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Executives

Mark K. Pogharian - Director of Investor Relations

John P. Bilbrey - Chief Executive Officer, President, Chief Operating Officer and Director

Humberto P. Alfonso - Chief Financial Officer, Chief Administrative Officer and Executive Vice President

Analysts

Mineo Sakan - UBS Investment Bank, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Andrew Lazar - Barclays Capital, Research Division

David Driscoll - Citigroup Inc, Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Vincent Andrews - Morgan Stanley, Research Division

Gretchen Guo

Thilo Wrede - Jefferies & Company, Inc., Research Division

John Baumgartner

Eric R. Katzman - Deutsche Bank AG, Research Division

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

The Hershey (HSY) Q1 2012 Earnings Call April 24, 2012 8:30 AM ET

Operator

Good morning. My name is Theresa, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hershey Company First Quarter 2012 Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Mark Pogharian to begin. Please go ahead, sir.

Mark K. Pogharian

Thank you, Theresa. Good morning, ladies and gentlemen. Welcome to The Hershey Company's First Quarter 2012 Conference Call. J.P. Bilbrey, President and CEO; Bert Alfonso, Executive Vice President and CFO and Chief Administrative Officer; 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 2011 filed with the SEC.

If you have not seen the press release, a copy is posted on our corporate website 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 reconciliations of select income statement line items quantitatively reconciled to GAAP.

As we 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 first quarter results excluding net pretax charges of $33.6 million or $0.09 per share diluted, which are primarily related to the Project Next Century program. Our discussion of any future projections will also exclude the impact of these net charges, non-service-related pension expense, and acquisition and integration costs related to Brookside Foods.

With that out of the way, let me now turn the call over to J.P. Bilbrey.

John P. Bilbrey

Thanks, Mark. I'm pleased that the Hershey Company generated solid quarterly results in Q1 of 2012. We expected to get off to a strong start as the first quarter is essentially the only period of the year where we realized pricing across the board. We continue to support our brands with the right level of investments to succeed in the marketplace across all channels. This has resulted in achievable, predictable and consistent growth, which has been ahead of the long-term targets we established in 2008, and we did this against a backdrop of consumer uncertainty. Importantly, the CMG -- candy, mint and gum -- category continues to outpace other parts of the store. For the 12 and 52 weeks ended March 24, 2012, the CMG category growth was, again, greater than the historical growth of 3% to 4%.

Given the high household penetration, impulsivity of the category, as well as affordable price points, we believe retailers across all channels will continue to value the confectionery category. As a result, we would expect the category to continue to consistently secure key merchandising space and programming.

In the first quarter, Hershey's net sales increased 10.7%. Bert will provide you with details, but growth was primarily driven by pricing. Everyday U.S. core brand performance was in line with our expectations and volume elasticity modeling, while Easter was slightly stronger. Our international business continues to be strong, contributing about 2 points to the overall top line growth.

Now looking at retail takeaway. CMG retail takeaway for the 12 weeks ending March 24, 2012, per our custom database, in channels that account for over 80% of our retail business -- and as a reminder, these channels include food, drug, mass, including Walmart and convenience stores -- increased plus 6.4%. If you were to add the other fast-growing retail outlets like club and dollar, which will be available to you around midyear, and add the Easter products scanned in all channels between March 24 and April 8, our retail takeaway is in line with first quarter U.S. net sales.

Looking at syndicated data here excluding Walmart, Hershey's FDMxC retail takeaway was up 4.7%. Hershey FDMxC CMG market share in Q1 was flat, in line with our expectations. Note that syndicated data currently excludes our market share performance at our largest customer and in the fast-growing value channels where we continue to do well. Additionally, the year-ago period benefited from our major product launches, primarily Reese's Minis, that occurred earlier in the year given the late Easter. In 2012, the window between Valentine's and Easter was closer, necessitating seasonal merchandising and programming on the floor much earlier than the prior year. Therefore, we plan to launch our more significant innovation to launch in Q2 and beyond. We expect that this will have a favorable impact on our FDMxC market share performance in the coming months and quarters.

Given these moving parts, I'm pleased with the overall category performance in the first quarter. Investments in the category in the form of advertising and innovation are present for most major manufacturers, and it appears that competitor new product launches were skewed to the first quarter. For the 12 weeks ended March 24, FDMxC CMG category growth, including seasonal activity in both the current and year-ago periods, was also up plus 4.7%.

Given that marketplace data for the 12 weeks ended March 24 excludes the significant last 2 weeks of the Easter season and all the aforementioned moving parts, my upcoming remarks related to marketplace performance by channel will include seasonal data in all periods. For the 12 weeks ended March 24, 2012, food channel CMG category growth was up 1.1%. Food channel retail takeaway for Hershey was off about 0.5%, resulting in a market share decline of 0.5 points. Our non-chocolate performance was solid, up plus 10%, driven by continued TWIZZLERS momentum and the new Jolly Rancher Crunch 'N Chew product. And as I mentioned previously, Hershey chocolate performance in this channel was impacted by the timing of chocolate new product launches in the year-ago period. Hence, Q1 food channel chocolate category growth slowed to plus 1.8%. Our food channel chocolate retail sales declined 1.4%, resulting in a negative 1.4 share point loss. Given the timing of our 2012 new product launches, we would expect marketplace performance in this channel to sequentially improve as we make our way through the year.

In the C-store class of trade where the Easter impacts are minimal, the CMG category was up plus 8.5%. Total Hershey C-store performance was particularly strong with takeaway up 9.3%, resulting in a share gain of 0.2 points. These gains were driven by pricing, core brand advertising, in-store selling, merchandising and programming, including our continued successful promotional tie-in with the NCAA March Madness basketball tournament. In Q1, Hershey's C-store performance was balanced with retail takeaway up 8.6%, 15.1% and 15% in chocolate, non-chocolate and mints, respectively.

Importantly, it doesn't appear that higher prices at the pump are having a major effect at the C-store level. In case you missed it on April 6, a NACS, or National Association of Convenience Stores, spokesperson was on CNBC and stated that despite higher gas prices, sales inside the store have actually increased. 2011 was better than 2010, and so far this year, he stated most members are telling him that sales inside the store are going up. Hence, the current prices at the pump don't appear to be having the same effect on consumer buying behavior at NACS locations as they have in the past. Our experience is consistent with this as first quarter traffic, partially due to good weather and consumer dollar spend, was higher at our own CHOCOLATE WORLD retail stores. The convenience store channel will continue to be a meaningful contributor to Hershey in 2012. However, as we make our way through the remainder of the year, retail dollar takeaway growth will most likely slow as we begin to lap the price increase.

