Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Mark Pogharian – VP Investor Relations

Dave West - President and CEO

Bert Alfonso - Senior Vice President and CFO

Analysts

Robert Moskow – Credit Suisse

David Palmer – UBS

David Driscoll – Citi

Judy Hong – Goldman Sachs

Eric Katzman – Deutsche Bank

Christine McCracken - Cleveland Research

Andrew Lazar – Barclays Capital

Chris Growe - Stifel Nicolaus

Jon Feeney – Janney

Bryan Spillane – Bank of America

Eric Serotta – Consumer Edge Research

Vincent Andrews – Morgan Stanley

Alexia Howard – Sanford Bernstein

Ken Zaslow – BMO Capital Markets

Ed Roesch – Soleil Securities

Terry Bivens – JP Morgan

The Hershey Company (HSY) F1Q09 Earnings Call April 23, 2009 8:00 AM ET

Operator

(Operator Instructions) Welcome everyone to The Hershey Company First Quarter 2009 Results Conference Call. I will now turn the conference over to Mr. Mark Pogharian.

Mark Pogharian

Welcome to the Hershey Company First Quarter 2009 conference call. Dave West, President and CEO, Bert Alfonso, Senior Vice President and CFO, and I will represent Hershey on this morning’s call. We welcome those of you listening via the webcast.

Let me remind everyone listening, that today’s 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 2008 filed with the SEC.

If you have not seen the press release, a copy is posted on our corporate website www.Hersheys.com in the investor relations section. Included in the press release are consolidated balance sheets and the summary of consolidated statements of income in accordance with GAAP as well as our pro forma summary of consolidated statement of income quantitatively reconciled to GAAP.

As we’ve said in the press release, the company uses these non-GAAP measures as key metrics for evaluating performance internally. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP. Rather, the company believes the presentation of earnings excluding certain items provides additional information to investors to facilitate the comparison of past and present operations.

We will discuss our first quarter 2009 results, excluding the net pre-tax charges. The majority of charges in both 2009 and 2008 are associated with the Global Supply Chain Transformation Program announced in February 2007. These pre-tax charges were $19 million in the first quarter 2009 and $30.7 million in the first quarter of 2008. Our discussion of any future projections will also exclude the impact of net charges related to these business realignment initiatives.

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

Dave West

Hershey’s results for the first quarter were solid and I’m pleased with the progress we continue to make. Net sales increased by 6.5% and market share performance is tracking nicely with core brands responding to the investments we have made. As we exited January our quarterly profile changed slightly. Commodities, while still up markedly year over year, were tracking a bit favorable to our expectations, driven primarily by dairy. Bert Alfonso will have further details on how we are thinking about dairy for the remainder of the year.

In Q1 this dairy favorability gave us the flexibility to add some incremental Easter advertising. Our decision was driven by our analysis of the holiday and Valentine’s seasons. We gained market share in these seasons but we noticed purchasing patterns were compressing with take away skew closer to the actual date of the holiday.

Recall that in 2009 Easter occurred on April 12th and in 2008 on March 23rd. Therefore we moved to increase Easter seasonal programming and advertising. This included Reese’s seasonal as well as the classic Cadbury Cream Egg clucking bunny TV spots. They ran in the first quarter to ensure successful sell through at retail. While results are not final, we had a solid Easter and will gain market share in our fourth consecutive season. We enjoyed strong sell through at retail.

The timing of Easter obviously has and will impact IRI and Nielsen data related to the March and April quads and therefore the first and second quarters as well. Easter timing aside, Hershey’s marketplace performance continues to improve.

Total CMG or total category candy mint and gum consumer take away for the 12 weeks ending March 22nd in channels that account for over 80% of our retail business and as a reminder these include food, drug, mass including Wal-Mart and convenience stores was down. Frankly, this decrease is not a meaningful indicator due to Easter timing.

Excluding Easter seasonal activity in both the current and year ago period, a better yet still imperfect barometer, our retail take away in food, drug, mass including Wal-Mart, and convenience was up 7.4%. Specifically the Reese’s, Hershey’s here excluding Bliss; Kit Kat and Twizzlers franchises were all up high single digits. Kisses declines are moderating as we lap the proliferation of flavors and filled versions launched in prior periods. We have seen some traction on everyday silver Kisses take away up slightly benefiting from the new advertising mix again in the first quarter.

Perhaps the easiest way to assess performance given seasonal timing and therefore all the noise and the data, is by looking at absolute market share results. Hershey take away in FDMXC excluding Wal-Mart and excluding the Easter seasonal activity was up 6%. We gained market share both with or without the Easter seasonal activity. All in, including the seasonal activity Hershey market share in FDMXC increased 0.5 points.

Our marketplace results were solid across all channels as we gained market share in all classes of trade on both an everyday and seasonal basis. Despite the challenging economic times and necessary price increases due to higher input costs the category is doing reasonably well. Excluding the Easter seasonal activity in the current and year ago period in FDMXC excluding Wal-Mart the category grew about 2.5%. This is slightly below historical growth rate of 3% to 4%.

A portion of the category softness is due to continued slowdown within the premium, gifting and novelty sub-segments. This is evident when you look at the Valentine’s results. As expected in FDMX Valentine’s category dollars declined about 6%. Channel shifting has impacted the FDMX performance. However, Hershey had a solid Valentine’s with FDMX take away up roughly 3% resulting in a solid 1.9 share point gain for Valentine’s.

Within the FDMX classes of trade Hershey’s total category performance was solid. Excluding seasonal activity in both the current and year ago periods Hershey’s take away in FDMX increased 4.5% resulting in a market share gain of 0.5 points.

Hershey’s chocolate performance in the food class of trade was particularly strong as we gained 1.1 share points. This was driven by higher levels of advertising across core brands including Reese’s, Hershey’s, Kisses and Bliss. Recall that aside from Reese’s the other core brands were not on air in the year ago period. Additionally, core brands benefited from strong seasonal execution and improved retail efforts.

In the C-store class of trade where the Easter impacts are minimal, the category was up 5.5%. Total Hershey’s C-store take away increased for the fourth consecutive quarter and was up 8.3% resulting in a share gain of 0.7 points in C-stores. I will remind you that the year ago period C-store category growth was soft, up only 2.3% and Hershey’s take away had declined 2.2% in the year ago period. In the current period, Hershey C-store chocolate and non-chocolate take away was up 7.9% and 16.0% respectively driven by price realization, king size distribution gains and strong in store merchandising.

Volumes were off a bit but better then the elasticity models had predicted. This was driven by successful programming, including a tie in with the NCAA March Madness Basketball Tournament that featured on pack promotion across the Hershey’s, Reese’s, Kit Kat and PayDay brands, as well as by a co-promotion with Coke.

