好時 (HSY) 2003 Q2 法說會逐字稿

Good morning.

My name is Constance and I will be your conference facilitator.

At this time I would like to welcome everyone to the Hershey Food Corporation second quarter conference call.

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

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

If you would like to ask a question during this time, simply press star then the number one on your telephone key pad.

If you would like to withdraw your question, press star, then the number two on your telephone key pad.

Thank you.

Mr. James Edris, Vice President of Investor Relations, you may begin your conference.

Thank you, Constance.

And good morning, ladies and gentlemen.

Welcome to Hershey's second 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 2003 rationalization and realignment initiatives as well as the business results for the second quarter and then we will be happy to take your questions.

We welcome those of you listening via the web cast.

Let me remind everyone who is 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 2002 filed with the SEC.

If you have not seen the press release, a copy is posted on our corporate web www.Hershey.com in the Investor Relations section.

Included with the press release are the consolidated balance sheets and summary of consolidated statements of income prepared in accordance with GAAP.

And our pro forma summary of consolidated statements of income, quantitatively reconciled to GAAP.

As we said in the press release, the company uses earnings which excludes charges related to business rationalization and realignment initiatives as shown in the pro forma income statements attached to the press release as a key performance measure of business results to evaluate performance internally.

This non GAAP measurement is not intended to replace the presentation of financial results, in accordance with GAAP.

Rather, the company believes the presentation of earnings excluding such charges provides additional information to investors to facilitate the comparison of past and present operations, excluding items which the company does not believe are indicative of its ongoing operations.

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

Frank?

Thank you, Jim.

And good morning, everyone.

Let me start by describing our 2003 rationalization and realignment initiatives.

Today, we announced a number of value-enhancing initiatives which are consistent with our strategic direction, built upon our recent momentum, and capture the immense opportunities in the marketplace.

These initiatives include new product introductions, divesting or eliminating certain nonstrategic brands and products, production line rationalization, and realignment of the sales organization.

Over the last few years, we have been working to eliminate nonstrategic SKUs for items in our product line.

The initiatives we announce today should complete the process of product line rationalization.

We have identified nonstrategic brands and products which would be -- will will be divested or eliminating during the balance of the year.

This will enable us to improve focus on our strategic brands, and to further enhance Supply Chain efficiencies.

We also will improve our cost structure by rationalizing certain production lines.

In addition, we are realigning our sales organization, building upon the efforts begun a few years ago.

The realignment recognizes and responds to continued changes in the marketplace from both customer and competitive standpoints.

This new structure will build superior selling capabilities and provide increased coverage of retail.

These initiatives are expected to result in net charges of approximately $17 million pretax, or eight cents per share diluted in 2003.

With two cents per share diluted in the second quarter.

As a result of brand divestitures, we expect the initiatives to be cash flow positive in 2003.

We also expect the initiatives to generate annual savings of approximately $5 million beginning in 2004.

An exciting aspect of today's announcement concerns new product introductions, which leverage our large brand and are on trend with consumers in terms of product and packaging benefits.

Hershey's Smores candy bar, a convenient candy bar form of the traditional campfire favorite incorporates Graham cracker, marshmallow and Hershey milk chocolate and will be available in stores later in the year.

Also later in the year, we will launch Swoop's Chocolate Slices in four favorite flavors.

Packaged in resealable on-the-go containers.

The fall lineup will also include Reese's mini pieces in portable tubes and additional limited edition limited edition offerings, and as I said all adding excitement to the category while continuing to build Hershey's key brands.

Now, let me turn to our excellent second quarter results.

In order to give you the proper perspective of our business, I will be discussing our second quarter results excluding the impact of charges related to the business rationalization and realignment initiatives.

These charges include two cents per share diluted in the current quarter as a result of the initiatives we announce today, and one cent per share diluted in the second quarter of last year.

Elimination of these charges would yield adjusted earnings per share diluted of $.56 cents.

Compared with $.47 cents per share diluted in 2002.

An increase of 19.1 percent.

For the second quarter of 2003, consolidated net sales increased 3.1 percent on a reported basis.

This sales performance was achieved through a combination of pricing and volume growth, simulated by new product introductions, and limited editions, offset somewhat by continued product line rationalization.

The success of our selling and marketing programs led to solid increases for our leading brands, our instant consumables business and high growth channels in the United States.

Our Canadian and Mexican businesses also turned in good sales growth for the period.

Given the Easter season timing, the more meaningful time frame for assessing retail performance is on a year to date basis.

For FDMXC, that is food, drug, mass merchants without Wal-Mart and convenience store outlets, the candy, mint, gum category has continued to gain momentum, and is up 2.1 percent versus a year ago.

Hershey's take away was plus 4.1 percent, nearly doubling the category growth.

Impressive gains in chocolate, in smaller gains in mints and gum, resulted in an overall share gain for Hershey of point six share points.

Once again, we experienced good growth in our advantage or focus brands, up over five percent.

Our instant consumables business up seven percent.

And every day business, up almost six percent.

Our growth in the convenience store channel continued at a healthy pace of six percent for the first half of 2003.

One measure which remains relevant for the 12 weeks, of course, is market share.

For the most recent 12 weeks ended June 15, a combination of core brand growth and good seasonal sell-through generated a share gain of .7 percentage points.

We are pleased to report that adjusted gross margin during the quarter continued to show excellent improvement.

In fact, by 120 basis points coming in at 39.3 percent, versus 38.1 percent in 2002. -- the gross margin was enhanced by higher price realization and overall Supply Chain efficiencies including lower ingredient and packaging costs as well as continuing benefits in logistics.

