好時 (HSY) 2002 Q3 法說會逐字稿

Good morning.

My name is Carmen and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Hershey Foods Corporation Third Quarter Earnings Release Conference Call.

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

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

If you would like to ask a question during this time, simply press star and then number 1 on your telephone keypad and questions will be taken in the order they are received.

In order to with draw your question, press star, then the number 2.

Thank you.

I would like to introduce Mr. James Edris, Vice President of Investor Relations.

Mr. Edris, you may begin your conference.

Thank you, Carmen and good morning, ladies and gentlemen.

Welcome to Hershey's third quarter conference call.

Rick Lenny, Chairman, President and CEO;

Frank Cerminara, Senior Vice President and CFO; and I will represent Hershey on this morning's call.

Frank will discuss the business results for the third quarter.

Rick will make some comments and then we'll be happy to take your questions.

We welcome those of you listening via the webcast.

Let me remind everyone who is listening that today's conference call may contain statements which are forward-looking.

These statements are based current expectations which are subject to risks 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 10K for 2001 filed with the SEC.

With that, let me turn the microphone over to Frank Cerminara.

Frank?

Thank you, Jim and good morning, everyone.

By now we assume that all of you had a chance read our press release, issued earlier this morning.

The reported results included pre-tax expenses of $17.3 million or 8 cents per share diluted related to the exploration of the sale of the Company and pre-tax charges for business realignment initiatives announced in October 2001, totaling $9.1 million or 4 cents per share diluted.

In addition, goodwill amortization has been eliminated from our 2002 third quarter results but our 2001 third quarter results, as reported, include goodwill amortization expense and the gains from the sale of Lutens [ph] .

Therefore, the elimination of one-time items from our 2002 third quarter results would yield earnings per share diluted of $1.01, compared with 90 cents per share diluted in 2001.

Assuming the elimination of goodwill amortization and the Lutens [ph] gain from 2001 third quarter results.

This is an increase of 12.2% and was included in the pro forma statement which accompanied our press release.

Since this scenario describes our ongoing business, my remaining remarks will be made in this context.

I should again point out that this year's top line has been affected by the new rules requiring the reclassification of trade promotions and last year's sales have been restated to reflect this change, as well.

For the third quarter of 2002, consolidated net sales decreased by about 2% on a reported basis and on a comparable basis, they declined about 1%, after adjusting for the sale of Lutens [ph], Heide, and the licensing of the aseptic drink business.

Sales were also affected by the relatively weak economy that has resulted in reduced retail traffic.

Competitive activity in the U.S., along with sluggishness in certain international markets, specifically Canada and Brazil, also curtailed sales growth.

Hershey's strategy to emphasize key brands as well as the more profitable pack types and trade channels continues to be evident in third quarter results.

In fact, sales for key brands increased in the mid-single-digit range.

Our most profitable pack type loose bars increased at a low double digit rate.

And our convenience store initiative continued to bear fruit growing at a brisk pace in the third quarter.

Back-to-school and Halloween shipments were satisfactory, although it is too early to tell what the Halloween sell through at retail might be as the heaviest consumer buying takes place in the last two weeks leading up to October 31.

Let me now switch to retail performance.

In recent months, store traffic has been reported as weak, resulting in packaged goods categories being relatively flat.

The confectionery category, of course, is not immune to a slowing economy.

Retail performance for the 12 weeks ending September 8 for food, drug, mass merchants, excluding Wal-Mart and convenience stores, shows the candy, mint and gum category growth up 3.6% in dollar takeaway.

Hershey's growth was 3.0% with solid gains in the chocolate and mint segments.

While our share is off 0.2 share points, most of this loss is attributable to gum.

Most importantly, we continue to gain momentum in our higher margin iconic brands.

For the 12-week period, these advantage brands have generated an 8.7% increase in takeaway.

This growth was the result of good in-store merchandising activity and supported the spiderman event, the red, blue and silver kisses, limited editions of kit kat and new items such as a new flavors for ice breakers and our Reese's Fast Break.

As all of you know, one of our major strategic goals is improving our cost structure and expanding gross margin.

We are pleased to report additional improvement this quarter.

In fact, our gross margin increased by 170 basis points, coming in at 37.8% versus 36.1% in 2001 on a comparable basis.

Improving product and channel mix and better selling price realization contributed to this performance.

In addition, our manufacturing plants, our greatly improved distribution network and lower ingredient and packaging costs have been significant contributors to this margin expansion.

For the full year, we continue to expect the gross margin improvement of about 125 basis points.

Selling, marketing and administrative expenses were 70 basis points lower in the quarter, coming in at 17.4% of net sales versus 18.1% last year.

Direct marketing expenses were down somewhat in the quarter while administrative costs were lower as a result of realignment savings and ongoing tight expense control.

For perspective, I might add that total marketing expenses, including trade promotions, which are now recorded above the net sales line, were up 5.6% in the quarter.

The expanding gross margin and control of expenses resulted in achieving another major for this year, that is EBIT margin expansion, of course, that's earnings before interest and taxes.

EBIT of $235 million increased by 10.5% compared with the third quarter of 2001 and the EBIT margin was 20.4% versus 18.0% last year.

A 240-basis point improvement.

Interest expense for the third quarter of 2002 was $14.1 million compared with $18.1 million last year.