We expect the convenience store channel to be a meaningful contributor in 2009, however, performance will likely not be as strong during the remainder of the year as we have now cycled the February 2008 pricing action and will be lapping the roll out of king size expansion that started about a year ago in Q2.

As we look to the remainder of the year across all channels our efforts will focus on core brands. Continuity levels of advertising will continue on Hershey’s, Reese’s, Bliss, and Kisses to maintain the momentum on these brands. We’ll also be on air in 2009 with new Twizzlers and Kit-Kat advertising. Twizzlers will start on air in Q2 and Kit-Kat later on in the second half. These two brands haven’t been meaningfully supported on TV in over five years.

We’re pleased with the strength of our advertising copy and believe that when coordinated with in store selling and merchandising it will generate excitement and drive consumers to the confectionary aisle.

Our program calendar for the balance of 2009 is built around high impact properties including a Reese’s NASCAR tie in and NCAA Football promotion, a big summer S’mores promotion featuring Rascal Flatts that includes national FSI’s for purchases of Hershey’s milk chocolate bars, Kraft Marshmallows and Honey Maid Graham Crackers. Consumers will also have an opportunity to win a personal block party with Rascal Flatts and VIP trips to their concerts.

Hershey’s Bliss will be supported all year long. The on TV plans include Win Your Bliss and Unwrap the Bliss Life promotions offering consumers a chance to win their ultimate Blissful vacation. The Kisses brand will anchor our Q2 Night at the Museum promotion featuring Ben Stiller. Additionally, Kisses will be the focus of the fall and holiday baking seasons. We expect to improve velocity on our core Kisses franchise items. However, this will be offset by planned sku rationalization of prior limited editions principally filled and flavor extensions.

Through the first quarter and Easter period we continued to build marketplace momentum. While there is a lot of noise in the data due to Easter timing, in FDMXC the overall category declined 1.9% for the 52 weeks ended March 22nd. We would expect that when the Easter effects are sorted out the 52 week category growth rate will be around 3%.

The category sub-segments of premium and trade up are soft. Overall, seasons are flattish in the category with everyday mainstream growing particularly within value oriented formats. Our strong brands, strong position at retail, increased advertising spending, and excellent seasonal execution should allow us to continue to hold our own in the marketplace.

Post Easter and April quad our comps do get tougher and the consumer will see higher promotional price points at retail on the balance of our portfolio. We remain committed to higher levels of advertising and in store programming to help the adjustment to new retail prices. We’ll continue to monitor consumer behavior and purchasing patterns and make the necessary adjustments and investment in brand building initiatives to drive sales at both the company and retail levels. This flexible approach will help us navigate the remainder of the year as the consumer sees the higher retail price points.

While the category has remained resilient, the help of the US consumer monthly retail sales and comments from government officials continue to point to concerns related to the overall economy. In the near term, it is difficult to predict consumer sentiment and purchasing patterns over the next months, quarter and year. We continue to expect our US volume to decline in 2009.

Outside of the US the countries where we operate are also facing many of the same issues impacting the US economy. Our international business will be challenged in 2009 as foreign currency exchange will negatively impact both the top and bottom lines as it did in Q1, particularly in Mexico and Canada. On a local currency basis we continue to make good progress with particularly good results in the India and Brazil JVs.

Overall, we still expect 2009 net sales growth of 2% to 3% as our pricing actions and core brand sales growth will be partially offset by lower volumes and the impact of unfavorable foreign currency exchange rates. We have good visibility into our cost structure. To date, dairy costs are favorable versus our initial estimates. If dairy spot market prices remain at current levels for the balance of the year, we would expect the year over year annual commodity costs impact to be somewhat less then our initial estimate of $175 million.

Advertising will increase 20% to 25% in 2009 and we will make the necessary investments in select international markets. Also, as previously communicated, our year over year increase in 2009 annual pension expense is $70 million. We do continue to expect earnings per share diluted from operations in 2009 to increase, however, at a rate below our long term objective of 6% to 8% growth.

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

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

Bert Alfonso

First quarter results were better then our earlier expectations with consolidated net sales of $1.236 billion up 6.5% versus the prior year, generating diluted earnings per share from operations of $0.38. The 2.7% EPS increase is primarily due to price realization, better than expected volume trends versus our original estimates and supply chain volume efficiencies and productivity.

First quarter sales benefited from a longer Easter selling period as well as from price realization. Partially offsetting these gains were lower sales volumes due to elasticity impacts related to our 2008 pricing actions, as well as about 2.5 points due to foreign currency translation. As a reminder, as we exit the first quarter, we have lapped the February 2008 price increase on the instant consumable portion of our portfolio.

Dave already provided details related to our marketplace performance, but note that our retail take away, adjusting for the Easter seasonal activity is relatively in line with our net sales shipments. As a result, inventory levels at key distributors and retailers are at normalized levels. In addition, a good portion of sales over the last two quarter related to seasonal candy and our sell through was solid.

Now turning to margins, during the first quarter operating gross margin increased 130 basis points driven by net price realization, supply chain efficiencies related to fixed cost absorption as actual volume was better than expected versus our initial estimates on supply chain productivity and savings. These margin gains more than offset higher input costs of about 320 basis points reflecting total consolidated cost increases for raw materials, energy, and packaging.

Higher employee benefit costs, primarily expense for our manufacturing facilities also reduced gross margin in the first quarter. In the first quarter, commodity cost impact was a bit better then we expected due primarily to the lower dairy costs. As most of you are aware, there is [inaudible] market for dairy products. Our current expectation is that dairy prices could increase over the balance of the year as they are now close to support levels and culling of the US dairy herd has begun.

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

We believe we have good visibility into the majority of our costs for the remainder of this year and all things being equal gross margin will be up in 2009 but not a the rate we realized in the first quarter. First quarter EBIT margin increased 70 basis points as higher gross margin primarily from price realization more than offset higher advertising, selling and pension expenses.

As Dave stated earlier, we took a flexible approach to first quarter brand investment by increasing our advertising and programming to drive key take away seasonal sell through. As such, advertising spend increased about 40% in the quarter supporting the ongoing Hershey’s Pure and Reese’s Perfect campaigns as well as Hershey’s Bliss and the new Kisses Coffee. Coupon redemption was also meaningfully higher about 25% versus year ago levels as consumers react to today’s economic environment.

Now let me provide a brief update on our international business. On a constant currency basis sales were solid. On a GAAP basis total company net sales were impacted by about 2.5 points due to stronger US dollar year over year. Local currency results were particularly strong in Brazil and India as distribution gains and our brand building initiatives are taking hold.

Overall, international profitability improved versus year ago but margins are still pressured as we continue to make the necessary investment to increase brand awareness and go to market capabilities. Going forward, we continue to expect foreign currency translation to be a headwind in 2009 which would impact both top and bottom lines.