Selling, marketing and administrative expenses were essentially flat, as a percentage of sales, coming in at 23.7 percent of net sales.

Versus 23.8 percent last year.

As a percent of sales, direct marketing expenses increased during the quarter, while administrative costs declined.

For perspective, I might add that total brand support, including trade promotions, as a percent of gross sales, increased by about 200 basis points during the quarter.

The increased marketing spending was used principally to support new product introductions, and to protect merchandising programs which had been structured prior to the price increase announcement.

Recent marketplace performance suggests the spending has been effective.

Adjusted earnings before interest and taxes of $132.5 million dollars, increased by 12.1 percent, compared with the second quarter of 2002, and the adjusted EBIT margin was 15.6 percent, versus 14.3 percent last year.

A 130 basis point improvement.

Interest expense for the second quarter of 2003 was $15.5 million dollars.

Compared with $15.9 million last year.

Primarily reflecting good working capital management and the overall strong cash flow in our business.

The effective income tax rate in the second quarter of 2003 was 36.7 percent, equal to the rate for the second quarter of 2002.

Adjusted net income of $74 million dollars, was 14.3 percent higher than the second quarter 2002.

And our net margin was 8.7 percent, versus 7.9 percent last year.

Weighted average shares outstanding on a diluted basis for the second quarter of 2003 were $132 million versus $138 million for the second quarter of 2002.

Leading to an EPS of 52 -- 56 cents per share diluted, compared with 47 cents per share diluted for the second quarter of 2002.

An increase of 19.1 percent.

During the second quarter, 2003, we bought 972,000 shares for about $65 million dollars.

Year to date, we have now repurchased 3.9 million shares, or about $252 million dollars.

Thus completing just over half of our $500 million authorization.

Turning now to the balance sheet, at the end of the second quarter, net trading-in capital declined about two percent compared to last year's second quarter, due in large part to a lower receivables balance, offset somewhat by higher inventories.

With our improved margins and profitability, as well as improved balance sheet management, our economic return on invested capital for the rolling 12-month period increased by 50 basis points, from 16.5 percent to 17.0 percent.

That concludes my remarks, and now, we will be happy to take your questions.

Constance, the first q-and-a.

Your first question comes from John McMillin of Prudential.

Congratulations on the solid quarter, Ed.

Thanks very much, John.

I think you know, in April, you talked about a flattish second quarter on the sales line.

The three percent.

Can you tell me where the surprise came from?

And is that right, your basic target going into the quarter was flat?

That's correct in terms was what we felt the second quarter might look like, John.

A couple of things.

First, the strength of our new product, speed to market and the initial take-away supported by the shims, obviously, has been slightly above expectations.

Also, we've seen good price realization from the loose bar increase that we took at the end of the fourth quarter of 2002, so what we're seeing from retail of RIR is we're seeing net price realization, meaning a higher average retail price but we've also seen higher volumes as well.

Does this change your -- the fact that this quarter, I know it is a seasonally slower quarter, but to the extent it came in higher than your forecast, does it change any of your full year guidance upline or EPA?

John, you would say -- we would say from for Q3, Q4, let's say for the second half, we should be expecting numbers in line with the second quarter.

So that they should be in the three percent-plus range.

And that would -- and on earnings?

And our earnings guidance remains the same.

As we've said.

Without the special charges, of course, would remain at the top end of our nine to 11 percent range.

You picked the right day to kind of add some good news to the food industry.

You know, just my final question.

You know, obviously, your former employer has you know, has come out with a statement on obesity, even though it is -- trying to get three percent volume growth, so -- but just in terms of Hershey, you obviously -- it is a sensitive subject, but does the company have any -- you know, a current statement in terms of -- you come out with these ads, I watch it on TV, in terms of chocolate is happiness.

And it certainly is today.

But does that pose any liability?

John, I think maybe to start off with what you talked about in terms of the issue of whether obesity and nutrition, clearly as it's been in the press, is an issue that the food industry, and obviously we at Hershey foods take seriously, and as such we are very much a part of all initiatives being undertaken by GMA.

We will do the right thing over the long term but there is a couple of things to keep in mind, particularly from our portfolio.

Confectionery products are treats, we market them as such.

They're not marketed nor considered by consumers as meal replacements.

And it is important to remember that confectionery products contribute less than about two percent of the average child and adult's daily calories.

Having said that we continue to offer a broad range of product and searching sizes.

One of the newest is Sug Ug.

The ice breaks has been successful and we will continue to look at all the different benefit needs that consumers have, and market products accordingly.

Okay.

Well, congratulations.

Thanks very much, John.

Thanks, John.

At this time I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone key pad.

Your next question comes from David Nelson of CSFB.

My congratulations, also.

Thanks, David.

I would like to pursue you know, how you see yourself doing in alternative channels?

I guess I will start with mass.

Wal-Mart in fact highlighted you at their analyst meeting saying you were doing a great job there.

If you have any comments on that?

On the club channel, you commented at your analyst meeting in December that you didn't have the right packaging or pack-types.

And what have you been doing and are going to be doing in the club channel?

And then lastly, on convenience, convenience, excuse me, it looks like you are getting maybe most of your growth from that channel.

It sounds like those initiatives are working quite well, also.

Let me start back with Wal-mart.

As you know, Wal-Mart does not release its data to IRI to Neilsen so we site FDMXC, Wal-Mart as in convenience stores and Frank gave the numbers.

If we were to add in our take away, which we do get their retail link from Wal-Mart, and the numbers that Frank cited on a year to date basis at four percent would be higher than four percent.