Primarily reflecting lower net borrowing levels.

This, of course, is due to the overall strong cash flow of our business.

The effective income tax rate in the third quarter of 2002 was 36.7%, compared with 36.6% in the third quarter of 2001.

With both years reflecting the elimination of goodwill amortization.

On a pro forma basis, net income of $139.8 million was 13.4% higher than the third quarter of 2001 and our net margin was 12.1% versus 10.5% last year.

Weighted average shares outstanding on a diluted basis for the third quarter of 2002 were $138.3 million versus $137.2 million for the third quarter of 2001.

That leaves us to an EPS of $1.01 per share diluted compared with 90 cents per share diluted for the third quarter of 2001.

An increase of 12.2%.

Turning now to the balance sheet and cash flow, as we have stated previously, one of our strategic initiatives is the more efficient use of capital.

The reduction of raw material inventory in the fourth quarter of 2001 jump-started this process.

Even with the normal buildup of seasonal working capital during the third quarter, our cash flow has remained very strong.

In fact, we have not required any short-term borrowings for the entire quarter.

As a result, our debt to total capitalization ratio has dropped to 39.0% from 47.3% at the end of the third quarter of 2001.

With our improved margins in profitabilities as well as improved balance sheet management, our economic return on invested capital for the rolling 12-month period increased by 90 basis points from 16.0% to 16.9%.

Before turning the meeting over to Rick Lenny, let me take a moment to discuss the cocoa market and our 2003 cost structure.

As you know, cocoa prices have run up considerably during the past year.

This price increase has been exaggerated during the past month with the report of civil unrest in Ivory Coast.

Although the market has receded about 10% during the last few days.

Up to this point, the flow of cocoa beans has been normal.

Historically, cocoa crops have been harvested and brought to the export market in times of unrest.

In fact, cocoa is an exceptionally important crop for several west African nations.

In the case of Ivory Cost, cocoa currently accounts for more than 50% of foreign exchange earnings.

It is, therefore, in everyone's best interest to bring cocoa to market regardless of who is running the country.

As a company, Hershey has always taken steps to effectively manage its cocoa needs.

At the second quarter conference call, our guidance was that we had taken advantage of previously depressed cocoa prices to extend our forward cover.

I'd like to reiterate that we expect our ingredient and packaging costs in 2003 to be essentially flat when compared to 2002.

We believe that this cost structure will continue to allow us to effectively compete in the broader snack category.

That concludes my comment.

Now let me introduce Rick Lenny.

Rick?

Thanks, Frank.

While I was going to title my comments how I spent my summer vacation, a better title and my true sentiment is that Hershey Foods is open for business.

All of us are fully committed to realizing the immense potential in our brands, our advantage supply chain, and in our people.

It's been just about a year since we announced our value-enhancing strategy.

The overwriting objective of this strategy is to deliver predictable, sustainable performance over the long-term.

By leveraging Hershey's iconic brands and significantly improving the total cost profile, we will achieve a better balance between top line growth margins and returns.

Progress against this strategy in a relatively short amount of time and despite a few distractions has been good.

The third quarter results reinforced the strategic actions we have taken.

Profitability, margins and returns were very strong and have been so all year.

I'm pleased with our progress thus far.

Due to a challenging retail environment and increased competitive activity, perhaps due in part to the sale process, net sales were off slightly.

However, areas of focus where we have above-average growth potential, performed well.

Our competitively-advantaged brands targeted for growth and supported by increased resources gained both sales and market share during the quarter and on a year to date basis.

Specifically, these brands, which account for about 60% of total consumer takeaway are up 9% for the latest 12 weeks and 7% year to date.

Our focus on the high-growth, more profitable c-store channel has resulted in Hershey's first market share gain in a long time, driven by a 10% increase in consumer takeaway.

Again, the right brands at the right price point against the right consumer target deliver the right results.

As our rest of world business continues to struggle, we're taking the appropriate steps to better match resources with its growth and profit potential.

Over the long-term, we anticipate further improving U.S. core brand performance behind increased and more impactful advertising, close end-line extensions that bring news to the total stack category and continued focused growth and more profitable customers and channels.

However, in the short-term, the retail environment will continue to be difficult, the slowdown in the economy and lower same-store sales have been well-documented.

First, as an impulse driven discretionary category, we will feel some short-term impact these factors.

Another by-product of this trend will be slightly lower seasonal business.

Fortunately, the strategy that we've been implementing and which is gaining traction, will take the pressure off of the seasons.

We're planning for fewer seasonal items to ensure the proper focus on our category-leading brands day in and day out across all outlets where consumers purchase snacks.

We won't chase unprofitable business, seasonal or otherwise, to simply boost top line sales.

Regarding the cost side of our strategy, I'm extremely pleased with the improvements made across our total supply chain.

Whether it is inside the four walls of our plants or downstreamed through our state-of-the-art distribution centers, total costs on both a per pound and as a percent of sales basis, continue to improve.

Specifically, gross margins have increased 160 basis points through the first three quarters of 2002.

These improvements enabled in part by a new focus on mixed management, along with ongoing containment in total G&A costs, will provide enhanced profitability when coupled with stronger top line performance.

With the prospect of the sale behind us, the senior leadership of Hershey can now return its full attention to building brands, improving costs and strengthening the organization.