Lastly, in March, we acquired the Van Houten brand in Asia. This acquisition complements our existing businesses in that region and gives Hershey a presence in several high potential markets including Malaysia and Indonesia. This transaction continues our disciplined global strategy, venturing growth markets through acquisition and partnerships. While small, the Van Houten business is profitable and will be accretive. The investment was about $15 million or approximately one time sales.

Now moving down the P&L, for the quarter interest expense decreased coming in at $23.9 million versus $24.4 million in the prior period. Lower interest was attributable to lower CP balances and related interest rates. In 2009 we expect interest expense to be about flat to slightly favorable versus 2008. The tax rate for the first quarter was 41.9% due the timing of certain tax events and the related accounting. This is greater than year ago but roughly in line with the outlook we provided in January. We continue to expect the full year tax rate to be about 36% and roughly 30% in the second quarter.

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

Now turning to the balance sheet and cash flow, at the end of the first quarter net trading capital decreased versus last year’s first quarter resulting in a net cash inflow of $22 million. Accounts receivable was up $32 million and remains extremely current and of high quality. The year over year increase is a result of Easter timing. We continuously monitor our accounts receivable aging and despite current conditions in the financial markets we have not seen an impact on our customer’s payment patterns to date. Inventory declined by $47 million and accounts payable increased by $8 million.

In terms of other specific cash flow items, capital additions including software were $37 million. In 2009 we are targeting total capital additions to be in the range of $155 to $165 million or about $20 million lower than previously communicated. The lower level reflects tighter control of our capital spend and will not have an impact on our Global Supply Chain Transformation Program and savings. About $40 to $50 million of the CapEx forecasted is related to the Global Supply Chain Transformation Program.

Depreciation and amortization was $47 million in the quarter. This includes accelerated depreciation related to the Global Supply Chain Transformation Program of $3 million. Therefore, operating depreciation and amortization in the quarter was $44 million. In 2009 we are forecasting total depreciation and amortization of about $190 million including accelerated depreciation and amortization of approximately $10 million.

Dividends paid in the quarter were $66 million. We did not acquire any stock in the first quarter related to the current repurchase program. There is $100 million outstanding on the current authorization that the Board approved in December 2006. During the quarter, we did repurchase $9 million of our common shares in the open market to replace shares issued in connection with employee stock option exercises.

As it relates to our short term cash needs the company is currently well positioned. While the credit markets are volatile, to date, market conditions have not had an impact on our Hershey’s day to day operations, liquidity, or longer term planning. Our cash flow continues to be strong and will improve as the Global Supply Chain Transformation Program is completed. We have not encountered any difficulties in our short term commercial paper funding and have been able to place our CP at attractive rates.

Now let me provide an update on the Global Supply Chain Transformation Program. Construction of our Monterrey, Mexico facility continues and about 75% of plant manufacturing lines are installed and producing product. Major US and Canadian plant closures related to the program have now occurred and the last of the relocated lines are currently in process. Closure of the Artisan Confection plant announced last January are also underway. Our progress continues and we are essentially in line with our implementation.

During the quarter we reported Global Supply Chain Transformation Program charges of $19 million pre-tax. That includes $3 million of accelerated depreciation and $1 million of project startup both in cost of sales and $2 million of SM&A expenses reflecting program management costs. As for the total project costs including likely additional pension settlement charges are in the range of $615 to $665 million. Based on employee withdrawals year to date we now believe it is likely that pension settlement charges will be incurred in 2009 and estimate these non-cash charges to be $40 to $50 million.

In 2009 the company expects to record GAAP charges of about $85 to $120 million or $0.24 to $0.33 per share diluted primarily related to the Global Supply Chain Transformation Program.

Now let me summarize. In 2009 our goal is to maintain our current marketplace momentum. Due to continued economic uncertainty and fluctuating consumer sentiment we expect a challenging business environment for the remainder of the year. As we have consistently stated since August, volume will be down in 2009 due to the US sales volume elasticity of the price increase.

Over the balance of the year consumers will see higher promoted price points on our everyday take home packaged candy. In some cases particularly Halloween, the largest of our seasonal businesses, these prices have not increased in several years. To ensure we maintain our market share gains we’ll continue to invest in our brands and businesses in both the US and international markets. Specifically, advertising will increase 20% to 25% in 2009.

As I mentioned earlier, commodity spot prices continue to fluctuate, however, we believe we have good visibility into our cost structure at this point in the year. In addition, as we stated in January the year over year increase in our 2009 pension expense is $70 million. These cost increases we more than offset by higher net pricing, ongoing operating productivity improvements and savings from the Global Supply Chain Transformation Program.

As such, in 2009 we expect net sales growth of 2% to 3% and earnings per share diluted from operations to increase. However, our long term objective of 6% to 8% growth.

We will now open to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Robert Moskow – Credit Suisse

Robert Moskow – Credit Suisse

On second quarter you told us that the tax rate is going to be very low. Is there some kind of a pull forward into first quarter and out of second quarter, can we expect you have 6.5% sales growth you’re well ahead of your annual guidance. Could second quarter sales be negative based on that?

Bert Alfonso

I wouldn’t read too much around the tax rate into the top line. What’s happening is mostly related to the accounting requirements around FIN48 and the timing of certain tax events, the earnings recognition. We initially taken that into account when we talked in January we knew our tax rate would be somewhere in the 40% range with the computation if you want to call it that in the second quarter but with a 36% rate to the year.

There have been a couple things that have occurred that ticked the rate up a little bit more than the 40%, some state actions a little bit more state tax. It’s mostly around our assessment of clients and the tax that will be recorded according to FIN48. It really isn’t that far off from what we anticipated. A little bit higher in the first and about where we thought in the second. No relationship to the top line.

Dave West

The revenue in the first quarter we had a good Easter period which we knew we were going to have. The pricing pretty much as expected and then foreign exchange probably hurt us a little bit more then we would have thought but nothing that significantly meaningful. Then we had a little bit better volume on a couple of the different pack types particularly on king size and standard loose. The first quarter stands on its own, there’s no timing effect across the quarter.

Robert Moskow – Credit Suisse

There’s no pull forward of Easter sales into first quarter and out of second quarter.

Dave West

No, all the Easter was certainly shipped in the first quarter.

Robert Moskow – Credit Suisse

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

Dave West

Let me give you a little bit color on it. The pricing is pretty much as expected on the list price increase that we took an increase in the early part of last year, February of last year pretty much on standard bars and six packs then we took another price increase in August. Those things at list naturally flow through so that’s probably a high single digit contributor if you will in the quarter in terms of sales. Foreign exchange as Bert said was about a 2.5 point to the top line headwind for us.