And we are doing develop well in that regard with Wal-Mart and we work very closely with them.

The second channel you referenced were club stores and we did talk about not having the right product lineup and programming to successfully compete in club stores, and we did see a turn-around in the second quarter.

So we are starting to gain some traction in club stores, and feel confident that at least we now have a better understanding of what it takes to compete and we're working very well with the specific club customers.

And while convenience stores continues to be a source of growth for us, in terms of being -- our take away is up five or six percent, I don't want to lose sight of what we're doing within drugstores.

Our drugstore business continues to do well for us, and it is a high growth channel.

And the introduction of sugar-free has enabled us to get secondary merchandising in the pharmacy sections of certain drugstores, so we feel that we're making progress in many channels, in addition to the ones you cited.

Could you expand a bit on what you did to improve your performance with the clubs?

A couple of things.

One, it is interesting when we sit down and have a good heart to heart conversation with the specific club customers, to better understand what Costco needs to compete in the marketplace with Sams or Vijay's needs to compete in their marketplace according to their strategies, and then getting our entire business group, whether it be operations, marketing, or sales to ensure that we have the right products, and supported by dedicated teams to win with club stores, so again it is early days on, but the important thing is we're starting to see some traction.

At least we did through the second quarter.

It might have been Frank that mentioned the 4.1 percent increase in take away.

Could you define within that how much was price versus volume?

Most of it, Dave, I think, as I mentioned, was price.

But we also had a small volume increase as well and as Rick pointed out a little earlier, that's probably a little bit of a positive surprise, because when you increase prices, it is a bit of a gamble, of course, relative to the type of volume that you will have, but our very good marketing programs, along with some of the excitement we're providing with line extensions and some of our new products, is really helped to hold up our volume as well.

That is a good point.

If you think about the good take away, in the second quarter, on products such as instant consumables, or more specifically loose bars, there was also a quarter where we had some decent success with Reese's Limited Edition.

So we were able to bridge benefit upgrades to the category statement, consumers might be confronting higher prices at retail.

Thank you very much.

Thank you.

Our next question comes from Christine McCrachen of Midwest Research.

Ms. Mccracken withdrew her question.

The next question comes from Terry Bivens of Bear Stearns.

Good morning, everybody.

Good morning, Terry.

A couple of questions here.

Was there any trade deloading at all affecting your top line this quarter?

Minimal.

Negligible.

Okay.

Do you feel going forward, Rick, that trade inventories are about where you would like for them to be following, you know, last year?

It is hard to say specifically, Terry and I will tell you one of the reasons, because we still have the issue, as everybody does, in terms of Fleming, you know, with Fleming declaring bankruptcy and selling off some of its stores and then selling off its wholesale business, do you wind up in a situation where there is some inventory that goes out of the system, what we're say - - something we didn't see that to have a big impact within the second quarter.

Okay.

As you look at, certainly given this quarter, it would seem that your chances for generating this $300 million in free cash this year seemed pretty darn good.

Any thoughts to the dividend at this point?

I'll answer that a bit more broadly in terms of the use of our cash.

As I talked about before, a couple of key areas, one is obviously on the business side.

We will continue to invest in our business from new products and the associated capital that is required which we announced some new products today for the fourth quarter of this year, as well as the new products we've introduced over the past year or so.

And we're always, as we should be, in a position to look for the appropriate type of acquisition from a buy and build standpoint.

And in the other areas, as you referenced the capital structure in term was we're halfway through with the share repressure and we obviously always are reviewing our dividend policy and I would probably leave it at that for now.

Share repressure.

One last one on cocoa, obviously prices continue to come down a bit.

Is there any -- I know you've said that -- - - cocoa is going to be higher than '03.

But is there any degree of magnitude we can begin to look at as we cast rise into '04?

Terry, that would be a pretty sensitive, competitive kind of information to send out.

But what I would ask for you to keep in mind, that while the market for cocoa has receded some, it has come down from a high of about $2,400 dollars to about $1,500 dollars, current prices, that's still -- that's still about $500 higher than where it was about two years ago.

So we don't want to be talking about what the magnitude of that change is, because it is a pretty sensitive, competitive type of information.

Okay.

Thank you very much.

Thank you.

Our next question comes from Chris Lieu of A.G.

Edwards -- Chad Grossbeck of A.G.

Good morning.

I had a couple of questions, for starters I wonder if you could talk about the marketing requirements behind these new product launches for the second half and how it could ramp up as you try to get the products out to the market?

There are a couple of things.

The limited edition Reese's which is a cup and inside out, they will ship earlier in the second half as opposed to later in the second half.

The Hershey's Smores and the Swoops line we will announce late in the fourth quarter so we will get pipeline shipment from those particular two items and then start to see consumer take away at the very end of of the fourth, so therefore the majority of the brand support for those items really falls in the first quarter.

But in terms of the Reese's Limited Edition and several of our other items that we've talked about, those will ship beginning in this quarter and then beyond.

So if that's your question --

That helps.

And then I'm just curious competitively if you're seeing some of the price increase dealt back in any way, I should say maybe larger than what you thought, I think you said price and mix in the quarter was the majority of the increase and you pretty much answered that's a piece of it , but I'm curious if you you've seen competitors spending back aggressively.

I think we've seen backing off from what we talked about the in first quarter which we continued to emphasize with the price increase announced in December, all of us were protecting key feature prices or merchandising agreements through April, through Easter and we have seen somewhat of a lessening of that and the important thing is when we talk about the increases in our instant consumables, standard loose, did standard loose bars from a take- away standpoint, please remember that reflects the average consumer price paid, so when it is up, 7, 8, or 9 percent that is net of any price reduction that might have been happening at retail but the key piece to reinforce is that at least in the second quarter, based on IRI, we did see both net price realization as well as higher volumes.