We will be spending the next few weeks ensuring that we have strong brand and customer plans in place for 2003 and that the organization is ready to execute them.

We look forward to discussing our plans in mid-December.

On a personal note, I came here to build the Company and deliver superior value to our shareholders.

Although we've only just begun to execute our strategy, I'm convinced that we will make significant progress and achieve our long-term growth expectations.

Competitive and marketplace challenges will always be there for everyone.

Given Hershey's enormous strength, I like our chances for success.

Now I'll turn it back to Jim.

Carmen, we'll be happy to take the first question.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad.

Please hold for your first question.

Your first question is from Leonard Teitelbaum.

Can you hear me?

Yes.

Hello?

Yes, we can --

I'm sorry, I'm on a remote phone.

It is a little tough.

Rick, I'd like -- if you could quantify, I think you made the remark that some of the sales growth may have been because you were obviously busy with other things.

Can you quantify what that might have been or did I mis-hear it?

Len, nothing to quantify because I didn't quantify it.

Or to clarify it -- it's hard to put a number on any of those and I would rather not do that.

You know, that's behind us and we're focusing on the -- you know, months and years ahead.

We had a good quarter but I wouldn't want to try to handicap what certain external factors might have had an impact or not.

All right, along that line, maybe you can answer this one.

Is there any preclusion from you buying in stock or the trust selling stock because of either what happened in the past or what we're reading about, some potential court cases, going forward?

Leonard, we obviously can buy stock, there are certain periods, of course, that are blackout periods, but there is nothing that procludes us from buying back stock and when we can't comment on what the trust company will do and will not do.

Thank you.

Thanks, Leonard.

Your next question is from John MacMillan.

Good morning, everybody.

Good morning, John.

You had a one-page press release, Rick, on tax, one day you will have to to write a book, though!

You know, obviously -- I don't want to look backwards, but to the extent that a lot of your competitors or at least many of your competitors toured your facilities, I guess reviewed some of your business plans and you kind of opened yourself up for a couple of months, just, you know, to what extent will that or is that having an impact on your Company?

John, I think there are a couple of things, first off, as you know, when those processes get under way that, pretty much goes with the territory.

But also, most companies and most categories and I think our company, our category fits that description, are fairly sophisticated about how competitors operate and it really works both ways perhaps in terms of learning about our competition.

But the way I think about it is we're all selling essentially to the same consumers to essentially the same retail customers and for me it all comes down to superior execution.

So, while your point could be a correct one for us, the most important one is how well we go execute our strategies now in place?

So you don't think it will have a material impact going forward, the fact that the competitors were inside your doors?

No, the big factor is how well we execute.

In July, when you reported the second quarter, it seems like an eternity ago, you projected 3 to 4% organic sales growth in the second half.

Clearly some things have happened between then and now.

What's that target now for second half sales growth?

Well, the -- the first and foremost we continue to feel very good about our long-term growth rate of 3 to 4% top line organic sales growth, despite the puts and takes, I'm certainly pleased with the quarter just ended.

Because we're in it for the long tomorrow to build a sustainable company.

I would, given what's happening at retail and some of the factors that both Frank and I cited, I'd probably expect the fourth quarter to look a little more similar to the third quarter yet, and this is important.

You know, our margins and cost structure will yield good profits and returns and fortunately as we continue and will continue to be disciplined about not chasing unprofitable growth.

But to the extent that, you know, sales come in 3 or 4% below expectation, at that same time you predicted, you know, earnings per share growth to be over 11% from a 284-base in late July.

Can you update us on, you know, on that projection that you have out there for earnings growth of over 11%?

Yeah, let me take the first half a little bit.

A -- provide some perspective and Frank will get specifically to your question.

While the growth, as you stated would be below our long-term expectation, as we said, where we're focusing our resources and where we know we have good sources of competitive advantage, which are in our scale brands, that have done quite well and we're starting to see improvement in mix and significant growth in the higher margin, faster-growing C-store channel, we like our chances of growing volume over the long-term.

But, in terms of your specific question, Frank, why don't you answer that for John?

John, at this point, we would not change that guidance that we gave you at end of the second quarter with the second quarter conference.

Good.

Thanks lot.

Thank you.

Your next question is from David Adleman of Morgan Stanley.

Can you hear me?

Yes, we can, David.

Okay.

Rick, I was curious, you know, having -- the minority shareholders having gone through this period of seeing the controlling shareholder, you know, not accept a premium bid.

Does that put you -- do you feel obligated in any way to do anything as a result of that process to create value for shareholders in the short-term than you may not have earlier looked at doing?

No, David, our position remains to build shareholder value over the long-term for all shareholders.

That's what we're focused on.

Okay.

Secondly, the comment about slightly lower seasonal business that you referenced, Rick, is that lower than year-ago, is it lower than what you had earlier planned?

Is it both?

David, it's about -- in the third quarter, our shipments for all seasonal shipments were about flat with last year.

Uh-huh.

And as Rick pointed out, we're trying not to put too much product at retail.

We don't want to go chasing it, having more product at retail than it looks like the store traffic at retail can bear right now.

So, it's about flat during the third quarter.

Okay.