In the drug class-of-trade, CMG category growth was plus 2.2%. Hershey retail takeaway increased 3.4%, resulting in a share gain of 0.3 points. Similar to the last couple of quarters, our drug channel retail takeaway was meaningful in non-chocolate, mint and gum and resulted in solid market share gains.

However, our chocolate growth slowed to plus 2.6% and we lost 0.3 chocolate market share points in this channel. Chocolate dynamics changed in this channel during the quarter. However, we maintained our disciplined and focused strategy that will deliver long-term chocolate category growth and quality market share gains.

As we look to the remainder of the year, we have many exciting new products, promotions, programs and merchandising events in place across all channels. New product launches include Jolly Rancher Crunch 'N Chew, Rolo Minis and Ice Breakers Duos. Additionally, we're pleased to announce the launch of Hershey Simple Pleasures in 3 flavors, milk chocolate, dark chocolate and vanilla cream, in a smooth and creamy format that has 30% less fat than the average leading milk chocolates.

Our proprietary sales force allows us to execute flawlessly in store and leverage our merchandising and programming expertise. Some of the activity we have planned includes S'mores programming that will run throughout the key summer dates and into fall tailgating; a couple of TWIZZLERS summer programs, one tied in with the upcoming Spiderman movie and another that will award a lucky consumer a chance to win a new car filled with their favorite TWIZZLERS products; as well as a summer Reese's and Coca-Cola promotion. We're also on track to increase full year advertising expense low-double digits for the total company on a percentage basis versus last year, supporting new product launches and core brands in both the U.S. and international markets, and new advertising campaigns on the JOLLY RANCHER and ROLO brands.

Q1 advertising growth outpaced the increase in SM&A expense x advertising. We don't expect that to be the case over the next 9 months, as our planned investments in international go-to-market capabilities accelerate, especially in the second quarter. The SM&A increases are in support of the key international markets we've previously discussed and are focused on market research, category management and building selling capabilities. Our businesses in the focus markets of Mexico, China and Brazil are off to a good start to the year as net sales increased about 20%. The business and consumers continue to respond positively to these broad-based investments, and we expect the same response from our 2012 initiatives.

Now to wrap up. I'm pleased with the way the confectionery category and Hershey continue to perform in the marketplace. We have solid relationships and are working well with retailers in all our channels. Macroeconomic challenges still exist, however, and we feel good about the prospects, as confectionery has proved to be resilient given the impulse nature of the category and the continued investment in the category in the form of innovation and advertising. Category growth has been robust. It's expandable, profitable for the retailer and affordable to the consumer.

Over the remainder of the year, we're confident that our innovation, advertising and in-store execution will continue to drive top line growth. As previously mentioned, advertising will increase low-double digits on a percentage basis versus last year. As a result, we have increased our top and bottom line outlook for the year. We expect organic volume to be slightly up in 2012, and including in the results of the Brookside acquisition, about $90 million at current exchange rates, we expect full year net sales growth of about 7% to 9% including the impact of foreign currency.

There is no material change to our inflation outlook for the year and we continue to estimate that the input costs will be higher in 2012 versus last year. Despite this increase, pricing, productivity and cost saving initiatives are in place and at this time, we estimate that full year 2012 adjusted gross margin will increase about 90 to 100 basis points. Therefore, given our solid first quarter start and the SM&A investments to be made over the remainder of the year, we have increased our full year adjusted earnings per share diluted outlook and expect it to increase 10% to 12%.

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

Humberto P. Alfonso

Thank you, J.P. and good morning, everyone. First quarter results were solid, with consolidated net sales of $1.73 billion, up 10.7% versus the prior year and relatively in line with our expectations. Adjusted earnings per share diluted of $0.96, up 31.5%, was a bit better than our expectations due primarily to the timing of SM&A investments that I will provide more context on shortly. J.P. provided details on our marketplace performance, so I will focus on the review of the P&L, balance sheet and cash flow.

As expected, first quarter net sales gains were driven primarily by a 10.9% net price realization benefit, partially offset by core volume decline due to price elasticity of 0.5 points. Our recent acquisition, Brookside Foods, contributed approximately 0.7% on top line, and foreign currency exchange rates were about a 0.4 point headwind. Importantly, in the U.S., excluding about a 1.5-point benefit from new products, volume elasticity due to price increases on core brands is tracking in line with our modeling, and our U.S. seasonal business continues to be strong. Following a strong fourth quarter holiday season, Easter sell-in in Q1 was a bit better than our initial estimates. We continue to see relatively consistent growth in our international markets, as they contributed about 2 points to our top line growth on a quarterly basis.

Turning now to margins. In the first quarter, adjusted gross margin increased 180 basis points, driven by net price realization, supply chain efficiencies and productivity. These margin gains were partially offset by higher input costs of about $30 million, in line with our expectations. Commodity spot market prices have been volatile, and we expect that volatility to continue in the coming months. As previously stated, we have good visibility into our cost structure and there is no material change in our full year inflation outlook. We continue to expect higher input costs in 2012 versus last year. However, due to our good start to the year, solid productivity and cost savings, as well as net price realization, we expect full year adjusted gross margin to increase 90 to 100 basis points versus our previous estimate of about 75 basis points.

Adjusted EBIT, driven primarily by higher gross margin, was up 28%, resulting in an EBIT margin of 21.3%, up 290 basis points over the first quarter of 2011. In addition, SM&A excluding advertising declined as a percentage of net sales by 130 basis points versus last year. A good portion of this gain is timing-related, and over the remainder of the year, we expect SM&A increases, excluding advertising, to be greater than the first quarter trends. Our planned SM&A investments include market research, category management and selling and marketing capabilities in both the U.S. and international markets. In addition, our R&D center in Shanghai is also scheduled to open later this year.

Advertising expense increased about 14% in Q1, and we continue to estimate low double-digit percentage increase versus last year, supporting core brands and new products in both the U.S. and international markets.