Longer Easter season it was a benefit to us, similar number, maybe 2% to 3%. Then the volumes were down as we would have expected because of the elasticity but they weren’t down quite a much as we would have expected we were a little better in certain, particularly in the instant consumable area. We were still down on volume in the US.

Bert Alfonso

The international affiliate did have volume growth.

Robert Moskow – Credit Suisse

Your market shares were very strong in the quarter and I’ve noticed that you are on air all the time now. You’re on TV quite often and I haven’t seen much of your competitor other than Mars and some outdoor advertising. Do you think that your share of voice has gone up substantially in the first quarter and do you expect that throughout the year?

Dave West

I would say that our share of voice is probably up some and I’m glad that you’re seeing the continuity effect on the brand because it is something that we’re certainly working towards. I do think we’ve improved our share of voice but in the scheme of things Mars and Wrigley’s still have quite a bit of advertising out there on air. We’re making good progress and we’re happy with the ROI and the returns.

The important thing for us the way we’re flighting our advertising this year and the efficiencies that the market allowed us to do in the up front buy we’ve gotten really good GRP delivery. So we’re actually getting GRP delivery beyond the increase of the spending level. I’m glad that it’s becoming obvious out there and our team internally is working very hard to get the continuity levels on the big brands.

Operator

Your next question comes from David Palmer – UBS

David Palmer – UBS

One industry person commented to me that Hershey got the pricing in place in the US chocolate spaces heading into ’09 but Mars failed to take advantage of the pricing windows so to speak so Hershey has been perhaps a little bit better positioned to deal back, to maintain volume versus your key competitor. In addition we’ve heard that Mars has been pretty distracted lately with some of the changes there.

Obviously you can’t comment on Mars’ distraction but has the competitive dynamic been somehow different or easier for you in this year versus your key competitor, any comment on that would be helpful.

Dave West

It’s a competitive category; it’s always been a competitive category. I wouldn’t comment any further other than its tough out there for everybody and we’ve seen nothing one way or the other unusual. That’s about where I’d leave it. There’s nothing that I would comment on that would lead me to believe that anything’s really changed significantly.

David Palmer – UBS

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

Dave West

We actually specifically in the first quarter with respect to our promotions if you’ll remember, when we priced the business in the fall we held the pricing that already existed and the programming that already existed on the Valentine’s and Easter, that’s principally what most of the activity is in the first quarter. I would say it was comparable; I think we certainly had a little bit more advertising and better retail coverage because our people are coming up to speed more.

If you remember in the first quarter 2008 a lot of them were relatively newly hired. Now they have a full year under their belt. I think that from the perspective of our seasonal performance particularly Easter I would say it’s a little bit of it is better brand programming but a lot of it is also better retail execution.

Operator

Your next question comes from David Driscoll – Citi

David Driscoll – Citi

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

Am I thinking about this right and pointedly I was surprised to see such large increases in price at the retail level on the seasonal merchandise. I know you didn’t realize it at the manufacturing level but it sure looked like it showed up at the retail level.

Dave West

We did move list prices obviously last August on everyday. To the extent that there’s everyday product that is kind of wrapped up in the Easter period it would come through at a higher price point. The real test for us is as we’re now coming out of Easter we’ll start to see package candy and our seasonal business around Halloween at the higher price points for the consumer particularly on a promoted basis.

If you’ll think about 2008 and really for several years when you think about Halloween for example the opening price point for Halloween has been two for $4.00 and a lot of the season runs at two for $4.00 or two for $5.00. We’re going to move from two for $4.00 to two for $5.00 and at holiday we’re going to move it from two for $5.00 to two for $6.00. The consumer is going to see, while we took pretty much a 10% price increase the actual price that the consumer is going to pay is going to be up more like 20% to 25%.

That’s really what you’ll see in the back part of the year seasonally and that’s the real test for the business. We think that we’ve got good execution from a retail standpoint and we’re going to continue to invest behind the brands to create some pull from a consumer standpoint. It’s a significant price increase on a large part of our second half business.

Really we haven’t done a lot of everyday promotions so when you start to look in the second quarter and the third quarter when we run our Night at the Museum promotion, for example, second quarter that’s the first time that we’ll see the higher promoted price point on our packaged candy business. We’re watching those things as we go forward.

In C-store we were pretty pleased with how the business held up in the first quarter both king and standard. I do think as you go through the back part of the year there are some significant, particularly the promoted prices moving. We are cautious about the macro economic factors and the elasticity related to that.

David Driscoll – Citi

Could you give us a range then for your expectation of full year ’09 price realization?

Dave West

We haven’t given that. If you think about what happened in the first quarter, high single digits because of the list price increase on average around 10%. We should see that similar kinds of numbers in the second and third quarter but then remember the price increase occurred in the later part of August so when you get to the fourth quarter there’s not as much price realization out in the fourth quarter. We’ll get a little bit of seasonal pricing.

You should see reasonably good price realization in the second and third quarters then not quite as much in the fourth quarter. That’ll also shop up in the gross margin line as well. Gross margin in the first quarter certainly won’t carry through for the full year.

David Driscoll – Citi

Fourth quarter seasonal business is about half the business in that quarter, isn’t that right?

Dave West

It depends on the timing of the shipment. We’ve never really given that specific. If you’re thinking about take away the Halloween take away happens in the fourth quarter but the shipments really occur in the third.

Operator

Your next question comes from Judy Hong – Goldman Sachs

Judy Hong – Goldman Sachs

I know private labels really have never been a factor in confectionary but obviously for the broader food category you’re seeing growth there. I think some of the retailers have talked about maybe allocating some more shelf spaces to their private label chocolate products. What are you hearing on that front and how do you think that that could impact Hershey going forward?

Dave West

You are right, private label is a very small part of our category today. In the category it’s probably more in the sugar side then in the chocolate side of the business. We are hearing that certain retailers may in fact want to devote more space to private label throughout the store. Your information on that is probably as good as our in terms of reading what you see in the press. We are obviously very focused on creating and investing in our core brands more so then we probably have been in the last few years and we think that’s the right answer in the category.

While we have taken some price increases we still are at a relatively approachable price point for the consumers, an absolute low price point. We’re going to continue to be diligent and watch what happens in the marketplace but so far at this point in time we haven’t seen a lot of private label growth in the category.

Judy Hong – Goldman Sachs

Following up on the C-stores you talked about how you’re pleased with the business holding up there. What other initiatives do you have in place to continue that momentum specific to the C-store channel?

Dave West

We were very pleased with the programming we ran in the first quarter, the NCAA Basketball Tournament tie in really seemed to work for us. Our tie in with Coke where we ran some bundled programs with Coke and Reese’s with a coupon really that activation was good. We’ll have a similar kind of bundling program later on in the year we have a very good shipper program lined up throughout the year.