And my last question, just, Rick, if you have any concerns of any sort by realigning your sales force in advance of a key holiday season is.

There anything to that?

I think it is a good time to do it in terms of getting everybody in place.

And again it is not a massive realignment.

It is a couple of key points.

I'm glad you raised the question.

It certainly builds upon the effort that began a couple of years ago and it recognizes and responds to continued changes in the marketplace.

The key thing, or the key component is we're going to be adding retail coverage.

We're going to be creating even more dedicated customer teams because we've seen that work in terms of selling our category headquarters.

But we also understand and responded to the opportunity to have increased retail coverage.

So those are the two key components and then we're also putting in place some new resource allocation models in terms of routing of coverage, customer spending, expanding our hand-held technology and we view this as just building upon some progress to date.

Not in a massive change one way or the another.

Will it be additive in term was sales people?

The total sales compliment is essentially the same.

Think of it as shifting the mix.

To have more focus at retail.

Okay.

Thank you.

Our next question comes from Romitha Mally of Goldman Sachs.

Good morning.

Congratulations.

Good morning, thanks.

In terms of the gross margin it definitely came in much larger than I was looking for in the quarter.

What should we expect the second half of the year?

We're still targeting to fall into the 70 to 90 basis point range and you have to remember the second half of last year had some pretty solid increases and particularly the fourth quarter.

So we still expect margin expansion.

But I would characterize it more in that 70 to 90 basis point range.

Could you give me a sense of how much lower rummages on packaging costs were in the quarter?

Marginally lower.

Most of our improvements this quarter really did come from the price increase, along with very, very good Supply Chain benefits, particularly out of the logistics area.

In terms of the new sugar-free products, how are they doing?

Doing well.

It is still early on.

We began shipping at the end of the first quarter.

It is in the -- certainly it is in the top three or four of the fastest turning items.

Within our group.

That is expected given the newness of it but we've been pleased with the initial retail at both customer and retail acceptance.

And then just out of curiosity in terms of the new product, the Smores product, how long did that take from sort of idea to getting it on, you know, ultimately getting it on the shelf?

I'll pass on that one, thanks.

Romintha, we have a funnel, as you know that has lots and lots of ideas, and some of them take a little longer in their gestation period and this one has been around a couple of years and what we didn't want to do is introduce it until we got it right.

Maybe that helps.

I think a couple of years.

I think the issue is I don't want to get into -- we don't want to get into necessarily how long it takes certain products to get to product so I wasn't being glib other than when you taste it, it is a great product and it is very interesting in terms of how we're manufacturing it so I'll leave it at that.

Thanks.

Thank you.

The next question comes from David Adelman of Morgan Stanley.

Good morning everyone.

Good morning, David.

I was curious, your comment about three percent second half sales growth, is that taking into account your intended incremental SKU rationalization and product -- and brand sales?

Yeah, we intend, at least our outlook is to have a comparable second half comparable to the second quarter in reported sales.

Okay.

So as we know, we have been rationalizing roughly at the rate of 1 1/2 to 2 percent.

And given Kraft comments about private label I wanted to devil there for a second.

Obviously one of the things that distinguish your categories is they've been highly branded.

Do you get any indication that your major customers are taking a hard look at emphasizing private labor confectionery?

Within confectionery private label has I think about two percent of the market maybe a little bit less, and the important thing is we continue to do our job on bringing news and benefit upgrades to our brands and get the type of retailer support that we have been getting.

We think we will be in pretty good shape.

Again you also have to remember that our product category and our brands cuts across all channels of distribution, some of which aren't necessarily as prone to having private label penetration within other categories.

Right.

Okay.

And then lastly, could you give us a general indication, I understand you didn't want to get into cocoa outlook for next year, but your overall cost of goods sold outlook for '04 versus '03, could you comment preliminarily on that? to get into cocoa outlook for next year, but your overall cost of goods sold outlook for '04 versus '03, could you

Sure, David, as we said in our 10-K, and I would not want to change that guidance right now, is we do expect our cost structure principally because of cocoa, to go up next year.

But we've got a lot of levers that we're working on right now, to minimize the impact of that.

And a lot of that has to do with doing things better within the Supply Chain, a lot of the initiatives that we've already talked about, some of the pricing strategies that we're employing, some of the mixed strategies in our product line, and selling more product through channels that have a better mix.

So there are a lot of -- you know, levers that we're counting on.

And -- levers that we're counting on and are planning for even right now to mitigate the price -- I mean the cost increase coming from raw materials.

Thank you.

Thank you.

Our next question comes from WilliamLeach of Banc of America.

Good morning, everyone.

Good morning, Bill.

You said volume was up a little bit.

Could you quantify that?

Is that one percent or less or what?

Bill, it's less than one percent.

And I think we would stop there.

So you would say flat basically.

No, a little less than one percent.

Okay.

And you mentioned in your prepared remarks that you had more brands you will be divesting.

Could you quantify the sales of those brands roughly?

Sure, and it is really a combination of brands and SKUs, I would rather talk about it in that fashion.

And you will recall at the end of the first quarter, we commented on divesting roughly, either divesting or eliminating, rationalizing SKUs that would -- that had sales in 2002 of about $150 million.

And I said at that time it was roughly half brands and half SKUs, it is probably a little more brands and a little less SKUs.

But that's the new number? 150 million?

No, that's the same number and that's about where we are.

And it's been very consistent.