Now let me provide a brief update on our international businesses. First quarter international sales, excluding Canada, increased about 20% versus last year. We are pleased with our progress in our focus markets and especially China and Brazil, whose top line growth exceeded 20% in Q1, driven by strong seasonal performance. International profitability increased versus last year. However, this increase was primarily driven by the already mentioned timing of SM&A investments. We remain committed to these markets and we'll continue to make the necessary investments to build brand equity and drive trial and repeat purchases.

For the quarter, interest expense decreased, coming in at $24 million versus $24.5 million last year. In 2012, we expect interest expense to be approximately $95 million to $100 million. The tax rate for the first quarter was 6.1% [ph], slightly lower 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%. The tax rate in Q2 will be slightly less than Q1 and about 34% in the second half of the year.

In the first quarter of 2012, weighted average shares outstanding on a diluted basis were 228.7 million versus approximately 230.2 million in 2011, leading to adjusted EPS diluted of $0.96.

Turning now to the balance sheet and cash flow. At the end of the first quarter, net trading capital increased versus last year's first quarter by $184 million. Accounts receivable was up $69 million and remains extremely current. The current year-over-year increase is a direct result of Easter timing. Inventory increased by $114 million year-over-year, primarily related to the Project Next Century production transition. Lastly, accounts payable decreased by $1 million.

In terms of other specific cash flow items, total company capital additions, including software, were $92 million in Q1. These amounts included Project Next Century capital expenditures of $47 million. In 2012, we expect ongoing CapEx to be approximately $240 million to $250 million, excluding Project Next Century. Capital additions are expected to be an additional $65 million to $70 million for Project Next Century, making our total 2012 CapEx estimate $305 million to $320 million. Note that these amounts include CapEx for Brookside Foods manufacturing capacity expansion as well. The Brookside integration is progressing as planned, and we intend to expand distribution in 2013.

Depreciation and amortization was $55 million in the quarter. This includes accelerated depreciation related to Project Next Century of approximately $9 million. Adjusted operating depreciation and amortization was $46 million. In 2012, we are forecasting total operating depreciation and amortization of about $195 million to $205 million.

Dividends paid during the quarter were $84 million. During the quarter, we repurchased 125 million of our shares against the 250-million repurchase authorization that was approved in April of 2011. There is 125 million remaining on this authorization. We also purchased 93 million of our common shares to replace shares issued in connection with exercises of stock options. All 218 million of acquired shares were repurchased in the open market.

Cash on hand at the end of the first quarter was $567 million, down $126 million versus year-end. As it relates to our short-term cash needs, the company is currently well positioned to manage the capital needs of the business. Our cash flow remains strong, and we'll continue to improve as we grow earnings and normalize inventory levels related to Project Next Century.

Let me now provide an update on the Project Next Century program. We are pleased with the progress we're making on the West Hershey plant expansion, which remains on track. The building is complete and progress continues with the startup of new production lines. All new lines are expected to be operational at the West Hershey facility by the end of Q2. The forecast for total project pretax GAAP charges and nonrecurring project implementation costs remains at $150 million to $160 million. By 2014, we expect ongoing savings to be approximately $65 million to $80 million. Please see the note in Appendix 1 in today's press release for further details.

Now to summarize. Our U.S. marketplace performance in measured and non-measured channels is tracking as expected. We have core brand building, merchandising and programming, as well as launches of new products planned for the remainder of the year, that will enable us to maintain our momentum. In addition, advertising will be up low-double digits on a percentage basis versus last year.

Given our strong start to the year, we have increased our top and bottom line outlook for 2012. We expect organic volume to sequentially improve and be up slightly for the full year. Our current modeling indicates organic volume will be about flat in Q2 and then up slightly in Q3 and 4. And we continue to estimate full year net sales contribution from Brookside of about $90 million at today's exchange rates.

Therefore, including Brookside, we expect full year net sales growth of about 7% to 9%, including the impact of foreign currency exchange rates. There is no material change to our inflation outlook for the year. We have good visibility into our full year cost structure, and despite higher input costs in 2012, I expect adjusted gross margin to increase 90 to 100 basis points, driven by productivity, cost savings and net price realization. Therefore, we have increased our full year adjusted earnings per share diluted outlook and expect to grow 10% to 12%.

Before we open up to Q&A, and as you work your models, please note the following. In Q2, we begin to lap last year's price increase. Due to seasonality, Q2 is typically our smallest quarter. Our 2012 innovation picks up in Q2. However, we are also lapping the launch of successful Reese's Minis and Hershey's Drops. Despite commodity spot market volatility, input costs will continue to be higher year-over-year. We would expect to incur promotional and launch costs related to Rolo Minis, Hershey Simple Pleasures and Ice Breakers Duos starting in Q2. And as already mentioned, a good portion of the estimated timing on expense increases will mostly likely be incurred in Q2 and Q3.

With that out of the way, we'll now open it up to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from David Palmer of UBS.

Mineo Sakan - UBS Investment Bank, Research Division

This is Mineo calling in for Dave. I guess our first question would be, you did mention something about increased marketing and go-to-market capabilities. Could you characterize the nature of that spending?

Humberto P. Alfonso

Sure. We've been making investments over the last couple of years, certainly in both the U.S. and non-U.S. markets. And in this particular quarter, we've talked about it separately than advertising, which we said increased at about 14%. And so market research; sales force capability, not only training but also distribution expansion in certain geographies, particularly in China, that we've talked about in the past; as well as other capabilities which are collaborative, such as IDP, with our major retailers. Those are the types of investments that we're talking about. In addition to those, I mentioned that with our product launches, obviously, we have product launch expenditures that also fall into the SM&A category.

Mineo Sakan - UBS Investment Bank, Research Division

Great. And as you start to lap the Drops and Minis, which is clearly going to represent tougher comparisons going forward, are there any additional innovation in the -- or is there any additional innovation in the pipeline for the second half of the year?

John P. Bilbrey

Well, we have innovation across all of the markets over the balance of the year. But the ones that we've talked about are primarily the ones that we're going to be focused on. So again, let me remind you that we talk about our innovation being about 1 point of our overall growth. Over the last couple of years, we've done certainly better than that. And we're going to do better than that this year as well, but there will be some tough comparisons versus the kind of success we had versus Minis. But we still believe that we've got a good slate of innovation that'll be very productive for us.