The comps get a little tougher clearly the first quarter year ago comp was our easiest and we were lapping the February and August price increases. The comps get a little harder. The important thing for us is that the things that we have we’ve got really good I think merchandising programs in place. We also are getting a benefit from retail coverage. We added a lot of retail coverage in the convenience class of trade in the later part of 2007 and in the early part of ’08. We’re very focused on distribution and getting the right items in the store.

I think those three things are going to help us continue to drive conversion there. The comps get a little tougher as the year goes on that’s for sure.

Operator

Your next question comes from Eric Katzman – Deutsche Bank

Eric Katzman – Deutsche Bank

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

Dave West

When we internally talk about pricing we talk about net pricing. We talk about net price realization which is list price less trade. That’s the way we like to think about it. When we have our conversations obviously with our retail partners out there that’s the way we think about it is net price realization. We have a list price in effect and then we also have certainly we’re going to see also a change in the prices at promoted. It’s a combination of both when we talk about it.

Eric Katzman – Deutsche Bank

Isn’t it fair to say that’s its pretty critical as to how Nestle and Mars kind of react to this rather than two for $4.00, two for $6.00. When should we kind of know whether they’re following your lead on taking up the promoted price points?

Dave West

We took a price increase because of our cost structure and our business. What Nestle and Mars look at in terms of their cost structure and what they do is entirely up to them. We have had conversations with our retailers. We know what our intent is in terms of price points and I just gave you those. We kind of know what our expectation is for our own business. We wouldn’t be aware of what the other competitors in the category are doing about price points or advertising etc.

What we’re doing is really taking care of our business. We’re advertising aggressively into the price increase and we’re making sure we have really good programming and retail activity to support the brand and to support the higher price points. That’s the way we’re approaching it and you’re right in any category, in any given week, if someone has a feature ad and someone else doesn’t you see the movement. That’s a wildcard and a risk for our business out there and one of the reasons why we’re cautious about what happens in the second half of the year in terms of promotion and promoted price points.

Eric Katzman – Deutsche Bank

That seems reasonable to be cautious because if you go back to what General Mills did I’m sure you examined it but they kind of did the same thing with their everyday promoted price, similar kind of increase. Unfortunately there was at least initial backlash from the consumer because I don’t think competitors followed. I guess we’ll see how it flows through.

Can you talk a little bit about cocoa and the fact that it’s priced in pounds globally and the fact that the pound collapsed and kind of what that might mean structurally for cocoa costs? Is that something that you can hedge against beyond just hedging the physical?

Bert Alfonso

Cocoa trades in New York in dollars and in London in Sterling which I think is you are referring to. Certainly it’s a forward market and we trade in dollars in this case. If you’ve looked at the fluctuation in terms of cocoa itself it’s had a bit of a wild ride. It certainly peaked around the same time as most commodities last year, around mid year. It has not had the type of decline that something like oil has. It’s held up better than that.

We don’t talk about our hedging strategy in terms of how far out we are. The 10-K is pretty specific in terms of providing a range of about three to 24 months or maybe 36 months. We’re conscious to be in that range. Right now we don’t think of it that way in terms whether there’s a currency play versus a pricing play.

Eric Katzman – Deutsche Bank

Beyond where you’re hedged, I know you don’t want to talk about that, that’s fine, are there fundamental reasons in the Ivory Coast and other places to why cocoa has stayed so high as opposed to what I understood was this collapse of the pound and the currencies influence on the pricing of the commodity as opposed to what normally would have been let’s say a roll over in the price of it because of supply and demand.

Bert Alfonso

My personal view is that the pound has collapsed much more around the UK economy versus any particular commodity. We watch conditions in the Ivory Coast which I assume anyone that anyone does watch whether its rainfall or crop quality and those types of things. Beyond that we don’t see anything unusual in the marketplace.

Operator

Your next question comes from Christine McCracken - Cleveland Research

Christine McCracken - Cleveland Research

Specifically on grind, in the latest data we’ve seen a pretty sharp decline specifically in Asia with grind down about 80% but even here in the US I guess grind is down something like 12%, Europe is down about 20%. Can you talk about if that specific shift in the marketplace is going to have any impact on Hershey?

Bert Alfonso

You’re quite right, the headlines have pointed out that grind is down in Europe and in Asia as you mentioned. That’s been a function of some lower demand in reaction to the marketplace. I think there’s been less of that in the US and then there’s this whole dynamic which some of our folks are experts in terms of the components as what comes out of the cocoa bean whether its butter or powder or liquor as they call it.

Those things will influence the supply and the price out there but right now there’s enough cocoa obviously to supply the marketplace. Any long term impact from lower grind we should see at some point but right now we don’t think that’s the driver.

Christine McCracken - Cleveland Research

On peanuts because Reese’s has quite a significant exposure to that clearly the indications are at this point that crops are going to be significantly smaller this year as they adjust for demand. I assume that that isn’t a big deal for Hershey just did your contract production is that a fair assumption.

Dave West

The supply in the market is much more related to last year’s crop. Anything that would be impacting acreage this year will have more of an impact on future peanut supplies. Last year was a good crop and there’s plenty of supply in the marketplace. To the extent that acreage changes it tends to have a future impact and not a current year impact.

Christine McCracken - Cleveland Research

Generally talking about the peanut recall and the overall impact on demand. Can you provide any color if Reese’s had any kind of softness or any kind of impact at all?

Dave West

No, we talked specifically about the fact that Reese’s was up strong single digits throughout the quarter. We haven’t seen, we’ve never bought from PCA, that was never a supplier for us and it’s not affecting the Reese’s brand at this point in time. We watch acreage and a number of other things and they acres rotate between wheat, corn and peanuts and that’s pretty standard stuff for us to track. At this point in time we’re not seeing any issue with supply and certainly the more important thing for us is from a brand standpoint Reese’s is really doing very well.

Christine McCracken - Cleveland Research

I guess I leave it with the expectation I think at this point is about a 30% drop in production that’s I don’t think ever been seen before.

Dave West

The important thing for us is we are a big purchaser. We have always been a big purchaser. It’s an important commodity which we track very closely and the reality of it is we watch those predictions and we’re pretty comfortable as we said about the cost visibility that we have.

Operator

Your next question comes from Andrew Lazar – Barclays Capital

Andrew Lazar – Barclays Capital

I heard a couple things on the call; one being in the first quarter volume was a little better then perhaps your initial expectations. You’ve got some potential, dairy flexibility as you go through the year and obviously no change to guidance at this stage around the year and I realize it’s early. You talked about wanting to be cautious.

Am I getting ahead of myself or does this maybe suggest that you probably realize you may well need or want to be somewhat more aggressive with some of that flexibility on the trade promotion side, you talked about wanting to kind of help consumers adjust to those new promoted price points. If that’s the case and maybe its not, is it something you’re already seeing from either a consumer perspective, a competitive perspective or a retailer’s perceptive that has got you thinking that way?