And are you seeing deloading because it appears from the data you provided that your retail takeaway is stronger than your shipment trends, or is that just a seasonal dynamic?

Well, given my druthers, I'd almost always have consumption increasing slightly more than shipments.

And, you know, there might be some of that.

Also, we have some selected weakness in unmeasured channels and one that's obvious across the economy would be bin.

Our bin business is down high single digits and we understand that's -- it's much driven by the economy as anything else and so that's a little bit of the give and take between takeaway and shipments.

There could be some working off of existing inventories at retail, you know, but for us, the big factor is where we're putting our emphasis and where we have the -- the appropriate branch strength.

We see some good growth.

Okay, thank you.

Thank you.

Thank you, David.

Your next question is from Bill Leach of Banc of America Securities.

Good morning.

Hey, Bill.

Hey, Bill.

Just to clarify, would you say your unit volume was down about 1% in the quarter on a comparable basis?

In line with the dollars sales decline?

Yes it would be, on an apples to apples basis, Bill, down about 1%.

And you're looking for the same thing in the fourth quarter?

I think as Rick indicated, we're not looking for a tremendous improvement in the fourth quarter, but once again we don't want to be putting too much product out in the retail channels, we need to gauge how well it is moving so that's where we happen to be.

Now, on the other hand, for our focused brands, the brands and the channels that we really want to be focusing on, those things are going much, much better for us and that is where our profitability is and you can tell that by the expanding margins that we've been getting.

And looking out to next year, you're shooting for a 3 to 4% top line growth?

Yep.

And basically flat margins; that what you're suggesting?

No.

No, we're not suggesting flat margins, we suggested a flat cost structure, but hopefully improving margins given that we're looking for a better mix and looking for better channels.

If we can get a better product mix as we have this year and better channel mix this year, that will help us improve our margins, as well.

Bill, our long-term expectations were 3 to 4% profitable organic growth, 7 to 9% EBIT growth and then 9 to 11% diluted EPS growth.

So, inherent in that model was always ongoing margin improvements.

And we look for continued improvements throughout the supply chain, downstream, as well and better leverage from our brands, as Frank just indicated.

And one last question, your SG&A was down 6%, how much is attributed to lower advertising?

We talk a little bit about the -- Frank mentioned in terms of inclusive of trade support, as well.

In the U.S.

That's the one to focus on because the total numbers would include the little bit outside of the U.S.

But our advertising and consumer promotion in the United States was slightly down versus third quarter year-ago about 20 basis points.

I think that's appropriate given that the airing of our new copy, which we at least believe is much better than what had been on the air for Reese's as a brand, Reese's Fast Break and Hershey's Milk and Almond, that new copy did not go on the air until late in the quarter.

And going forward, we want to ensure, and I want to ensure, that we advertise behind both product and event news given the competitiveness of the category.

Because were we've seen selected four for a dollar and five for a dollar competitive feature prices, it's tough for advertising alone to overcome that relatively deep discounting.

Where we're developing new copy on our brands, the three that I just mentioned, you will see increases on that next year.

Okay.

Thanks.

Yep.

Your next question is from David Nelson of CSFB.

Good morning.

Hey, David.

Good morning, David.

I've heard several references to international and don't typically worry or think too much about international here, although you're expanding in Brazil.

But I've heard it a couple of times here referenced.

What's going on there?

And what might be the remedy?

Well, just as a reminder, David, our international business or business outside the United States is only about 10% of our total revenues and typically less than 5% of operating profits.

Understood.

Most -- most of this outside of Canada and Mexico is really an export business with the exception, as you mentioned, in Brazil.

And our Canadian business was off this past quarter as was our business in Brazil.

In Canada, they're having some of the same types of problems as seem to exist in the States.

There is a slowdown at the retail level in Canada as we've seen in the U.S. and in Brazil, you know they're having the obvious issues in South America.

So, that's affected our business, as well.

At the same time, though, it's not a great, big portion of our business.

So --

It did bite us a couple of years ago, though, I recall.

Anyway, are the realignment charges done?

No, they will be a lit bit more.

Remember, the total realignment charges were expected to be about $313 million.

Uh-huh.

So, we have a little more to go in the fourth quarter yet.

Okay.

Thank you very much.

Thank you.

Thank you.

Our next question comes from Eric Katzman of Deutsche Banc.

Hi, good morning, everybody.

Good morning, Eric.

Hi, Eric.

I guess I've been kind of focused on the cocoa issue and first question here is I understand that Mars and Nestle are not hedged, that their business is getting squeezed and obviously they've been promoting pretty aggressively against you in selected channels.

Rick, how do you think you managed that decision to either go for volume or go for price, if you have the flexibility in 2003 because you're hedged on such an important, you know, input cost?

I think the important thing as Frank talked about our total cost structure.

What we're looking at, Eric, is where do we have opportunities grow profitably?

And despite the fact, and this is an important point to underscore, despite the fact it's been well documented of some competitive activity, particularly in the loose bars or instant consumables, we've gained takeaway and share in the largest, most profitable segment, which is the chocolate segment.

And then, our, what we call instant consumables, higher margin bars, they were up 13% in the quarter.

If you throw in mint and gum singles, they were up 11%.

So, we were up 13%.

And even if you back out vending which we know was soft, was down, was still up 10%.