Operator

The next question is from Jason English of Goldman Sachs.

Jason English - Goldman Sachs Group Inc., Research Division

A couple of things real quick. On Brookside, can you tell us where you stand right now in terms of capacity utilization, the plan, the pacing of the expansion and where that business sits in terms of distribution across all channels today?

John P. Bilbrey

Well, the Brookside acquisition, if you remember when we talked about capacity, will be bringing on new capacity late in the year of 2012 that will help position us for a much broader expansion in the U.S. market in 2013. So today, that business is doing very well, and in fact, we wouldn't be able to go much further than we have already with the capacity we have. So we'll have capital investments in that business late in the year that gives us the ability to expand. And again, we're excited about what we believe is the potential of that. But 2013 is where the big change happens in terms of both volume and distribution gain.

Jason English - Goldman Sachs Group Inc., Research Division

And any help in me sort of sizing the prize on what the upside could be? Are you currently around 25% distribution, 50%, for example?

John P. Bilbrey

Well, we have broad distribution in Canada and then through Costco in North America. So as we think about bringing on the distribution, we would hope to be able to achieve distribution levels consistent with the balance of our brands in the category.

Jason English - Goldman Sachs Group Inc., Research Division

Okay. And Costco, I think, is around 10% of U.S. right now, so that sounds like there's a lot of untapped opportunity.

John P. Bilbrey

We're very optimistic and excited about what Brookside brings to us.

Jason English - Goldman Sachs Group Inc., Research Division

And last question and I'll pass it on. I don't want to be too much of a time hog here. China, I think last quarter you guys talked about pushing out into Sugar Confection, maybe with the JOLLY RANCHERS brand. Can you give us any updates on that?

John P. Bilbrey

Well, in China this year, as well as in 2013, we have a number of different efforts going on in our sugar confectionery business, so ICE BREAKERS is certainly one. We would see the Duos launch also being one that would be relevant in China as well. So that category is actually doing quite well for us. And as you know, in China, sugar confectionery is a significantly larger percentage of the business than chocolate is today. So we really are focused on having a balanced portfolio, sorry, of brands, and then also recall that we have our R&D center that we hope to have open later this year, which should also help us develop products that are very China- and Asia-specific.

Operator

Your next question is from Ken Goldman of JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

So cocoa has stayed quite cheap for a while now. I know you're loathe to comment on this and I understand why, but let me maybe ask the question this way. If cocoa stays inexpensive versus recent historical levels, and if you don't see big increases to your other inputs, why should investors maybe not start to think that your input costs late this year and into next year have a chance to be much less of a headwind or even a small tailwind? Is there maybe something we're missing when we're thinking optimistically about this part of COGS?

Humberto P. Alfonso

Yes, Ken, I mean, I don't think you're missing anything. I mean, I think the way you've characterized it is reasonable. Cocoa is down and a couple of the other commodities, while still at pretty elevated levels, are down. Versus last year, we continue to signal that there is some meaningful inflation year-on-year. But having said that, downward trends in commodities certainly will show up, but we don't ordinarily talk about the timing because that's proprietary on our side. But I think the longer it continues, the general optimism is well placed.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

And then I'm hoping to get a better understanding of how your sales performed, maybe in the center of the store where we've seen -- we've seen volumes be such an area of concern for so many of your food manufacturing peers, but it sounds maybe from your comments like you did better in the center of the store than the industry has as a whole. So I guess first, am I reading that right? And second, if so, how did you buck that trend, in your view?

John P. Bilbrey

Well, I think you're probably reading it right. And I think we believe that the category continues to be accessible. One of the things we say over and over again is that this is one of the most -- it is the largest, most profitable confectionery market in the world and happens to have one of the lowest costs per pound. It has the ability to be an accessible indulgence regardless of what seems to be happening around use. I would call that resilient, certainly not anything recession-proof. I wouldn't go that far. But I think this is a unique category. It has a lot of great qualities. It has the seasonal events that really bring consumers into the store and get them into the aisle, as well as all the other points of distribution that it has. So again, we have programming that's well over 30 weeks out of the year on our brands, so they're just broadly available and accessible to consumers and then they can enjoy them without having to sacrifice a lot. And I always looked at the C-store channel in addition to the balance of retail as a testament to the strength of the category.

Operator

The next question is from Rob Moskow of Crédit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

My questions have pretty much been asked already, but you mentioned that international contributed 2 points of growth. Can you give us a little more detail on the extent to which that would -- what did the growth look like x Canada? Were you still hitting kind of that 25% kind of growth? Or was it better than that?

John P. Bilbrey

Well, the numbers we gave you would've been x Canada, and of course, there is a large mix across all the countries. So some of the countries are obviously doing significantly better than that and a couple modestly below. But that's really the texture of that business. We continue to feel very good about our ability to execute against a very basic, solid model in each of these marketplaces. And if you recall from our last call, we talked about that these markets have gross margin very similar to our U.S. business. And therefore, as we continue to go forward, it gives us choices around how we invest in those markets and how we can adjust that investment to ensure that we continue to be -- we continue to be productive. But right now, we feel very good about being able to deliver the overall business results we are and still be able to invest differentially in what are some of the most attractive markets around the world.

Robert Moskow - Crédit Suisse AG, Research Division

And can I ask a follow-up? On the question earlier about SM&A being up higher in second, third and fourth than it will be in first, a lot has been talked about how your category management skills have improved. You've invested in a lot of new tools. What can you tell us about the types of these investments? Are they just kind of like similar to what you've been doing all along with better technology and better use of data? Or is there something new, maybe some new programs that you're introducing to the trade?

Humberto P. Alfonso

Yes. I would say that there's a bit of a combination and it's evolutionary, right? I mean in the U.S., where we've done the most of that work, certainly we're further along as you might imply in terms of intellectual capital and the sophistication of the trade and how we collaborate with key retailers. We do bring that knowledge into other markets. Some of those markets are not quite as sophisticated at the retail level, but the objective is very similar. It does involve data, obviously. And then it involves the types of insights that you would expect in terms of consumer and shopper. And so really, it's a matter of the level of sophistication, but it is focused on intellectual capital and our people, and the collaborative nature of how we bring knowledge to retailers to maximize the value of the category, certainly our brands, but the value of the category in general.

