are you seeing in the new product, the Drop?

Also you obviously increased your advertising behind PayDay; you didn't say anything about that.

Just can you take us to some of the new products and what you are seeing in terms of success?

And if you are getting a payback on some of our advertising spending besides Hershey's Syrup.

I will let J.

P.

Bilbrey take that one.

We feel good about the progress that we are making on both Drops and Minis.

One of the measures that we look at is we take some of our previous introductions, and I will use Pieces as an example, we are able to get these two launches into distribution faster so the distribution build has been faster.

Then the other thing that we are very pleased about is the takeaway and the repeat is also meeting and exceeding our expectations.

So we feel like we are off to a really good start on both of those.

Let me follow up on your PayDay question as well.

As you look at the increased advertising that was in Q1, part of the reflection of that is some things that we added in terms of additional brands that wouldn't have been in the previous quarter.

PayDay was certainly was one of those.

And so PayDay, Almond Joy, Mounds, all of those brands are responding very nicely to the advertising that we have added.

Then we also feel good about the upcoming Air Delight introduction that we have in June.

Retailers have responded very positively too that.

We feel good about the programming that is in place and that is also a new format for us, as well as the category.

And so we are optimistic there as well.

And what white space is that kind of, the new product, the Air Delight, actually fill for you guys that you are thinking that you don't have?

Well, there is really two places for it.

It will be available in kisses so it's an innovation on Kisses.

And if you remember in Kisses we have been working on really rebalancing and rationalizing our portfolio there.

We have been investing in advertising in Kisses and we really haven't added an innovation leg there so Air Delight will be a new variant on Kisses that we are optimistic there.

Then in the instant consumable space with Air Delight it gives consumers another way to enjoy the Hershey brand in a totally different taste and mouth texture profile.

So we think the positioning of that will be unique enough that we are again optimistic.

And you recall, one of the things we have talked about is our discipline around innovation and so we feel very good about the time and consumer insight work that we are doing on these.

And so while we may have fewer innovations, they are bigger and better and more sustainable than we have had in the past.

That is certainly coming true with Minis and Drops.

Great, thank you very much.

Rob Moskow, Credit Suisse.

I wanted to ask about the IDP program.

It has been a huge success in drug, up 14% in the quarter, and I think what your plan is is to start marketing that strategy to food stores.

When do you start doing that and when can we start seeing the benefits of that?

Thanks.

Well, you will probably see most of the benefit for us more as we move to 2012 and 2013.

We have done some early work with several of our retail partners, which is yielding some really good results.

Drug was certainly one of the places where we went and really changed the dialogue with our customers in drug around how we tried to look more at a consumer-centric approach and really working with them on shopper insights.

And so the combination of really being able to take our consumer data, their shopper insights has enabled us to have a different type of dialogue.

I would describe that part of our relationship historically has been more transactional in nature and what has really changed now is it's more long-term collaborative business planning over several years.

So as we make substantial investments in their shoppers, our consumers it just really enables us to look at the total stores differently and the role of our category within the store.

It has really been a positive thing for us and the successes that we have had we hope to roll out.

This also probably will be focused for us on, call it, a handful of customers as we go forward, because part of it is you have to be able to have the commitment on the retailers' side and the resources that go up against it.

But early indications are this is a real step forward for our company.

Do you have commitments from a handful of customers now to start collecting the data and then --?

Yes, we do.

We are well on our way in being able to integrate retailer data with our data, and also working in some instances with syndicated data and third parties to build some unique systems that allow us to look at the business differently than we had before.

This is really in the interest of the industry to be able to find ways to take this data and mine it in a much deeper way than we have before.

At any rate it takes time; it's a long-term commitment.

Where we have been able to work with some of our most sophisticated retailers, they are as excited about it as we are, so I think this is a great opportunity.

We have talked a lot about being more brand and consumer centric, and this is certainly central to us being able to deliver against that.

Thank you very much.

Vincent Andrews, Morgan Stanley.

Maybe just one last question on the pricing.

Could you talk a little bit, to the extent that you are aware, the competitive activity or has your largest competitor matched your efforts or anything you are hearing from the channel?

I think our pricing model is specific to what we want to do in our portfolio.

The line pricing nature of the category, I think on some level is going to take place and has started to take place.

I think retailers once -- generally once they see anyone in the category move, they will generally move up.

So I think you have seen the retailers start that initiative.

We feel good about what we have done for our business.

Remember our business has a larger seasonal component than probably anybody else's in the category as we are the share leader there.

So I think what we have done is specific to what we wanted to do for our business.

And I think overall across the category prices are kind of moving up but not everybody is doing the same thing.

But we are happy with what we have done.

Okay.

Thank you very much.

Erin Lash, Morningstar.

Good morning.

I was hoping you could talk about or provide some additional details about the recent announcement that you are leveraging your relationship with Wal-Mart over in the UK and whether there are additional opportunities to expand that further globally.

Yes, we have some product in Asda; we launched in the Asda stores.

Wal-Mart has a program, a global brand program.

We have also been in several other markets or will be in several other markets with them in South America and in Asia.

I think it's not appropriate for me to comment on what Wal-Mart's potential plans are in the future.

What I would tell you is, as part of their global brand initiative, it's very opportunistic for us to play with them as they go into markets and have strength in some new core markets for us.