To answer your question directly, we're going to be smart about where we think we can create sustainable growth and profitable market share and take it from that.

I wouldn't want to comment too much beyond what our intentions might be in light of competitors cost positions.

Okay.

And then I guess to a certain extent, more of a strategic issue and obviously what happened last summer -- this past summer has -- I guess has implications for this.

I guess most us were expecting you to possibly do something, I mean look at Adams, it would obviously make some strategic sense with the asset being out there.

How does your ability to grow through acquisition now, you know, play into I guess, you know, what the trust intentions are, where your cash flow and balance sheet are?

Can you kind of, as specific as you can, kind of address -- can you be a player for large assets that come up for sale in the business?

And, you know, I will let you go from there?

Sure, well, first, certainly, as we've said in the past, we don't comment on any potential, you know, acquisitions or divestitures, but your question is a much broader one, there is really no difference from the past in terms of how we're being directed by our board of directors and how management is focused on creating shareholder value for all shareholders over the long-term.

So, that really has not changed despite what we all went through over the past several months.

We still turned in a good quarter and we're focused in the long-term on creating value.

But is it -- I mean do you feel I guess more constrained now with how you're going to allocate your capital in terms of either feeling required to either bail out the trust or help with an overhang issue versus allocating money to acquisitions.

Is there -- you know, is there a way you can answer that more directly?

I feel no restrictions whatsoever.

I mean, again, to reiterate, essentially nothing has changed from what we've been through with the exception of we now get to focus on what we all came here to do which was to build value over the long-term.

So, there is no issues or restrictions that would come into play.

Okay.

I will let others ask their questions now.

Thank you.

Thank you.

Your next question is from Romitha Mally of Goldman Sacks.

Good morning.

Good morning.

Rick, I remember last year you mentioned that one of Hershey's competitive advantages was being in all four segments of the U.S. confectionery markets.

That could change with the sale of Adams.

And I guess, you know, as competition intensifies in confectionery and snacks more broadly, do you think Hershey's relatively smaller size could be a competitive disadvantage?

And was it these type of strategic issues that ultimately led you to embrace the Wrigley offer?

Well it wasn't a question of an embracing or not embracing, I won't go to that one.

Because that implies a conclusion I don't think was ever stated, but the important one, back to your point, Hershey is at a competitive advantage.

You mentioned quite correctly at the beginning of your question that we are well-positioned in the four segments and we have good scale in a couple of segments, obviously number one chocolate, number one in non-chocolate.

We need to do work there.

A couple of our non-chocolate brands aren't growing to the extent that we need for them to.

Our mint business is doing extremely well.

Gum business and convenience stores is holding its own.

It's gum business in all the other channels where we're having the share decline But to answer your question specifically we see good potential for our brands as well as some of the new items that we're coming out with that capitalize on this broader snack market.

I'll just give you one quick example.

We have a four-item line, 99 cent presliced tubes of bites-to-go.

And that's going to get us as much merchandising activity out of the confectionery aisle as it will within the confectionery aisle.

So, for us, we view that as a great entre into capitalizing on broader snacking behavior.

With the distractions of the strike and the auction, would you say you're maybe behind plan a bit in some areas such as new product development?

No, in terms of new product development, I feel very good as well as the organization does about the products that are shipping in the fourth quarter.

We've highlighted those before.

Products that are going out in the first quarter and one that we're very excited about that we just introduced at retail is sugar-free Hershey.

And we've waited a long time to come out with the product that we knew matches up with consumers' expectations of sugar-free, particularly under the Hershey brand.

So, that's in the first quarter of next year.

The one that I would like to cite, that we have good traction and therefore is going to be a foundation for growth going forward is our limited edition platform.

We've seen it work in kisses, we've seen it work in Kitkat and we are going to be continuing with that because it is a great type of in-and- out item that focuses on our big brands, it brings news to the category, it's efficient from a supply chain standpoint and it pulls along the base business, as well.

So,k I don't see that we've lost any traction in the new products area.

Thanks.

Thank you.

Your next question is from Terry Bivens of Bear Stearns.

Good morning, everyone.

Good morning, Terry.

Hey, Terry.

Just a couple of quick ones.

As you look, Frank, at the receivables, they look awfully heavy, even given the fact that, you know, this is the quarter where they are seasonably large.

Is there anything going on in there in particular that would account for that?

Terry, that's a good observation.

Our receivables, as you pointed out, are up seasonably so if you're looking at the balance sheet that we put out this morning, that's as of December 31 is the comparison you're making.

I pulled out our balance sheet at 9-30 of last year.

Our receivables were $548 million.

So, while they've gone up seasonally, they've gone up a little more.

We used extended dating terms a little bit more to try to get a much more efficient supply chain.

We wanted to spread out the third quarter business a little more than we have in the past and not have it all compacted in the last, you know, have so much of it compacted in the last three or four weeks of the quarter.

So, we extended terms on some things we have not in the past, as you know though, we have the cash flow to do that and just to reassure you, even though those receivables are up significantly, most of it is seasonal, some of it is additional extended terms, but they're 97% current just as they were a year ago.

So, they're really in quite good shape.

How much of your business would you say you extended the terms on percentage-wise?

Well, at this time of year, much of our business happens to be seasonal business, so, it probably applied during the quarter to over 75% of the business.