And by the end of this year, we expect to have most of that, if not all of it rationalized.

But didn't you announce a new program today?

No, this is part of what we had talked about.

We have very definitive plans now or more definitive plans on which SKUs and which brands and so on.

But just a continuation of the previously announced program?

Yes.

Okay.

We're just putting some numbers a little more definitively numbers around it for what the cost of the program will be.

Okay.

And then lastly, you've been buying back about $2 million shares per quarter.

Is that roughly what we should assume going forward for the balance of the year?

We will continue it, as I said, when we got the $500 million authorization, our intent was to essentially spend that within the context of this year or early next year, we're about halfway there, and you know, will continue to evaluate it day to day, just as any other buyer would in the market.

Okay.

Thanks.

Thank you.

Our next question comes from Leonard Teitelbaum of Merrill Lynch.

Good morning.

Good morning, Len.

More than an adequate quarter.

Thank you, Len.

Just so that we're -- I get the same parameters right, it is about $100 million is a successful new product in the chocolate category, in the nonchocolate category it is about half that.

Isn't that correct?

Len, I think those are numbers that have been discussed before.

I know it came up when we introduced Fast Break, around those ranges, and I think we've said over the past couple of years we want to get away from specifically saying two things, A, Hershey is going to come up with a major new item every two years like clock work, and B, if it is a major new item therefore it will have this level of sales and I think our track record to date shows we will continue to build our leading brands which is why you see limited editions, but when there is an opportunity to satisfy consumer benefit which Smores clearly meets as does Swoop's Slices, then we will come out with the entry and it will not be on any predetermined timetable.

That blows my second question.

If I want to turn -- I want to turn to the balance sheet very quickly, please, Frank.

What -- loans payable, that is regular commercial debt and you just use loans payable for that or is there something different in that title?

That is all it is, Len.

Okay.

Next question, the -- I know this is a small quarter, and the inventory build I'm presuming is starting to get ready for the, you know, for the upcoming season.

The -- I believe you said this before, I just want to make sure, Frank, that the percentages that we're using or that we see in this quarter, shouldn't they obtain pretty much as we go through the end of the year?

Or are we looking for a bulge in SG&A expense as we get to more to Q4?

Aren't you now trying to align your expenditures closer to consumption on the advertising and promotion front rather than to presell, so to speak?

I think it is fair to say, len, that if you're trying to track advertising, for instance, the tracking it against sales, so that a quarter's worth of advertising is roughly proportionate to that quarter's worth of annual sales.

If that's what your question is.

Yes, sir.

And in terms of trade promotions, that may vary some but obviously it would track sales, maybe a little higher in some quarters where you've got, you know, considerable new product activity.

But for the most part, you can assume that it will track sales.

Okay.

Switching gears a little bit, the -- are you done making all of the supplemental contributions to your pension plan?

Or will that be reviewed in Q4?

I'm not sure.

I'm --

Didn't you put some extra money into your pension plan?

Yes, we did last year on two occasions and you might -- you know, you will recall that obviously the stock market was not performing very well, if the stock market continues to perform the way it has been performing, we certainly would not expect a contribution anywheres similar to what we made last year.

Last question, one of the reasons cited by the trust, if we hate to relive the bad old days, was that they did have a capital spending program.

Should they come to the market to buy stock, historically, you've bought - - hairy pursue with the public, if the trust wanted to liquidate their holdings you bought them with an equal amount coming on to the public would you expect that pattern to continue should they need money and come to you for a stock sale?

In the past, Len, we've done a little bit of both, where we announced buy back programs, sometimes they participated in those buy back programs.

At other times, we had negotiated individual deals with the trust, for certain amount of shares.

You might recall back in '95 and '97, we negotiated $500 million worth of stock buy backs each time.

Did not have an equal amount or a proportionate amount with the public.

So we have to take these, you know, as individual cases, as they come up.

But your percentage is getting, I think, and correct me if I'm wrong, is getting around that point to where if you don't buy from the public and they want to sell stock, if they're getting pretty close to a threshold price, aren't they or do I have my numbers incorrect?

I'm not sure I understand the question.

Their percentage of ownership in total is still around 31percent, maybe closer to 32 right now.

I'll follow-up offline.

Thank you very much.

Thanks, Lenny.

Your next question comes from Mitchell Pinheiro of Jamie Montgomery Scott.

Good morning.

Hello, Mitch.

Couple things, one, how much -- did you quantify, on the call here, how much new products contributed to sales growth?

We didn't quantify it but we did that for specific reason, and the way we're looking at new products, as Rick tried to indicate a minute ago, Mitch, is they are really building on current existing large franchises.

Okay.

So you know, it is a little bit of building on the core business, rather than creating brand new franchises.

So we look at it all as franchise building for current platforms.

All right.

But the new item specifically, whether it be the Limited Editions Reese's, Sugar-Free, continuation of To Go, etcetera, those have -- those did contribute to the quarter and also contribute to contemporizing the parent franchise.

Okay.

What about the -- in terms of the -- let's say the instant consumable market, but more directly related to the convenience store channel, did the cool weather, wet weather have any impact where, you know, consumers would make a choice, you know, not buying the ice cream, you know, sandwich and would go with, you know, a candy bar?

Was there any of that, were you able to -- did you see any of that in the quarter?

Mitch, not necessarily.

I think a couple of things.

We saw good take away for us on a 12-week basis which is not seasonally affected so convenience store take away is applicable for the 12 weeks, where there is a five percent, we gained a little bis less than one share point.

Year to date, take away up six percent.

We gained about a share point.