Dave West

In the first quarter what we did with the dairy flexibility was actually spend on advertising at Easter. It was not a promotion storage for us at all it was really running specific brand advertising around Easter. As we look through the year we’re cautious about the consumer and the consumer reaction and haven’t seen increases in prices at Halloween or holiday for some period of time now. The moves are fairly significant. We obviously will continue to watch and we want to make sure that we support the brand.

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

Andrew Lazar – Barclays Capital

As the summer kicks in and you start to get some of your early data from those higher promoted price points. To the extent that you do need to make some adjustments and again you’ll have probably some flexibility to do so if you need to. How quickly can you make that happen at the point of sale? Is it something you can get in terms of risk of missing the window if you will around sell through for back to school and Halloween?

Dave West

What we saw at Easter is this is one of the time particularly when its great to have the kind of retail sales force that we have because we have the ability to flex fairly quickly at retail in terms of merchandising and even pricing and price points to get them executed if we need to do that. The retail sales force here is a really big advantage for us and one that I’m glad we have.

At Easter we did dial the advertising that you can do in a relatively short period of time because the market, there’s still enough spot available in the market because there’s enough advertising inventory around. The biggest issue is for us and for anybody for that matter, if you already own activity or have planned activity in a window, moving the price point up or down in the window is not all that difficult with a little bit of lead time. If you don’t own activity it’s much harder to get in.

For example, we have activity planned all the way through Halloween and holiday at certain price points. If we wanted to change those price points we obviously could go to retailers and dial price points up or down with the appropriate spending conversation with retailers as long as you have the activity. You can react to it to the extent you already have something planned it’s a lot easier to change it. To go in and actually get incremental activity at the last minute’s a lot harder.

Andrew Lazar – Barclays Capital

At the June analyst meeting last year you talked about the potential for much more meaningful innovation really not till the second half of ’09. Was more of that at the time the thinking was more around all the premium and trade up kind of stuff, which I understand wouldn’t be as much the case or need at this stage given the environment we’re in or there are things that either I’ve missed or that you haven’t announced yet that will be part of your ’09 innovation plan.

Dave West

There are a few things that are coming in the back half more toward the fourth quarter that we haven’t announced yet. Certainly closer in innovation. In this environment you’re absolutely right the market has changed, the consumer expectation, I think has changed as has retailer expectations. If people are going to spend money in this market they’re going to spend money on something they really are comfortable with and know and like.

Certainly any innovation in the trade up or premium space we’re very, very strongly supporting Bliss we think that Bliss is the right entry for us we’re going to stay with Bliss for as long as it takes to get it to work. It’s working very well right now. It’s exceeding our expectations in terms of velocity and distribution so we’re pleased with that. Beyond that there’s not a whole lot else we’re going to do in that trade up premium space right now and I think we’re going to stay very focused on the core because I think that seems to be resonating well with consumers right now.

Operator

Your next question comes from Chris Growe - Stifel Nicolaus

Chris Growe - Stifel Nicolaus

In relation to the conditions that occurred in the first quarter where you said you had a little favorability from dairy costs and you spent some of that behind the Easter holiday. Did you say that was advertising or promotion or was it just a combination of both?

Dave West

Advertising.

Chris Growe - Stifel Nicolaus

What I’m curious about, as you’ve seen the category being a little soft in terms of the overall consumption level and perhaps as we go into, especially the second quarter, seeing a little more elasticity and of course the pricing coming through. You have not really changed your outlook for say promotion and trying to get maybe being a little more diligent about price points if we’re going to be in a tough consumer environment. Is that fair to say and that sort of a watch out for you that you got to see increased levels of promotion just based on the consumer response?

Dave West

That’s not what we’re saying at all. I think what we’re saying is go back to the fundamentals of it, our cost structure we have $175 million commodity cost increase and a $70 million increase in our pension expense this year. In order to keep our business model in tact and be able to invest in the brands and advertising the way we want, we clearly needed to take a price increase. We’ve done that and as we look forward there’s obviously always elasticity effect.

We’ve modeled those and we’re cautious about that particularly in this economy and this kind of economic environment where the consumer sentiment is what it is, we’re just watching it. I don’t think there’s any overhanging promotional issue here its just we took a big price increase, we understand it, we needed it because of the cost structure of our business and now we’re watching the elasticity and large part of the portfolio has not moved yet and as it moves through the year we’ll watch it and monitor it.

Chris Growe - Stifel Nicolaus

What I’m trying to understand is as the elasticity changes or if it changes of if you see some weakness are you prepared to respond with promotion is what I’m getting at.

Dave West

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

Chris Growe - Stifel Nicolaus

In relation to trade de-loading I heard about some trade de-loading in the convenience store channel, did you see any of that activity in the quarter?

Bert Alfonso

No, we’ve not. I mentioned that our take away and our shipments are pretty balance right now. We’re pleased where we have, in terms of we track distributor levels that feed into those C-stores and obviously our people are at many of the C-stores. We are comfortable with the inventory levels that we have right now. We are not expecting any form of trade de-loading. We’ll leave it at that, that’s an area we’re particularly comfortable with right now.

Chris Growe - Stifel Nicolaus

As we look at the degree of pricing in the first quarter and we look at it the second quarter you’re going to have the price increase a year ago rolling off and you’re also going to have of course less promotion coming through as you get those promoted price points up. Without saying something you can’t say or guidance is it reasonable to assume that the second quarter pricing could be up a little different from where it was in the first quarter or does that rolling off of that price increase maybe keep it down a little bit sequentially.

Dave West

The second quarter is a non-seasonal quarter for the most part. It’s skewed more towards instant consumables, it always has. The fall off of the February of last year price increase we’ve already lapped it. That would tell you that it’s probably, the quarter looks similar but mostly instant consumable. We’ve already lapped that price increase.

Operator

Your next question comes from Jon Feeney – Janney

Jon Feeney – Janney

I wanted to dig into your better than expected elasticity performance. I wonder do you have any data to indicate or do you think that you’re benefiting from maybe trade down from the category from some more expensive snacking alternatives like maybe energy bars or something like that might explain it, have you ever seen that in the past and could that be something that’s going on?

Dave West

We did comment on specifically within the confectionary category is that there has been a slowdown in the premium and in the trade up space and we would expect that those folks if they’re not exiting obviously the category altogether are trading down into our mainstream brand. That’s clearly part of the story.

Jon Feeney – Janney

I know this might be strange but these are strange times, other categories within snacking maybe that are more expensive losing share to you particularly in consumables.

Dave West

We do track other categories but at this point in time I’d rather not give away any of our own insights into the category.