But that's not unusual to have a high percent of it on extended terms because of the seasonality of the quarter.

Okay.

If you look at the fourth quarter and I just wanted to clarify this a little bit, as you look at fourth quarter, would you again expect apples to apples growth to be kind of in a flat to slightly down pattern that we saw in this quarter; is that a fair way to look at it?

I think our expectations, Terry, are that as Rick stated a little bit earlier, it is likely to be a relatively flat quarter, but not all brands and not all pack types are created equal.

So, where we're putting the focus on our major brands that have the higher margins and the pack types that have the better margins within certain channels that are better margin channels.

That's what we're expecting to get the growth.

Some other parts of the business may not do as well.

So, as a profile would be similar to the third quarter, but hopefully relatively flat top line for the quarter.

Okay.

And finally, just to piggyback on Eric's question a little, in terms of cocoa, I appreciate the guidance today and you were pretty clear on '03, but, you know, for a lot of investors out there, I find that this cocoa price thing, I know we've had some positive movement in the Ivory Coast and I'm aware of that situation over in the London market, but is there any way as you look into '04, when presumably some of your forward actions, you know, have expired, I guess the fear is, you know, once those expirations start occurring then we're going to be forced to buy cocoa at much higher costs.

I mean how do you look at it over the next couple of years, I guess?

You know, towards getting a little bit more comfort with what happens when some of the contracts expire?

Yes, Terry, that's a good question.

What we've managed to do by being so far forward covered really is buy ourselves more time.

So, a lot of things can happen between now and when our cover would expire and I'd hate to comment on what that cover might be down the road a year and a half or two years, because the crops are likely to change in that period of time and the fundamentals can change in that period of time.

So, simply stated, we have a -- you know, the great cost structure for next year but we've also bought ourselves quite a bit of time to let events unfold.

And then we will have to deal with those events as they unfold.

Okay.

Fair enough.

It's nice to have a call where the focus is on the business again.

So, thanks very much.

We will second that one.

Thank you.

Thanks, Terry.

Our next question is from Mitch Pinheiro from Jamey Montgomery Scott.

Hi, good morning.

Good morning, Mitch.

I had my in notes from Q2, that you had some delayed shipments due to the strike or -- how did that impact Q3?

Hardly at all.

It's hard to differentiate a few shipments between the second and third quarter to be honest.

There's no impact from what we can tell, Mitch.

Okay.

I had -- you had estimated it was about -- you thought it shaved about 1% --

Mitch, I'm not sure if we actually characterized that, but remember, the second quarter is so small that it would be more of an issue for the second quarter than the third quarter.

Okay.

Fair enough.

How -- in terms of this convenience store channel, I didn't hear -- did you provide the growth rate of that channel in this quarter?

I didn't -- in your opening remarks?

In terms of convenient stores --

Yeah, how you're -- what yours growth was in the convenient store channel?

Yeah, it's in double digits.

Double digits?

Low double digits both at retail and our shipments.

You know, our shipments directly to the convenience store channel are not the entire business.

It goes through retail convenience stores because some goes through candy and tobacco distributors and wholesale grocers.

But at the retail level itself, we're up in double digits and you can conclude from the wholesale level that's what we're up as well.

Mitch, I just want to tag on to that.

That's an important consideration, because when some of us just look at FDMX, and the X excludes Wal-Mart, we're looking at least for the Hershey business and most likely our category, roughly less than half of total consumer takeaway.

So, once convenience stores are added in, which is about 15% for total category takeaway then it brings those numbers up considerably.

And as Frank had said, with that segment growing in the low double digits and with ourselves growing and gaining share, it really changes the composition of what someone might be seeing on an FDMX basis.

Do you still -- I was just down at the [inaudible] show and, you know, there's -- there's 20% more exhibitors down there, I mean it's a channel that every packaged food company has stated as a strategic objective and are you finding -- I mean -- so you sort of -- you're doing well now, but is this -- is this -- how are you doing -- how are you affecting that -- that -- your strategy there and -- and I just would anticipate it getting a lot tougher very quickly?

Well, you're right.

I was at the same show and it's recognition of a channel that is growing and that's profitable and has a significant opportunities, at least for our category for expandable consumptions.

So, as I said in my comments earlier on, in this year, you know, we've gotten the right products with the right brand names at the right price points and we're still in the midst of improving our retail coverage at convenience stores.

So, we don't expect any reduction in growth at all and we continue, as I mentioned before, in the bites to go in some of the new items coming out, particularly in our gum business, we expect to see continued opportunities there, so, it's, once again it is figuring out what makes sense for the drug channel, figuring out what makes sense for the convenience store channel and being a lot smarter and for us, a lot more disciplined about going where the growth is.

What about -- finally, what about your debt level, where -- do you have a stated comfort level with maybe a maximum amount of debt that you'd be willing to take on?

Our stated comfort level in the past of what we have been shooting for has been 40 to 50% debt to total capitalization.

We are now at a point where we're below that and as Rick stated a little bit earlier, you know, we need to take a look at our capital structure coming off of, you know, the potential sale of the Company, we're now back into addressing all of those issues.

You will hear more about that in the future.

Thank you.

Thank you.

Your next question is from Jane Mary of Salomon Smith Barney.

Thanks,good morning.