John P. Bilbrey

Rob. Hey, Rob, one real specific example is if you recall from CAGNY last year, we talked a lot about the demand landscape. We're investing in that work in places like China and some of the other geographies, which is really the foundation of the consumer insight and demand landscape work, because that's what our overall business model hinges on in terms of the way we go to market. So we're really expanding some of those programs.

Robert Moskow - Crédit Suisse AG, Research Division

But, John, you also talked about rolling IDP, which was a huge success in drug, rolling that out to grocery. I haven't heard much of an update on that. Can you give us one?

John P. Bilbrey

Sure. Today, we are probably working with about 6 to 8 of the largest customers on an IDP-type framework, which really starts with a long-term strategic -- joint strategic planning. And then you really go down through a menu of solutions based on what those strategies are -- were for both the retailer and ourselves. And what I would tell you we're finding is, is that the success we're having in those customers which have the tools and we work jointly with performed differentially versus those where we have not rolled out IDP. So the goal for us is, one, we have to be prepared ourselves, and that's one of the things Bert talked about in terms of investing in intellectual capital and getting people that can interact in these kinds of programs. And then the same thing happens on the retailer side. So as we can do more of that, we will do more of that. But we are very encouraged by what we're experiencing, and we believe it's fundamental to a number of our successes.

Operator

Your next question is from Andrew Lazar of Barclays.

Andrew Lazar - Barclays Capital, Research Division

First off, I'm just trying to get a better idea to the extent you can help us around maybe the magnitude of the sort of the timing shift in the SM&A. And I only ask this because if we think about some of your guidance on a full year basis for sales and gross margin improvement and some other things, it's pretty easy to get to a full year earnings number that's pretty far beyond what your sort of current guidance is. And I realize it's only 1Q and all of that, but the plug there is obviously what that SG&A line looks like for the full year. So I'm just trying to get a sense of how that might look on a full year basis, just so we have a better sense of that?

Humberto P. Alfonso

Yes, Andrew, I certainly think it's more than just the one line in terms of how you're characterizing it with -- and I understand your thought process in terms of where SM&A is in Q1 versus outlook. There's a definite increase, obviously, and some timing involved in the SM&A, but it's not about programs that we weren't already planning for. So from that perspective, I would say that we haven't added a lot of investment. If we had, we typically would talk about that. While we're -- while we have food advertising, it's still at the low double-digit rates and we expect SM&A not only to kick in more with the new products coming in place, but also just the timing of some of the work that we just talked about, whether it's demand landscape in other markets or those types of things. The other thing to point to, while we haven't talked a lot about it, but I think it's obvious in the comments, is the level of price realization, which was quite high in Q1 as expected, because other than a little bit of Valentine, the entire portfolio would benefit from that. And then you start to lap the price realization. You start to recover some of the volume. And so you don't have as much gross margin expansion in the remainder of the year. By definition we said 180 versus 90 to 100. So I wouldn't focus overly on the SM&A line, and think of it more some of the other moving parts in the P&L. I would say that's probably the better way to look at it. And what I can tell you is we think they are the right investments to make and the right markets, and that's how we framed up the overall annual outlook.

Andrew Lazar - Barclays Capital, Research Division

Got it. And then it's a smaller channel, obviously, but in the drug channel, I think, J.P. mentioned that there was a sort of a change in the, I think, category dynamic as you put it. And I'm just trying to get a better understanding of what you meant by that.

John P. Bilbrey

Well, I think for us, as we've worked with the drug channel, there's a couple of things that are going on. The drug channel was historically very overdeveloped in terms of the percent of seasons that it sold and some of that volume, we felt, was probably less productive for everybody, the retailer as well as us, in terms of the way we were going about it. And so we've been able to, I think, rebalance some of those efforts to where we're getting much better balance on front-end sales. We're doing better on the in-aisle part, and then I think as we do seasons, we're doing seasons smarter and more profitably. So as we look at what's happening for both the retailer and for us in the way that we go about managing, specifically the seasonal sales, it's a higher quality sale for everybody, I think, than maybe it had been historically. And so that's a bit of the context change there. And we're very optimistic about the drug channel just in total. So getting our business as productive as possible there has been really important to us. And it's taken several years, frankly, to get to the point where we're at, and that's really what I was referencing.

Operator

Your next question is from David Driscoll of Citi Investment Research.

David Driscoll - Citigroup Inc, Research Division

A couple of questions, pretty quick ones, though. First one is on Easter. Is there anything related to the timing of Easter that would affect the shipment pattern between Q1 and Q2? Was Q1 in any way benefited by better shipments because of the earlier Easter? And I would assume that's all volume-related if it was true. But you didn't call it out so I'm thinking no, but could you just clarify?

John P. Bilbrey

David, it would be relatively modest actually in terms of the changes. I think one of the things to think about is if you look at the IRI data, I think that's through March 17. Our comments have been around March 24. We feel very good about the actual sell-in of Easter as a double-digit volume increase. But we really won't know the answer until we get the May 3 data on what was really the overall outcome of Easter, but we would anticipate growing share at Easter. And our -- as we tumble the numbers, and this is a very imperfect science at this point, we hope to gain about 0.5 share point over the course of the Easter holiday.

David Driscoll - Citigroup Inc, Research Division

Okay. But in terms of from the manufacturer's point of view, from your point of view, the shipments would've occurred in the first quarter in the year-ago period, and they would've occurred in the first quarter this year no matter what the timing -- the exact timing of Easter was in the second quarter. Is that right?

John P. Bilbrey

Yes. I think -- yes, I think that's correct. We just -- I mean there could be an absolute modest amount that would've been different, but not really meaningful, Dave.

David Driscoll - Citigroup Inc, Research Division

Okay. On the SM&A question, excluding the marketing expense. So I think the SM&A budget this year -- or sorry, in the first quarter was up like 3% when you exclude marketing, and your guidance is -- if I read everything right, the guidance is just that simply it will be north of 3% of an increase in the subsequent quarters. But maybe this is too cryptic for me. Can you just tell me what you think SM&A is going to be up year-over-year for the full year? Is there any reason why you wouldn't know that right now?

Humberto P. Alfonso

Yes. You're right about the 3% and we would expect it to be more in line with sales growth.

