好時 (HSY) 2003 Q3 法說會逐字稿

Good morning, my name is Cheryl and I will be your conference facilitator.

At this time, I'd like to welcome everyone to the Hershey Foods Corporation quarterly earnings 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 then the number 1 on your telephone keypad.

If you would like to withdraw your question, press star then the number 2 on your telephone keypad.

Thank you.

Mr Edris, you may begin your conference.

Thank you, Cheryl 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.

Rick will provide an overview of the company's performance during the quarter.

Frank will provide the specific details and then we will be happy to take you 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 on current expectations which are subject to risk and uncertainties.

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 2002 filed with the SEC.

If you have not seen the press release, a copy is posted on our corporate web site, www.Hersheys.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 income before accounting changes, excluding charges related to business rationalization and realignment initiatives, the gain or loss on the sale of brands and incremental one-time charges such as those incurred to explore the sale of the company last year.

As shown in the pro forma income statements attached to the press release, these are used 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 and gains or losses 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 call over to Rick Lenny.

Rick?

Thanks, Jim.

I'm pleased with Hershey's performance during the third quarter.

A combination of solid top line growth and continued productivity gains delivered a 13.9% increase in diluted EPS on a pro forma basis.

Our value-enhancing strategy of investing in Hershey's market-leading brands and superior selling capabilities is gaining momentum.

I will briefly review some of the highlights of the quarter.

First, net sales increased by 3.4% with about 3% due to pricing and about 1/2 of 1% attributed to volume growth.

Our ability to achieve both net price realization and stable volume is the result of focusing our resources on key growth opportunity areas.

For example, during the quarter our scale or leading brands had a sales growth of 5%.

Instant consumables were up 6% in sales and our sales to C stores increased by 8%.

We also had the successful introduction or continued growth of new items such as Reese's Limited Editions, Hershey and Reese's sugar-free and the 99 cent to go line.

Turning now to the retail marketplace, both the category and Hershey experienced solid gains.

For the most recent 12-week period, the total category, as measured by food, drug, mass excluding Wal-Mart and convenience stores increased by 4%, bringing the year to date increase to 3%.

Hershey continued to outpace the category and expand its leadership position.

For the 12 week period, our retail takeaway, again, as measured by FDMXC, increased by 8% with a 0.8 point gain in market share.

On a year to date basis, our takeaway is up 5% with a market share increase of 0.7 points.

This performance is broad-based behind our growth initiatives.

For the 12 weeks, our scale or our leading brands had an 11% increase in takeaway, instant consumables were up 9% in takeaway and in the fastest-growing most profitable chocolate segment, we grew 12% versus a 10% growth for the segment, thus increasing our share by 0.7 points.

New products have played a key role with Hershey having three of the top-five fastest turning new items.

Within the high growth convenience store channel, we continue to build our position.

For the 12 weeks, our takeaway increased 11% and we gained 1 full share point in market share.

These gains in convenient stores were driven by strong performance in both chocolate, up 16% in takeaway, and gum, up 13% in takeaway.

As a result of last year's price increase, we are now seeing higher prices at retail.

Despite these higher price points, we're experiencing volume gains in addition to the dollar growth just cited.

For the 12 weeks, Hershey's pound volume increased 1.5% with the 8% increase in dollar takeaway mentioned earlier.

A key contributor to this performance at retail has been improved distribution of merchandising resulting from our new trade promotion strategy.

Bundling our brands and program offerings together for greater efficiency and more scaled leverage is yielding positive results.

Total brand support, both consumer and customer, increased by 100 basis points for the quarter and the spending was balanced across all of the components.

Turning now to the gains in productivity, our gross margins increased by 150 basis points for the quarter through a combination of price realization and supply chain savings, particularly in logistics and our overheads were flat for the quarter.

As we look ahead to the balance of the fourth quarter of this year and the early part of 2004, in addition to profitable growth during the seasons, we're introducing several new products that satisfy a broader range of consumer benefits.

In December, we will begin shipping Hershey Swoops, four varieties of thin chocolate slices in convenient, on the go packages and Hershey S'mores.

Reese's white chocolate peanut butter cups, which had been a limited edition item this past year and based on its success will now become a permanent item.

Ice Breakers Spearmint Gum builds off of the recent positive trends in this gum brand.

In the first quarter of 2004, we will have an equally as strong lineup, we will be introducing sugar-free York Peppermint Patties, further building our scale in the on-trend sugar-free segment.

Ice Breakers Liquid Ice, breath freshing capsules in a pocket size on the go package, will continue to build this franchise.