Good morning.

Good morning, Jane.

Speaking of, I mean, just, I want to go through the balance sheet a little more closely.

You have a balance sheet to die for here!

I mean your accounts receivable, if you look at seasonally what happens in the fourth quarter, you could be sitting with, what, $300 million or less in net debt by the end of the year, potentially, if those accounts receivable sort of free up cash, but there's just a -- you're not passive, obviously about running your business, but there is a sort of overriding sense of passivity, excuse the expression, around this whole situation now that sort of feels very unnerving.

You know, you're about -- you're as far away as you can be from an $89 number.

I don't see how running the business, even running it better can create the type of shareholder value that is presented by that opportunity.

I know it wasn't your choice not to accept that opportunity, but it's -- where -- where does the line for fiduciary responsibility for the board of a company and where does it begin, if you know what I mean?

Jane, I think the important thing is just to tie it back, we have certainly, as a board of directors of Hershey Foods, we have executed our fiduciary obligation and during the sale process, as we said at the beginning, as the majority shareholder, the controlling shareholder, the trust initiated the process and then the trust chose to stop the process.

So, there is no issue from that standpoint.

What we talked to our employees about inside, you know, to quote $89 a share is that we're pleased that other c-grade value as we have all along and will continue to deliver it.

You know as well as I do, anyone who puts a one-time premium out there is going to outrun a business model in the short-term.

However, it certainly does indicate that there is a significant amount of long-term value potential in this business.

So, I like what you said, we're not passive about running the business and, you know, the sales process just ended.

We were out of the market for close to six months on account of the sales process for those of us who knew about it.

So, we're now taking steps to figure out, you know, what's the best way to pursue our uses of cash.

And, I mean, the -- well, I just -- I keep struggling with this issue of if the board of a company should be protecting all its classes equally, don't you have a responsibility to try and -- you're not going answer this question, but try and exert pressure on one shareholder that is aggressively hurting another shareholder.

You're right, I don't have to answer that question.

Frank, go ahead.

When all is said and done, our hands were tied.

You know, our majority shareholder who controls 77% of the votes --

Yeah, I know.

-- asked us to explore the sale and then they terminated the expiration of that sale and so we're back to running our business.

I mean, Jane, clearly, the important thing was that once the trust decided that they no longer wanted to go ahead with the sale process, at that time they decided they would not vote their shares and legally abort does not have to engage in futile exercises.

Yeah.

Can the trust use its voting power in some way to force you, quote unquote, to reinstate the offer that you made to them to buy back their stock exclusively from them?

I know you said you have no intention of renewing it, but can they vote you to do that?

No, it's first and foremost, as I've said from the very beginning, and it is, you know, our fiduciary obligation and one that we have upheld and will continue to upheld, we have this same responsibility to all shareholders, regardless of class, and we wouldn't do anything to advantage one to the disadvantage of another.

Right, you wouldn't, but --

The answer is no.

So, legally they can not vote you to either declare a special dividend or buy back their stock or something that advantages them?

Correct.

But they can use their vote to block something that's clearly better for the class "A" minority shareholder?

Jane, at that point I can't speculate on what the trust might or might not try to do.

But, again, it's important to, you know, we're a Delaware-based company or incorporated under the laws of Delaware, and that's our responsibility to all shareholders.

Okay, thanks.

Thank you.

Your next question is from Michael Hildebrandt of Gibelli and Company.

Good morning.

Good morning, Michael.

Piggybacking off the last question real quick, would you actually be interested in reinstating that offer to buy back a portion of the shares from the family trust?

No, we said at the time that offer was, is off the table.

Okay.

Thanks very much.

All right.

Thank you.

Your next question is from Visam Parl of Wilmington Trust Company.

Yes, hi, thanks for taking my call.

Hi, Rick, hi, Frank.

Good morning.

Good morning.

I had a question about your foreign sales channel.

You were talking about it was somewhat weak in Canada.

And Latin America.

Right.

What is your goals for that area going forward?

Our goals, as I've stated in the past is where we know we get the greatest growth and certainly our greatest potential for creating value for our shareholders is in the domestic business, that's where the majority of our efforts have been and will continue to be.

We are going to be smart as we look at '03 and beyond given the economic condition and where we don't have the appropriate scale.

Our goals will be modest growth, but profitable modest growth.

Okay.

Great.

And just one last question, it's been about a year since your Reese's Fast Break has actually hit the stores.

What are your thoughts of how that first year has gone?

And what is your pattern going forward for new products actually hitting the markets at this point?

Specifically for Reese's Fast Break, it's done well.

It was introduced about this time a year ago and continues to do well at retail and does particularly well in convenience stores, which we thought that it would do.

As well, we have a couple of new pack types or SKUs coming out now, but in terms of our new product strategy going forward, as we stated previously, it's for value-added close in-line extensions that are very efficient from a supply chain standpoint that clearly focus on our big brands and have more of an ongoing basis of these new products as opposed to every couple of years, one big bang type of new product.

So, think of it more as a steady stream of, you know, appropriate line extensions that are leveraged by the scaled brands.

Okay, great.

Thank you for taking my call.

Thank you.

Thank you.

Your next question is from John MacMillan of Prudential Securities.