David Driscoll - Citigroup Inc, Research Division

Okay. So SM&A x marketing, up something in the magnitude of sales growth. Because it's only up 3% in the first quarter yet first quarter sales are up 11%, that's the timing issue that you were talking about. Is that right?

Humberto P. Alfonso

Yes, that's correct. And so again, I want to reiterate, we're not -- in the past, when we've changed some numbers, we've talked about hey, and we're increasing our investment versus what we've planned. That's not the case. We're making the investments as we've planned them. The timing is just a little bit different. And that accounts -- and that applies to both SM&A as well as advertising.

David Driscoll - Citigroup Inc, Research Division

And then does this SM&A issue, does this drop all the way down to the bottom line? So if $0.81 was consensus and you come in at $0.95, $0.96 depending on how you want to treat the pension cost issue, that's $0.14, $0.15 of an earnings peak. Guidance is only up $0.03. So is your explanation that the timing of SM&A is the explanatory factor why full year numbers don't rise by the significant beat versus consensus?

Humberto P. Alfonso

Yes, that's part of it. And again, I mentioned it to -- in response to Andrew's question, the pricing is quite different, right, during the year in terms of if you look at our gross margin of 180 basis point expansion in Q1 and our guidance of 90 to 100, there's a lot -- the pricing, as you would expect, because it's across the portfolio and you're only starting to lap it in the second quarter is also a contributor.

Operator

Your next question is from Bryan Spillane of Bank of America.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Just one question and one point of clarification. First, just on the gross margins as we look out the balance of the year, so as pricing will be less incremental as we go through the remaining quarters, is your cost inflation essentially -- the year-on-year inflation essentially the same in each quarter? Or is there any variability in terms of what you'd expect for inflation from quarter-to-quarter?

John P. Bilbrey

Bryan, it's fairly consistent. Obviously, when we set up our standard costs at the beginning of the year, that's a standard that's consistent across the quarters. If there were some variability to that, it would come up as purchase price variance, and the fact we haven't talked a lot about that tells you we're pretty close to standard. The only thing I would say is the first quarter, certainly it's our most impacted volume quarter as well. And we gave the number of about $30 million of inflation, so there would be some volume pickup as you get through to third -- second, third and fourth quarter, so you're going to have a little bit more volume, so you may have a little bit more of the cost impact because of that volume, but I would say that from a standard perspective, it's relatively the same.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Okay, great. And then during the course of the first quarter, there had been some discussion, I guess, in the channel about maybe the potential of some competitors either rolling back pricing or not following through completely on all their pricing plans. And so now you've got sort of the first big holiday under your belt. Just if you could give any sort of comment on that line of logic and whether or not you've seen anything that would suggest that the industry or some of your competitors may not be following through on all the pricing.

John P. Bilbrey

Well, first of all, we're not going to comment a lot on what we believe other people's pricing strategies are, but we continue to execute, we believe, successfully against the things that we've chosen to do. We don't see a number of things in the marketplace that would lead us to believe that there's anything different than historically occurs, and there's always instances where you could go into an individual store or maybe a regional customer maybe decides to do something unique. But for the most part, we feel comfortable that the course that we've charted is working well for us, and we continue to believe that's how we'll execute through the balance of the year.

Operator

Your next question is from Chris Growe of Stifel, Nicolaus.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

I just had a quick question for you. I think it's a bit of a follow-up on the price realization. As we think about the sequential pricing through the year, Q3 pricing, would that be greater than Q2 pricing because of the degree of seasonal sales in the quarter? Am I looking at it the right way?

John P. Bilbrey

Yes, we'll have some pricing in Q2, and then we'll have some in Q3 as you rightly point out, related to Halloween particularly, which is when that ships. So nowhere near in Q1, because in Q1 it applied to everything except for a little bit of Valentine. So we will have some price realization in 2, a little bit more in 3 and then it really winds down a lot in fourth.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Okay, just wanted to be clear on that. And then I also -- there was a comment before about a roughly 1.5% benefit to sales from new products. Is that like a year-over-year calculation for the first quarter?

John P. Bilbrey

Well, when we talk about our growth algorithm on a going basis, we want to have 1 point of net growth coming from innovation. And what we have been experiencing is innovation success greater than that over the last, frankly, several years. But I think we were at about 3.5 last year. I think we're a little bit lower than that this year. But certainly, ahead of the 1-point algorithm that we have for ourself.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

And that's -- is that like products from the last year essentially, the last 12 months? Or...

John P. Bilbrey

Yes, the way that we calculate that is in the second year, those are not included in terms of innovation, so you really look at it net of cannibalization. And when you calculate that, then the numbers that we talk about are really what's happening net of cannibalization in the year -- the second year.

Humberto P. Alfonso

But the way to think of it is that the 10.7 net sales growth that we talked about, it's 1.5 points of that.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Yes, sure. Okay. I guess to -- just to follow up, I know there's been a lot of questions on the international investments. My question to you would be, would your profits grow at a materially slower rate for international versus the sales growth this year? Is that your expectation? I'm just trying to frame the level of investment and maybe that's one way to kind of get a little closer to it.

Humberto P. Alfonso

Yes, I mean, we don't do segment reporting, but we try to give some color on international. We've been trying to give more. So what I would say is in the key markets where we're growing rapidly the top line, as well as investing for future growth, that will be true. I mean, we're largely in a reinvest mode. So while we're -- as J.P. already mentioned, we're very conscious of our gross margin in those markets. It's really less about profit contribution.

John P. Bilbrey

If I could just build on that comment for a second, is that when you think about our business model, there's 5 or 6 markets around the world that have GDP growth of greater than 5%, some significantly greater than that. And those are really the markets that we're focused on. So in terms of quality and attractive growth for us in these markets with attractive gross margins, which again gives us choices on how and when we choose to invest, it's really a very attractive model versus having legacy businesses. I mean, if we all looked this morning at some of the news items coming out of Europe, certainly, there are some drags on businesses there. And hopefully, we'll be able to continue to grow at an attractive business level in markets that have the best growth potential of any of the markets we have and continue to execute in a smart way, building brands with -- behind really strong consumer insight. So I think it's why we continue to feel very, very good about our approach. And so hopefully, we'll be able to continue to see that we'll achieve the international growth targets that we've set and maintain a very healthy business at home.

Operator

Your next question is from Matthew Drizer [ph] of Morgan Stanley.