So we are seeing the same trends in take away and also the share growth, so I can't contribute what might or might not have been happening to other categories at this juncture.

Your C store growth at all - - did you have any increase difficulties, any distribution point gain or was it all --

The majority of it -- we do continue to add a little bit of distribution points obviously if we get the 99-cent To Go bites in or would F-we got Ice Breakers unleashed in, but a lot of it is a good velocity and velocity buying some of the new times.

What about, just going back to last year, the work stoppage within your Q2 last year which might have had some impact.

Can you quantify what that was last year, so maybe I can X that out of --

Yeah, Mitch, what we said last year, as I recall, and -- is that the work stoppage had fairly minimal impact on the quarter last year, and so I mean, we didn't use it to rationalize last year's quarter one direction or the other, and you know, so we're looking at this year, pretty much compared to what a typical second quarter would have been the prior year.

Okay.

And finally, so -- have you this Smores, Rick, I think you said it is late or in the Q4, is that correct?

Begin shipping at the end of fourth quarter, correct.

At the end of fourth quarter.

What about Cat In The Hat?

Cat In The Hat is -- that is going to be part of the Kit-Kat brand which is - -tiing in with Cat In The Hat movie staring Mike myers so that will be earlier in the fourth quarter, we also have, as I mentioned a couple more of the Reese's Limited Edition, Reese's and Payday Honey Roasted coming back with the mint Kiss for holiday and return of the Kit-Kat light and dark so we have limited editions items as well as some new items in the third and fourth quarter.

Okay.

Anything else?

Frank referenced it as well as I did earlier, the Hershey's Swoops which are the thin slices of chocolate candy and resealable on-the-go canisters, think of them almost like spiral wound type of canisters.

Okay.

And Reese's Mini, the one thing also is Reese's Minis because Reese's is a franchise, continues to do well, and it is going to be -- we're going to be introducing Reese's Mini in on- the-go tubes later this year as well.

A pretty full pipeline that is actually coming out of the pipeline.

How does the pipeline look, you know, as you enter, you know, early '04?

We have a few items in early '04 that will be communicating at a later date so the pipeline looks pretty good.

All right.

Thank you very much.

Thank you, Mitch.

The next question comes from Eric Katzman of Deutsch Banc.

Good morning.

Good morning, Eric.

Good morning, Eric.

A few questions, I guess first up, in response to kind of Bill Leach's kind of questions on the SKU rationalization, I think last time, actually, Frank, you said $75 million this year and $75 million next year, to equal out the 150, 2002 base.

Let me --

What you're saying now is that all of that is going to hit this year?

No, Eric, let me explain that.

If we rationalize all of it by the end of this year, we obviously will have had those items and those brands in the line for parts of the year.

So whatever we've sold, for instance, in the first half, in those lines, items, we discontinue, we're selling the second half, when we do comparison the first half of '04 to '03, obviously some of those will have disappeared from the line.

You see what I mean?

Yeah.

So we could be done with our product line rationalization by year-end, but it will still affect '04 numbers and that's the way I meant it.

So it is the same as what we've said back in April.

Okay.

So if we look at -- I mean, I realize '04 is a way's away, but if we look at -- between the way your new products are shaping up, the better price realization, and you know, I mean, do you see sales accelerating on a reported basis?

I think we're still within that three percent range.

And the important thing is what we see in this quarter, albeit it is a low quarter for the year, and it is doesn't have the sell in the season, I think we did a better job on Easter in sell through market share and overall profitability, what we do see is we're getting some traction behind our new products and continued traction with our big brands, and we think that will bode well going into next year.

But we will leave it at that for now.

Okay.

And then Frank, as a follow-up, I guess to Lenny's question, you know, inventories up whatever it was, 35, 40 percent, referables down 35 or 40.

I guess the net doesn't bother me but why such a swing?

You know, the inventory swing, first, you know, you're comparing it of course to year-end.

So if you were comparing it to last year's second quarter, there is a much smaller increase.

But the reason for that, of course, is the seasonality of the business.

At this time of year, we're building inventory for the back to school, Halloween, last year's second quarter, too, you might recall, because we had the work stoppage, our inventories were much leaner at the end of the second quarter because we had just gone back in the second half of June, the work stoppage was settled and we were just going back to rebuild up the inventory.

So it is not out of the ordinary at all.

In fact, it is just the way we planned it.

And it is pretty much the seasonal build-up that you would expect in the second quarter.

Okay.

And then the last question is, you know, I've tried to do a fair amount of work on this ROPEY or return on promotional investment, and you guys have been, you know, I think in the forefront of that, but you didn't really kind of talk about how promotion affected your top line in terms of a reported basis.

Was promotion year over year up, or down?

And where do you expect that to move either for the second half or into '04?

Well, promotion I think some of my comments, Eric, tried to get at that, and that is first, they were up from last year, some of that was of course because we had a lot of new product in production that we talked about, and they do take a little extra promotion support, some of it was related to the merchandising and programs that we had in place prior to the announced price increase, so while it was up from last year, it was actually down a little bit from the first quarter.

And as Rick said, we didn't see quite the competitive activity in the second quarter, particularly at the end of it.

As we had seen in the first quarter.

So I think it really depends on the amount of new product activity that we see quarter by quarter, as to the level of that promotion activity.

But it is one of the, you know, areas that -- where our business is very responsive to it, as long as we're getting the proper merchandising for it, and so as long as it's responsive, we think it is a pretty good spend.