We are very pleased with how it has gone.

I think what it really shows from our standpoint is how flexible that we would like to be and can be.

It's very small to us.

It's not material, but I think it's more important for us to demonstrate that our brands can play in a number of markets around the world and that we are flexible enough to make it work.

And we are happy with the relationship with Wal-Mart.

Thank you very much.

That is helpful.

David Driscoll, Citi Investment and Research.

Good morning, everyone.

Nice start to the year.

Just a couple of odds and ends that I was hoping to kind of plug in to my model of what you guys have already said.

You talked a lot about the quarterly shift from 2Q 2011 to 1Q 2011, but you didn't mention the fact that I believe there was a 4Q 2010 shift into 1Q.

How much was that shift?

And then pricing also in the quarter I think that was roughly zero.

Can you confirm that?

To J.P.

on Reese's Minis, is it too aggressive to think that this is going to be a $100 million product this year?

And then final question, ad spending is up 5% but there has been a ton of shifting in the media mix model.

And so I am thinking that GRPs are going to be up significantly more than that.

Can you just comment on that?

Thank you.

You rattled those off, David.

I am not sure -- I hope somebody here in the room was writing them down.

Let me try.

Yes, there was a little bit -- if you will remember, a little bit of seasonal shift out of Q4 into Q1.

Order patterns were different and Easter was a little later, so when we talked about seasonal volume being up roughly a third of our volume growth that is embedded in that number already.

So a couple points probably out of fourth quarter into first, which is consistent with what we would have expected.

I will answer for JP; he is not going to tell you how big he thinks the Reese's Minis business can be.

What he has already said is just how strong -- we are off to a good start and how consumers are responding to it, and that it is exceeding our initial expectations.

And so I think -- with respect to the advertising, we probably had a little bit more advertising on air in the early part of the year than we might have initially anticipated and I think some of that was opportunistic around the new brands.

And they are responding.

We do expect to be more efficient with our advertising with respect to GRP delivery.

So while we are talking -- when we talk about mid-single digits we are talking about the spend, dollar spend.

We would expect to be much more efficient, and our folks here do a tremendous job over the last two or three years of really getting much higher weight in terms to GRP increases versus where we would expect on the dollar spend that we have gotten.

So you are correct in assuming that while we may be saying mid-single digits on an overall dollar basis, it is much higher from a GRP standpoint.

That is really helpful.

The only piece that I was also wanting to know was pricing in the quarter roughly zero, was it roughly flat?

Yes, pretty much, pretty much flat.

We had a little bit higher trade promotion [rate], a small amount.

And that is largely a mix factor with the new products coming in and then with Easter later a much larger portion of seasonal sales in the quarter than the prior year.

That tends to be on a higher promotional rate.

So if you think about it the trade promotion was a little bit higher on a rate basis, but it was mostly mix.

And did you mention any timing related to the $250 million authorization?

No, we did not.

Can you?

No, we typically don't.

We said that we would be in the market from time to time, and that is what we have agreed with the Board.

But we haven't put any definitive timeline on it.

Okay, thank you.

Bryan Spillane, Bank of America.

Thanks again for the follow-up.

Just a quick question in terms of what you are doing now to accommodate retailers in terms of helping them absorb this price increase.

I guess it sounds like you are allowing retailers to buy in a little bit more ahead of time.

You are also going to promote a little bit more to help ease the consumer into it.

I guess what I am trying to get at or trying to understand is just are you doing more, or what are you doing differently, to help accommodate retailers to get this pricing through on to the shelf now maybe that what you were doing in 2008?

Are you having to do things differently or accommodate more in order to get the price increase through?

Actually, we are not -- I wouldn't say we are doing anything differently than we did in 2008 and certainly what we -- we are not promoting more, to be clear.

But what we are doing is honoring the promotions that we already had in place and, therefore, we will probably spend a little bit more promotional dollars to make sure that we get to the price points that we had already agreed on with retailers.

We haven't' -- each retailer is unique, so we have a different program with them all.

And so we would go back now and say at a higher price goods we want to run the same promotions.

So it's not more promotional activity, it's just keeping the promotional activity there, which by the very nature of it will ease the consumer into it because they will start to see everyday prices higher.

But they will still also be able to ease their way in because they will still be able to get volumes at a price they are used to.

So I think we are not really doing anything really differently.

Then we offered an 8-week by in, if you will.

That is pretty standard.

We have done that historically over the years and that is pretty consistent with our past practices.

So nothing new there in terms of what we were doing.

I wanted to follow-up on a question -- I think it might have been Robert Moskow might have asked it.

I don't know who asked it; it might have been yours.

Bryan, it might have been yours.

With respect to the second quarter, we don't want to imply that second-quarter volume is going to be down.

We are up against a 5% comp a year ago and we will have a little bit more promotional activity and a little bit of elasticity on the instant consumable part of the business, but I don't want anybody to be walking around thinking that the second quarter is going to be down.

That is not -- we may have misspoke and implied that and I just wanted to clean that up a little.

Okay, that is helpful.

Thank you, David.

At this time there are no further questions.

Presenters, do you have any closing remarks?

Yes, we thank you for joining us for today's conference call.

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

Thank you very much.

Thank you.

This concludes today's conference call.

You may now disconnect.