Unknown Analyst

So just 2 quick questions. First, I wanted to ask specifically about the special pleasures health and wellness product. Can you give us a sense of how this might be positioned from a pricing standpoint, how material you expect it to be? Is this something that you're looking at more as a niche product? Or should we be looking for relatively broad distribution and a significant push behind the product?

John P. Bilbrey

Well, we would expect to gain broad distribution behind the product. It's more of a trade-up type product in terms of its pricing, and we don't position it necessarily as health and wellness as much as it is an indulgent chocolate that has fewer calories than if you were to look at a solid milk chocolate bar. So the truffle center -- it's more like a truffle technology, the center. The cream there is very low calorie and so it gives you a unique experience in terms of eat, that it's a very melty, creamy-type taste, and then it has this center fill. So the way to think about the 30% lower calories is that versus other chocolate products in the category, the average chocolate products in the category, it has fewer calories yet a very indulgent experience.

Vincent Andrews - Morgan Stanley, Research Division

Okay. So from a distribution standpoint, it's a product that you think will have traction immediately, but may gain more distribution over sort of the course of a 12- to 18-month period.

John P. Bilbrey

Yes, we would see that the product gets broader distribution over time, but we would expect it to get all the time and attention that all of our launches get.

Mark K. Pogharian

Yes, and we probably wouldn't see that across all channels. I mean, it would primarily maybe be focused in food and drug out of the gate as we educate the consumer about it, because there is that process to it.

Vincent Andrews - Morgan Stanley, Research Division

Okay, that's great. And secondly, I was just hoping you could provide a quick update on the key export markets and how these are performing relative to the core international markets. How much of a benefit are you getting, if any, from undemanding prior year comparisons in Japan and sort of selected markets in the Middle East?

Humberto P. Alfonso

Yes, I would say that our -- we've already commented in the past that's a very profitable part of our international component. And it's growing nicely as we anticipated. To be specific, certainly Japan has rebounded. Last year, they had the catastrophe, so that we're certainly seeing above average growth in Japan because of the -- last year's tsunami, and a little bit of the opposite in the Middle East because of some of the turmoil. But overall, very good. Continue to penetrate new markets in Latin America and other parts of the world, but it's a good business for us. But specifically, the 2 markets that you mentioned, one certainly with a rebound because of prior year and the other about the same. Again, it's a very profitable model for us in terms of our export business.

Operator

Your next question is from Alexia Howard of Sanford C. Bernstein.

Gretchen Guo

This is Gretchen Guo calling for Alexia, and I just wanted to quickly ask about India. You had mentioned some of your other focused markets, mainly China and Brazil, which have grown about 20%, but we didn't hear too much about India. Can you just talk a little bit about that market, and perhaps an update on the Godrej JV?

John P. Bilbrey

Well, we grew again in our India business this quarter, so we certainly felt good about that. We continue to be optimistic about the potential of the India market. And I'll add, over time, we have India classified as a market that we want to participate in. We certainly don't want to get out over our skis there, and we're not commenting on the JV. Certainly, we've all seen different things in the press, but there's really nothing new to say there from the things that we've said before. So at the current point in time, we feel good about the progress we're making there and we're learning a lot.

Operator

Your next question is from Thilo Wrede of Jefferies.

Thilo Wrede - Jefferies & Company, Inc., Research Division

Two quick questions for you. You mentioned comments on gas [ph] that consumer behavior these days is -- due to high gas prices, is different from what's happened in the past. What's your explanation why consumers are much less affected by gas prices these days?

Humberto P. Alfonso

Yes, I would say there are a couple of factors. On the one hand, I think the last time that we looked at that impact would have been back in '08 where we saw a very rapid spike in prices. And while prices are not any more attractive than they were back then, it's been less of what we would think of as a spike and we think that the consumers adjust to that in a different way than they do to the spike. Having said that, consumers are sometimes not filling up the tank, and we see some -- we saw some of that conversation on the CNBC show that J.P. mentioned, where they may take more frequent trips, and that tends to help our category as they come into the store. So we do think it's the shock factor. We also think that while unemployment is not at a good level, there has been some improvement in the U.S. economy in the first quarter. You've seen the consumer numbers in the first quarter all around. We're somewhat better despite the higher gas prices, so we just think the consumers has adjusted to them better than they have in the past.

Thilo Wrede - Jefferies & Company, Inc., Research Division

Okay. And then the second one, a small modeling question. You bought back significant amount of shares and exhausted a good amount of your authorization. Are you still expecting to do share repurchases for the rest of the year? Or are you done?

Humberto P. Alfonso

Yes, we don't comment on the specific timing of those repurchases. Certainly, we have 125 million that's still authorized, so we'll execute against that in consultation with our board.

Operator

Your next question is from John Baumgartner of Telsey Advisory Group.

John Baumgartner

J.P., can you talk a little bit about what you're seeing from the food channel and what's driving that share loss there? Do I understand it correctly that it's primarily the timing of innovation between yourselves and competitors? Or is there something else going on there?

John P. Bilbrey

Yes. I don't have any concerns around the fundamentals of our business in the food channel. I think, essentially, what we're seeing is that we're lapping some very strong innovation in the first part of the previous year base. There was a lot of competitive activity in terms of introduction of new items in the first quarter, and we've made a conscious decision that in Q2 and Q3 is where we'll be focused more around the new items that we have. And then you have the other aspect of it is that the whole price conversion and all adds so much noise to the system that I kind of on this tend to look at the total and make sure that the fundamentals are good. So if you were to look at the first quarter from a quality, merchandising and featuring standpoint, our competitors would have certainly won that share of voice. And we would hope that we'd continue to be able to do the same in Q2 and Q3 as we introduce the things we have. So while it's never fun to lose share, I don't see it as something that would fall outside of just the fundamentals of our business, and I think we'll continue to do well as we go through the year. And then the other comment I would just make broadly across our businesses and coming back to IDP is we feel very good about the financial performance of the company, and we believe that over time, we continue to deliver quality share and quality share growth, and sometimes you can look at numbers that they might feel good but they may not be the best quality result. And we're pretty confident that the results we're delivering are quality results.

John Baumgartner

Okay. And then in terms of the Simple Pleasures, if you were to benchmark that in terms of more recent launches, I guess like the Drops or the Minis, I mean it seems like you're expecting a smaller impact out of the gate for Simple Pleasures. Is that fair?