Eric, one to add on to that, as we've discussed at the session last December, we said we would be rolling out a new trade promotion strategy which we had done in the early part of the year and that takes some time for everybody to get experience with it, and second, to get it sold into customers and accepted, and that seems to be gaining some traction as we bundle our funding to better leverage our portfolio scale and we've talked about that and we're starting to see that have some positive impact but you know, quarter in and quarter out there's always competitive issues we will be prudent in terms of how and where we respond.

So is it then fair to say that if your pricing was up about two and your volumes were up a little bit less than one, that if I assume the promotion was a negative one or two percent, that your core volume, X'd the SKU reduction was probably up three to four?

I mean, it seems like maybe it's better than maybe we're give you credit for.

I think you're giving us more credit.

It is more price than the way you've added it up.

Think of it as a price increase of roughly three percent.

Very much consistent with the ten percent, plus increase that we announced on certain part of the line that make up about a third of the total line so the effect of price increase across the whole broad line is about three percent or a little more than three percent.

But as you also pointed out, we did have rationalizations that may have amounted to about 1 1/2 percent.

So our core volume is up a little bit, much of it, most of the increase of that three percent is related to price.

Okay.

Thank you.

Thank you, Eric.

Our next question comes from Christine McCrachen of midwest research.

Good morning.

Good morning, Christine.

Sorry I got cut off before.

Good to hear the inside out is finally coming out after -- [ LAUGHTER ] Months of anticipation.

Wondering, Rick, if you could talk a little bit more about your international strategy?

You know, you had mentioned it during the shareholder's meeting, didn't hear a lot about it during the call.

Could you just bring us up to date there?

A couple of things there, our Canadian business is doing very well in terms of sales profitable, and market share.

We have a good -- profit - - We have a good share of the chocolate market which is the largest market, about 25 percent and we've made some improvements and the team up there has responded well through the first half of 2003.

And our Mexico business has had decent growth year over year.

The rest of the business which is primarily export with the exception of the in-country operations in Brazil has had some spotty successes and some spotty setbacks obviously, a little bit of that might be related to SARS with the small business anyway, and the small time of year in China and duty free shops and things of that nature, but we are starting to see some improvements in our core business in Brazil which is what we had articulated earlier in the year that we had not done as good a job as we would have liked on the acquisition and the integration of - - and now we have in manufacturing in Brazil we are looking at how can we better utilize this throughout Latin America.

So at this point you're comfortable with your exposure to international, don't expect it to go a lot larger?

Not in the near term, correct.

Yes, I am comfortable, yes.

And then you talked about several alternative channels, didn't really touch on dollar stores and I've been reading a lot about confectionery making a huge push in that charge.

Can you talk about what you're gross dollar stores are one of fast growing and chance IRI and Neilsen and we've done well in dollar stores where we've had some recent gains and where we think we're holding if not gaining shares and the key for dollar stores is a rapidly and evolving channel, and we need to be - - what is the best product lineup for dollar stores so to ensure we have good margins but to ensure it satisfying the merchandising strategies of those operators?

You have to I guess change your market, or your sales strategy to go into that channel or do you use again the same kind of sales base that you are using in --

It is the same selling structure, the key, whether it is dollar stores, club stores, convenience stores, or drugstores, is make sure that we have the right product lineup that makes sense for that particular channel and the right programming, depending on how they want to market to their consumers, so it is a continuation of being more flexible from what the retailer needs to succeed.

And then you had touched just briefly on your outlook, or I guess fill-in for back to school and Halloween, can you just give us a read on what your expectations are for the holiday season?

It seems like you've been gaining some momentum on holidays, despite the fact you're not really focused on.

We are -- we are focused on winning the seasons and being successful but doing so from a more profitable standpoint which is why we've said repeatedly we weren't going to chase unprofitable season sales or that last particular case, what Frank might have referenced at Easter was we had a good sell through and we had good take away at retail which reinforces what we're doing, at least in the near term, has been correct, and we're taking that data and what we learned from Easter and working that into our selling plans for back to school and Halloween.

So again our goal is we are in no way shape or form walking away from the seasons, we just want to be a little bit more disciplined about how we continue to gain share during that time but also do so in a profitable manner.

In terms of your outlook then for the upcoming season?

We are still in the midst of selling it in, and it is something that at this juncture I wouldn't want to comment on for competitive reasons.

All right.

Thanks, nice quarter.

Thank you.

Our next question comes from John McMillin of Prudential.

You know, in December, Rick, you gave some specific targets for the year.

I think it was a one to two percent volume drop, and a two percent sales increase.

Is that right?

John, I want to make sure Frank and I -- we recollect correctly.

I thought we said the first half would be slightly down.

And the second half would be up.

And at the time, I think we said reported, it would be up 1 to 2 for the year. 1 to 2% of sales?

That what we said on a reported basis for the full year, off on the first half, coming back in the second half, again we have seen some improvement above what we had thought in the second quarter and I think that's what Frank said earlier, we are looking at about maybe a three percent, I think for the back half from a top line basis.

So that would get you to the basically these targets?

Yes, it would, John.

So these targets in December are basically right on, going into the big period?

You know, in December, as Rick said, we probably talked closer to one percent for the full year on a reported top line, and I think, you know, as you'd up the numbers now and as we'd them up, we're -- add up, we're comfortable with the one to two percent for the full year now.

Okay.

Now, I'm reading back over the notes, you're not including in this 8 cent charge anything for new product rollout, product line rationalization, and I guess I --

No we're not including it, you know, as part of what we've announced as a program that is intended of course to grow our business, but no, there are no expenses related to these marketing, you know, the roll-outs of new products, that is included in that 8 cent charge.

You're right, John.

I felt like I have to ask, given the way you structured your remarks.

No, it is a good question but it is not in there, correct.