Again, just to kind of follow-up on Jane's line of questioning, when you talked about the value potential, that value potential, Rick, was as a combination with Wrigley, you know, often people pay premiums because one and one equals more than two.

So, I just wondered if you could elaborate why what Wrigley pays will ever be seen again?

John, I can't comment that it will or won't.

Because, you know, I'm not going to speculate on what that was at that point in time.

All I was stating was that as we went through the process, Wrigley, as well as others, and it kind of ties back to the question you raised at the very beginning, I did see great value in the Company as we have all along.

We're going continue to work hard.

We're in it for the long-term.

So, it is hard to sit here and explain, you know, what $89 a share meant a month ago, it is a tough thing to speculate on and one I would choose not to.

So, all my point is, and the one that's important for our shareholders and our employees, is we see great growth potential as we did before the process started.

So, nothing's changed from that standpoint.

When you took the job, I don't think you were anticipating it being jerked around by a majority shareholder, and I'm not saying you've been used as a puppet back and forth to sell it, but clearly there has got to be some frustration on your part.

As you sit here and kind of digest the period, are you firmly committed to your job?

I hope you view that as a fair question.

Absolutely.

I appreciate you asking the question and I certainly am committed, not just to my job, but to the Company, the shareholders and what we set out to do.

You're right.

We all went through it, not just myself, there are a lot of people here, Frank in particular and others, who went through a tough time over the past several months. for a few of us this goes all the way back to March.

But that's behind us and we're looking ahead.

So, I appreciate your question.

It is a fair one, but I'm as committed as I was -- should be as committed as I was before hand and even more so because I've seen some great things that the Company was able to do over these last three months when top management was otherwise occupied.

I will see you in December.

Yep, thank you.

Thank you.

Your next question is from George Asku of Legg Mason.

Can you quickly remind us of what your share repurchase authorization currently is?

There is $84 million left on our authorization, George.

Okay.

Would it be appropriate to see that increased?

Over the next --

As Rick -- as Rick talked about a little bit earlier, we're going to go over the entire capital structure and obviously that's a board level decision.

We just came off of this, you know, potential sales process, so, we want to do that in -- in a nice, thoughtful, disciplined way and not just react to, you know, a market event that took place.

So, you will hear more in the future about it and, yes, we are thinking through it and going through it thoughtfully.

Okay.

References toward -- regarding reduced ingredient and packaging costs, can you give us more detail there on what was moving around and the cost structure?

You're talking about for the quarter itself, George?

Yes.

Yeah it was -- our costs have been that way the entire year because we were pretty forward hedged.

So, this year's cost, they're not tremendously below last year, but they're enough below last year that they have helped our margins some.

Okay, so we're talking, your hedges on cocoa --

We're talking across the board, cocoa, peanuts, almonds and then when you throw in packaging materials as well, that whole bundle of cost that essentially make up the product and its wrapping is down year-to-year, slightly.

Right.

Are you seeing any new crop, peanuts, flowing through your income statement at this point?

New crop peanuts being the ones that reflect the changes in the Farm Bill this spring?

Yes, as a matter of fact.

The fourth -- the fourth quarter, probably late third quarter, but more so in the fourth quarter, we'll have the advantage of some of those, but you should know that we peg a price so that we're not getting say 40 cent peanuts one quarter and 60 cent peanuts another quarter.

So as soon as were aware that the Farm Bill had changed, we would have adjusted so that in the third quarter we would have had lower peanut prices as a result, but no new crop peanuts actually running through the system yet.

Okay?

Okay.

Good, thanks.

Your next question is from Terry Bivens of Bear Stearns.

Hello again.

Hey, Terry.

Just a quick follow-up, I know everyone is dancing around the share buy back thing, if you decide -- according to my numbers, this thing is accretive well into the $70 range.

If you decide to do something like that, is there any way the trust can come back at you and say no?

No.

Okay.

Likelihood of that?

Are you not going to comment on share repurchase?

Obviously it just seems to be kind of a no-brainer here --

I think as Frank said and we're not going to comment specifically, again, the sales process just ended and we -- it's beneficial for us but we want to use it wisely as we have great credit ratings, strong cash flows and a good valuation.

Frank touched on, I think, is $84 million, I believe, is on the previous authorization, we do intend to use it and we're reviewing different alternatives going forward, but importantly that will be beneficial to all shareholders over the long-term.

That's as much as we, I think, would want to comment on it at this point.

Fair enough.

And, Rick, we have some wagers going on as to whether you're going to send Bob Valor a Christmas card.

Any comment on that?

We will send a lot of folks holiday greetings from Hershey Foods.

Terrific.

All right.

Thanks again.

Thank you.

Your next question is from Eric Katzman of Deutsche Banc.

Just a follow-up, Frank, do you have the restated sales numbers for the EITF for the full year 2001 and what that implies for the fourth quarter?

Fourth quarter will be 1153 restated.

1153.

Okay.

That's it.

Thanks.

All right, Eric.

At this time, there are no further questions.

Do you have any closing remarks?

Hearing no more questions, we will conclude today's session.

Mona Fern [ph] and I will now be available to answer any additional questions you may have.

As a reminder, our fourth quarter sales and earnings release and conference call will be January 29th, 2003.

So, thank you very much for your interest and good day.

Thank you for participating in today's conference.

You may now disconnect.