John P. Bilbrey

Well, Minis is definitely a home run. So I wish I could have one of those every single time, and certainly, that's probably not always going to be the case. But with this one, anytime you have something new, so whether it be Air Delight, whether it be something like Simple Pleasures, you're really building a platform that the consumer has to learn what it is. So trial is important and getting people to then, of course, repeat is fundamental. So it's a little bit longer of a story on those type of brands when you launch those first than something that's a big driver around a core brand. And then this is in a standup patch, so there's no inter-consumable [ph] version either. So by default, you have a bit of a difference there as well. But we're committed to try to build these brands as best we can. And again, I would just remind you, versus our long-term algorithm, as we continue to see how we're doing in innovation, we're doing better on a sustainable basis within our innovation than we have in some time.

Operator

The next question is from Eric Katzman of Deutsche Bank.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. I guess, let's go back to Dave Driscoll's question and maybe Andrew Lazar, because I'm not exactly sure, Bert, that I get the guidance. So if you're up 10% to 11%, 12%, that's like 20 -- that's like $0.30 a share. You did most of that this quarter. You're saying that your SM&A spending really hasn't changed, gross margins are a bit better, but that all works out to be just a couple of pennies for the rest of the year per quarter. So is that really what you're saying, that it's just a couple of pennies of growth in earnings per share each quarter?

Humberto P. Alfonso

Yes, Eric, I appreciate the question. And again, I'm not going to say anything different than I said before. We've planned a certain amount of investment in the business this year. There is some timing related to first quarter versus rest of year and we continue with those plans, which we think is the right thing to do for the business, both short-term and long-term. You are seeing some uptick in terms of the guidance on the bottom line. It is partially the price realization that's coming through, which we think is a bit better, and a little bit more volume on the top line. So that's the way the math works. I'm not sure how else to try to answer that.

Eric R. Katzman - Deutsche Bank AG, Research Division

Well, I mean, it's just -- I don't want to beat a dead horse, but it just -- it's either -- it seems to me either your investment spending in some of these initiatives is higher than you originally expected or you're just being incredibly conservative. Because otherwise, I'm just not sure how exactly the math works if you already were, call it $0.15 to $0.20 of that $0.30 has already been put into the bank.

Humberto P. Alfonso

Yes, for the most part I would say that the investment profile in terms of total SM&A as we planned it through the year with, obviously, with the timing thing we've already talked about, is largely in line with how we started the year's thinking.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. And then I guess just more of a broader industry question for J.P. Kraft is obviously going to Acosta for their grocery company. I was just with General Mills and McCormick had an Analyst Day and they talked about how, kind of similar to you if anything, they're investing more in their own kind of sales force and in-store capability. And so I guess maybe for somebody -- or for a company that, I guess, has been really pushing this initiative from when Rick took over to Dave to now you, what do you see as like the potential advantage of using a third-party distributor as opposed to the in-house capability, because it seems like the industry is -- like some players are going one way and the other players are going the complete opposite?

John P. Bilbrey

Yes. I can't really speak for how other folks have really thought about it, but I can tell you that from a philosophical standpoint, I am a strong supporter of having our own organization and our future being in our hands. So we believe -- as you've heard us say many, many times, our sales organization, we believe, has a strategic advantage. We can move on a dime. Our people are passionate about the results we get. Every one of them can tell you that winning is visible when you walk out of a store. You don't have to have somebody give you 100 metrics to understand if you've won or not; you can recognize it easily. And so we just feel very, very strongly about the commitment we have to our own people and the passion they have for our brand. You could do all kinds of analysis around what is the financial comparison, et cetera. And all I know is that when we stand up in front of our troops at those national sales meetings once a year, I couldn't be more proud to be associated with those people than I am every time I'm with them. And so, I guess, on my watch, never say never, but as far as I'm concerned, we'll fight the battle with our own guys.

Eric R. Katzman - Deutsche Bank AG, Research Division

Right. And, Bert, if I could have just one quick follow-up. I think you said that elasticity on the everyday business was what you had expected in terms of volume. Was it down like mid-single digits or low-single digits? What do you mean by it was like in line with what you had expected?

Humberto P. Alfonso

Yes, it would be low-single digits to characterize it. And yes, it was in line with how we think -- with how we were expecting it. But I would -- the only thing I would say is we look at it across package, across channels, so every one of them is imperfect, but by and large, yes, low-single digits and a little better than we expected, but not by a lot.

Operator

And your final question comes from John Feeney of Janney Capital.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Just a couple of quick ones. First, how do you think about dividends versus share repurchase? I apologize if that's been asked. I missed a few minutes of the call, but I know, certainly, with the performance in the stock, the yields a little lower and certainly there's some cash flow.

John P. Bilbrey

Yes, in terms of how we think about cash deployment, clearly, we're always conscious of what we think we need to run the business in terms of day-to-day operational and strategic investments. We're very much committed to the dividend. We think that's a good way to give back to shareholders. We increased it 10% back in February. And as a result, you're right. I mean, the stock has performed well. So I'm not going to apologize for the low yield at this stage, but they're equally, [indiscernible]...

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Because you got there the good way.

John P. Bilbrey

Right. They're equally important to us, and again, we did execute against some of the buyback and we'll continue to talk to our board to see how we want to treat the rest of the authorization. But currently, the dividend is an important element for us.

John Baumgartner

Okay. And just a follow-up for Bert. You mentioned that you don't break out segments. I don't know how the rules work or how you look at it as a judgment call, but at what point do you anticipate breaking out international as a segment...

Humberto P. Alfonso

Yes, the way the rules works -- the way the rules work clearly is based on size of business and a number of other factors. If you take a look at the accounting pronouncements, right now we're a little bit below what those rules would require for segment, but I suspect we'll be reporting segments certainly in the future as the international business grows. From a complexity standpoint, again, it's not that we couldn't. We certainly are accounting folks who are capable of doing that. We're not required to, so at this stage, we've just chosen to stay with our current requirements but I think it's pretty predictable that there's going to come a time when we will report segments.

Mark K. Pogharian

All right. Well, thank you for joining us for today's conference call. And Matt Miller and myself will be available for any follow-up questions that you may have. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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