Good.

Okay.

Thanks again.

Thank you, John.

Our next question comes from Andrew Lazar of Lehman Brothers.

Good morning.

Good morning, Andrew.

Just, you know, with respect to the -- seeing some of the net price realization and also feeling you know, a bit better perhaps about volume in combination with that, than maybe you had originally budgeted for and I know you like to be conservative on that front, is there a way to get a sense of what you would attribute, you know, the -- I know the second quarter is small so we don't want to get ahead of ourselves but thus far, seeing the combination of pricing and volume not really sort of falling off, how -- what do you attribute some of that to?

I know I thought about maybe there being a broader range of price points now in the market so it is tougher to sort of really see perhaps some of the incremental pricing, as a consumer, but I'm just trying to get your perspective, because that's one of the more interesting points to me, out of some of these results.

A couple of points, Andrew, and I think we touched on them both at the end of the year and at the end of the first quarter here.

You know, part of the benefit of announcing a price increase for this year when -- as I've said a number of times, we probably did not need that price increase from a cost structure point of view.

That did give us the latitude, a little bit of latitude of easing into that price increase at retail, over the course of the year, rather than trying to do it abruptly, you know, the first day of the new year.

Rick pointed out a number of times that we protected various programs that were already in place, so that that also helped with conversion.

And then the thing I think that also has helped to -- helped us out quite a bit is limited edition and many most of the limited edition as you know come in standard loose bar form and those have brought excitement and interest both from consumers and the trade.

I think all those things working together has really helped us to keep our volume up.

And not deteriorating it with the significant price increase.

And lastly, as you spend, and others I guess, also, spend perhaps more resource on sort of the instore or retail execution component, and some of the sales force realignment seems like that is perhaps where it is -- where you're going, do you think just generally speaking it becomes -- I don't want to say -- I don't want to use the word less important but tougher to analyze, you know, your marketing effectiveness by just say looking at what high quality advertising did in any given quarter?

I think is always difficult to try to.point to one specific variable, particularly in a category high household penetration purchased, and quite a few new products that come in and out of the market regularly, what we've said repeatedly is we believe we have a good advantage in our scale brands, they permit us to introduce cost effectively, close inline extensions, they permit us to have somewhat higher ad - - and maybe smaller brands and it also permits us to bundle our trade promotions and go to a customer with a larger fund on a total basis but perhaps on a per pound or a percentage of sales basis, somewhat less than what our -- what competition might go with, so I think what we're going to see is having greater resources, a retail is going to provide an opportunity for upside leverage to our brand building initiative so I think it will work far nor sin gistcally than not.

Am I right to assume that you probably in many ways can get a better read on your return on let's say some instore promotions than you can on sort of advertising programs where I think it is a lot more vague perhaps on the real sort of lift you get, you know, from a particular sort of ads.

I think it is two different types of lifts.

Obviously if it is an instore promotion over a short term period, then you're able to work with the retail and retailers are getting very good data so we're able to work with them and see on scan data the impact of that promotion in the short term.

However, over the long term, there is equally as robust measures to see how well we're building our base business or overall brand loyalty, so really two different approaches to get at two different measures, but working together, they both build brand equity.

Great.

Thanks very much.

Thank you.

Your next question comes from Terry Bivens of Bear Stearns.

I noticed, Rick, where Mars is introducing an energy bar and it has always seemed to be kind of a natural, I guess, what you had referred to as an adjacent seat, perhaps do something with Reese's in that regard.

Either along the energy bar or protein bar line.

Any thoughts there?

Does that kind of preshadow what you might be looking at?

I think what we've said before is that we view our leadership position in the confectionery segment which is the largest segment of the 60-plus billion dollar snack market, we view that as a good gateway to snack market adjacent, and I - - we think there are a couple of brands that can work in adjacent, and we have work under way but obviously I don't want to go too much further than that.

I think a product that is certainly not positioned as an energy bar nor should is be is the Reese's Fast Break that we introduced about a year and a half ago, and that continues to do well, and particularly so in the convenience store channels so we see latitude in several of our big brands and obviously when you introduce sugar-free behind reese's and the Hershey brand it shows we can expand those franchises.

Thank you.

Thank you.

The final question comes from Chad Grossbeck of GrossbeckInvestment Management.

Thank you.

Some of my questions have been answered, but I just wanted to touch back on inventory.

You said that the inventory was up due to a normal seasonal buildup.

Yes, uh-huh.

That's right.

Uh-huh.

And the other thing was I noticed cash was down.

Can you touch on why cash was down?

Yeah, that of course is intentional.

We had built up an awful lot of cash last year because we were exploring the sale of a company, as you will recall, we really couldn't do anything with the cash, we have spent much of that cash, of course, on the $252 million of share buy-backs from the first half.

Okay.

Any other big expenses besides the buyback, though?

Like dividends or -- no?

All of the normal, you know, capital in the first half of the year, of course, and dividends in the first half of the year, our cap ex in the first half of the year, in fact, was about $88 million dollars.

So we've covered that.

We've covered our Cap Ex, our dividends, and bought back $252 million worth of our shares.

Build up the seasonal inventory, and that pretty much depleted then the cash that we had on hand.

Okay.

Great.

Thank you.

Sure, thanks.

There are no further questions at this time.

Mr. Edris, are there any closing remarks?

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

Mona and I will be available to answer any additional questions you might have.

As a reminder, our third quarter sales and earnings release and conference call will be held October 16, 2003.

Thank you for your interest, and good day.

This concludes today's Hershey Foods Corporation second quarter earnings conference call.

You may now disconnect.