Jon Feeney – Janney

If you look at the convenience channel I know that’s a big part of instant consumables, it’s going to become more important this quarter. The comparison for convenience store traffic in aggregate be it much easier in the second half of this year yet I guess a lot better execution by Hershey and some Hershey specific factors that make your comparisons more difficult. If you just think about the convenience channel do your comps get easier or tougher from here in that channel?

Dave West

As we said, the comps clearly get tougher for us going forward. The first quarter of 2008 was our softest take away quarter; we were actually down 2% in the first quarter of 2008. Our retail coverage in the channel really kicked in, in the early part of 2008 and those folks are now up to speed and doing a very nice job in terms of gaining distribution and selling in at retail. That’s a benefit for us but as we go through the rest of this year that benefit was also in the prior year.

As I said, we had price increases in February of 2008 and we got a benefit from lapping that in the first quarter and we don’t have that benefit the rest of the way. The comps are tougher for us as you go forward.

Operator

Your next question comes from Bryan Spillane – Bank of America

Bryan Spillane – Bank of America

I want to understand your market share performance in the first quarter a little bit better. Would it be possible to break out or at least give some color on were your market share gains more pronounced in your promoted or seasonal items or was it with everyday items?

Dave West

We parsed it about three or four or five or ten different ways as you would expect we would. We looked every day, with looked with seasons, without seasons, we looked across multiple channels. Any way you slice it we’re up and we’re up pretty much around the same amount. So there’s nothing I would say that we were up more everyday or more seasonal I think it’s pretty comparable across the board. We gained a solid half share point when you look at it all in FDMX or FDMXC for that matter.

When you look at it with the Easter in it, it’s a little better probably when you take Easter out but I’m not sure that that was hard to measure. I would say that we’re pretty pleased because it was broad based and solid everywhere.

Bryan Spillane – Bank of America

If gifting has been a little bit elastic I would assume that that’s related to consumers gifting fewer premium items. Does the price gap of your seasonal items which hasn’t seen an increase yet versus the premium items giving you some advantage in terms of market share gain and is that something that we should watch going forward as the seasonal items being to go up.

Dave West

You might say that at Valentine’s but certainly not at Easter. Easter doesn’t have a whole lot of premium in it and so I think as you go forward holiday doesn’t have a whole lot of premium in it either. I wouldn’t say it’s a big driver, it’s not a large part of the category as I said I think overall we feel pretty good because its broad based and pretty solid everywhere.

Bryan Spillane – Bank of America

Space allocation has that changed at all in terms of the amount of shelf space being allocated to mainstream versus premium confection?

Dave West

We talked about that I think back in the conference call in January and so we’ve seen that happen. There are parts of the category particularly the premium and the trade up sections that are giving away and losing some space. The velocity as they drop its hard to hold those kinds of items on the shelf. That space is finding its way to the mainstream items and benefits our brands.

Operator

Your next question comes from Eric Serotta – Consumer Edge Research

Eric Serotta – Consumer Edge Research

Digging into the gross margin improvement a little bit you sighted two factors that were positive in terms of the cost side one being the better fixed cost absorption from the improved or better expected but I guess still down volumes in the quarter and the other from the supply chain savings. Just wondering whether you could in whatever detail you’re comfortable with, give us some measure of the balance between those two factors as certainly the latter would seem more sustainable then the former since you don’t have the benefit of the extra Easter volume this quarter.

Bert Alfonso

In terms of the gross margin obviously we’re very please with the increase of 130 basis points and we explained was a little bit higher then we anticipated. I would say that the better volume in terms of elasticity would have been more of contributor although that’s entirely related to the volume in terms of the absorption going through. Its hard to project either of those going forward and that’s part of our stance in terms of will be able to maintain that level of elasticity as we see different price points coming into the market and they’re both very correlated in terms of the pricing.

The supply chain savings are in terms of those that are related to the supply chain transformation program are a bit higher in the second half, you would expect that because the last couple of plants that we’ve shut down were in the first quarter and while right now with the visibility that we have to or cost basket we certain expect that we will expand margin year. We don’t expect it to be at the same level that we were able to achieve in Q1.

Operator

Your next question comes from Vincent Andrews – Morgan Stanley

Vincent Andrews – Morgan Stanley

I want to reconcile one thing which is that you stated that volume in the first quarter was coming in better than you expected but at the same time it sounds like you spent back some of the dairy savings on increased advertising. I want to reconcile whether your volume was a function of the increased advertising or if those things don’t have much to do with each other.

Dave West

What I would say is the decision on the advertising was as much as did our analysis of the holiday and Valentine’s periods and saw a compression there and the category declined although we gained share and grew at Valentine’s we wanted to make sure given the longer Easter that the Easter product that we had already shipped sold through well and so I don’t really think it was a driver necessarily of shipping more Easter it certainly was a driver of having the Easter sell through be particularly good.

Vincent Andrews – Morgan Stanley

You said the Easter purchasing pattern was somewhat compressed closer to the date so was the ad spend.

Dave West

No, the Valentine’s and holiday purchasing patterns were compressed closer to the date and so we expected to see something similar to Easter and we wanted to make sure that we accelerated and sold through our Easter inventory.

Vincent Andrews – Morgan Stanley

Is there a scenario where let’s assume dairy costs stay where they are and you do have a dairy cost benefit for the balance of the year or increase or however it would turn out. Is there a scenario where that savings falls to the bottom line or would you expect to spend it back in one for or another?

Dave West

What I think we would need to do is make sure as we go through the year is we’re watching what happens from a consumer standpoint. I don’t know that I would earmark it any one particular way. We’re going to make sure that our brands grow and that we continue to maintain our momentum and we’ll spend appropriately to do that. It’s probably very premature for us to determine what that looks like. As I said, dairy prices are certainly bouncing around at the low, they’re pretty much near the support level but they can’t certainly get any lower. It’s probably premature to make a call on that too.

Operator

Your next question comes from Alexia Howard – Sanford Bernstein

Alexia Howard – Sanford Bernstein

On the outlook for advertising spending, we obviously saw a 40% increase this quarter, it’s been stepping up over the last couple of years as you’ve been rebuilding the brand support. Is this the year where you really are stepping things up and by the end of the year you feel as though you may be where you want to be. I’m asking for 2010 and beyond are we going to continue to see these kinds of step ups or is the idea to get as much of the heavy lifting out of the way in 2009.

Dave West

We haven’t made a comment on that going forward at all. You’ll see from us in ’09 is getting to continuity levels on Hershey’s, Reese’s, certainly on Kisses, starting on Twizzlers, and Kit Kat and continuing on Bliss. On those core brands we’re starting to get the continuity levels. We’ll continue as we go along here to run mix modeling and do an ROI analysis and as long as the spending is generating good returns and good growth we’ll make those decisions as we go further on but we haven’t made any kind of certainly any statement about 2010 or beyond.

Operator

Your next question comes from Ken Zaslow – BMO Capital Markets

Ken Zaslow – BMO Capital Markets

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

Dave West

Improving volume trends versus our elasticity model would certainly be one thing or getting sustainable advantages in some of the commodity costs. It’s pretty premature to say that because we do have a lot of moving parts in the business particularly with respect to the consumer. Very premature to make any kind of statement about that but any of the levers that are in the model moving in any direction.

Ken Zaslow – BMO Capital Markets

It just seems like you hit all the levers this quarter and it just seems like things are still going in your direction. I know it’s early but to me it just seems like things are progressing the way you would want them to progress to be able to start to think about generating your long term growth targets maybe a little bit earlier then expected.

Dave West

There’s a large part of the business that has yet to see the number of segments chocolate package candy on an everyday basis, our Halloween and holiday business that have yet to see the increases in prices and consumers haven’t had the chance to react to that. It is very premature.

Operator

Your next question comes from Ed Roesch – Soleil Securities

Ed Roesch – Soleil Securities

Last year in the first half you were building your SG&A spending around some international additions, infrastructure there and also the sales force build out. If you go back into ’07 and ’06 and prior years the first quarter and second quarter your SG&A spend on the dollar basis was pretty similar. I’m wondering if you could help out on this year on whether the first half the SG&A spending should be pretty similar in the first two quarters then.

Bert Alfonso

I’m not going to comment on going back several years. If you contrast it to last year there’s a little bit of impact although not a lot to rebuilding the retail sales force so we still had a little bit of that. Certainly the year on year pension expense is significant. We’ve mentioned that that’s $70 million which cuts across the quarters fairly evenly during the year.

The higher advertising rate of 40% in Q1 versus what we’re projecting for the year at the 20% to 25% does impact this year’s results in Q1 and part of that is having the incremental advertising. We didn’t have Kisses advertising on last year. In fact Hershey’s Bliss, we advertised Hershey’s Bliss but the Hershey’s Pure campaign didn’t come on until the second quarter of last year. We did have a higher run rate then the annual rate. The pension is a meaningful difference and a little bit from the sales force. Those are really the drivers that contrast from first quarter last year.

Ed Roesch – Soleil Securities

If you look at the gross margin line does your standard costing system imply that you’re essentially putting the same cost burden as soon as you hit Q1 based on your assumptions for all of ’09? Are you basically applying the same cost burden to all of your product based on your assumptions for the total ’09 increase throughout the entire year is that the way to think about it.

Bert Alfonso

That would be correct. A good example would be savings that we captured last year through the global supply chain transformation do become part of the standard and projected savings from this years become part of the standard. While a little bit back end loaded on this years savings program because the a couple of the last plants closing in the first quarter the way you’re thinking of it is the right way to think of it.

Ed Roesch – Soleil Securities

You’re already seeing some of those benefits?

Bert Alfonso

That’s correct.

Operator

Your next question comes from Terry Bivens – JP Morgan

Terry Bivens – JP Morgan

I know it’s a little bit late in the call but I did want to ask you a strategic question. Our understanding is one reason Mars has maybe been relatively a little bit more restrained lately is they are installing SAP. It seems to us that where they have innovated the velocities have been pretty good particularly when you compare them with Bliss. Clearly in this kind of economy it’s been a good move to advertise more behind your core brands but it seems to me at the end of the day it’s still very much an innovation driven business.

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

Dave West

The reality of it is the category has always had some level of innovation be it close in line extensions or flavor news, it’s a variety seeking category and there are a lot of brands and consumer are fairly promiscuous they’ll try a lot of new things. That’s not new, I think our past strategy created way too much churn and didn’t generate the incrementality. We’re being very thoughtful about our approach to innovation.

We have changed our internal processes and we are certainly working and we won’t talk about just anything more specific then that on innovation which we believe is more sustainable and incremental. The question obviously is what’s the right to launch certain items and certain initiatives, that depends on marketplace conditions. This is certainly a time when focus on the core is a good thing. It seems to be serving us well.

We have underinvested on some of the brands in the past and so as we’re investing in them now we’re seeing good returns on the core that we’re going to continue on that path but its not to say that we’re not working against innovation we just aren’t in a position right now to think that it’s the right lever to pull.

Terry Bivens – JP Morgan

Looking forward are you happy with what you see coming down the pipe. You made a reference I think in response to Andrew’s question later this year into 2010 and beyond do you feel pretty good about that?

Dave West

We have some items and some initiatives that we have yet to announce that’ll be coming in the later part of fourth quarter this year, first quarter of next year, that we think are going to be very good performing items. Again, we have taken a different approach then we have in the past it’s a different business model for us, we think it’s appropriate. It appears to be working on the core right now and we’re going to stick with that in this economy is the right thing to do.

Operator

Your next question comes from David Driscoll – Citi

David Driscoll – Citi

On cash flow guidance and if you could talk a little bit about working capital then a second question on share repurchase. You mentioned you really didn’t exercise any of the $100 million authorization that still remains outstanding. What is the plan on that, are we going to see some repurchase start happening in the second quarter or in the third quarter?

Bert Alfonso

In terms of cash flow I mentioned our working capital was good in the first quarter, we had a net cash inflow of $22 million. A lot of it came from better inventory management. Our receivables were a little bit higher and some of that was related to the Easter timing. We also improved our payables a little bit so we’re happy where our cash flow is.

Given the market conditions these days you can’t have enough cash flow and so we’ve taken a look at our capital budget and have made a decision that prudently we can manage that a bit better and so we’ve made a decision to bring CapEx spend down by $20 million this year and that will fortify our cash flow for the year. We’re tracking well against cash flow. We expect the supply chain transformation to continue to help us in that area in two fronts, capital spending with fewer plants will come down and obviously we’ll have the improved savings which help our business.

Getting back to the buy back of shares, that’s really a Board level decision. We revisit it with the Board periodically and there’s no doubt that we will revisit that with the Board in the coming quarters. Right now we’re not giving any particular guidance on when that might start to happen.

David Driscoll – Citi

If there’s a $100 million authorization from the Board does it not become a management decision at this point whether or not to go ahead and assume that already given authorization?

Dave West

Its an authorized level in terms of we can execute against it but we still confer with the Board in terms of the timing of that buy back how that impacts our capital structure. We do have a discussion despite the fact that it’s already authorized.

Operator

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

Mark Pogharian

We thank you for joining us on today’s conference call. [Inaudible] and myself will be available for any follow up questions that you may have. Thank you again for joining us.

Operator

This concludes today’s Hershey Company first quarter 2009 results. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Hershey Company F1Q09 (Qtr End 04/05/09) Earnings Call Transcript
This Transcript
All Transcripts