And for the first quarter of 2004, the big news will be carmel-filled Kisses, it's our first soft-centered Kiss and it's a great platform from which to build.

All in all, the third quarter was solid as we turned in balance performance and gained further momentum in the marketplace.

Given this progress, we now expect full year earnings to be slightly above our earlier projections.

Now Frank will review the third quarter and year to date results in greater detail.

Thank you, Rick and good morning, everyone.

I'm very pleased to discuss our excellent third quarter results.

In order to give you the proper perspective on our business, I will be discussing our third quarter results, excluding various items.

First, the impact of the accounting change for operating leases.

Second, the charges related to the business rationalization and realignment initiative, third, the gain on the sale of certain gum brands and fourth, last year's charge related to the expiration of the sale of the company.

Elimination of these items would yield adjusted earnings per share diluted of $1.15 compared with $1.01 per share diluted in 2002, an increase of 13.9%.

For the third quarter of 2003, as Rick pointed out, consolidated net sales increased by 3.4% on a reported basis.

This sales performance was achieved through a combination of pricing, about 3%, and volume growth, about a half a percent, which was simulated by the positive effect of limited editions on our scale brands, 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 consumable business and high growth channels in the U.S.

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

We are pleased to report that adjusted gross margin during the quarter continued to show excellent improvements, in fact, by 150 basis points, coming in at 39.3% versus 37.8% in 2002.

The gross margin was enhanced by this higher price realization, better mix and overall supply chain efficiencies, as Rick said, particularly logistics.

Adjusted selling, marketing and administrative expenses increased 40 basis points as a percent of sales, coming in at 17.8% of net sales, versus 17.4% last year.

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

For perspective, I might add that total brand support, including trade promotions, as a percentage of gross sales, increased by about 100 basis points during the quarter.

The increased marketing spending was used principally to support our scale brands and recent marketplace performance suggests the spending has been effective.

Adjusted EBIT of $255.8 million increased by 8.9%, compared with the third quarter of 2002.

And the adjusted EBIT margin was 21.5% versus 20.4% last year, a 110 basis point improvement.

Interest expense for the third quarter of 2003 was $17.3 million, compared with $14.1 million last year.

Two primary factors contributed to this increase.

First, additional long-term debt related to the change in accounting for certain lease obligations, effective July 1 of 2003, and secondly, lower cash balances for the quarter, leading to somewhat lower interest income.

The effective income tax rate in the third quarter of 2003 was 36.7% or equal to the rate of the third quarter of last year.

Adjusted net income of $151 million was 8% higher than the third quarter of 2002 and our net margin was 12.7% versus 12.1% last year.

Weighted average shares outstanding on a diluted basis for the third quarter of 2003 were $131.6 million versus $138.3 million for the third quarter of 2002.

Leaning, as we said, to an EPS of $1.15 per share diluted compared with $1.01 diluted for the same period last year, or an increase of 13.9%.

During the quarter, the third quarter of 2003, we bought 650,000 shares for approximately $47 million.

Year to date, we have now repurchased 4.5 million shares for about $299 million or at an average price of $66 per share.

Thus, we have completed about 3/5 of our $500 million authorization.

Turning now to the balance sheet, at the end of the third quarter, net trading capital declined by $130 million or almost 12% compared to last year's third quarter, due in large part to a lower receivable balance.

Free cash flow has continued very positive and is running ahead of last year by more than $90 million.

Now I'd like to recap the effects on our balance sheet of the change in the accounting for the company's leases of certain warehouses and distribution facilities.

This change serves to increase our PP&E, or property, plants and equipment, by $108 million and increases long-term debt by $115 million.

There is no effect on the calculation of economic return on invested capital, however, since we have always included these assets as part of our invested capital.

With our improved margins in profitability as well as improved balance sheet management, our economic return on invested capital for the rolling 12-month period increased by 60 basis points from 16.8% to 17.4%.

Regarding the realignment initiatives we announced in July, the following events have occurred and I'd like to recap those for you.

In the second quarter, we booked 2 cents per share related to these initiatives.

In the third quarter, we have recognized the charge of 4 cents per share related primarily to the U.S. sales force reorganization.

Also in the third quarter, we realized a gain of 4 cents per share from the sale of certain gum brands.

We expect these initiatives to be completed for the most part by the end of the fourth quarter of this year, with an overall charge that should reach about 8 cents per share for the full program.

Just to update you on our item rationalization efforts, consistent with previous direction, our skew, or stock keeping units counts, currently stands at about 1500 active items.

And as we said before, we expect to get to the 14 to 1500 SKU level during the first half of 2004.

Now let me conclude with a few additional items of information frequently asked by many of you.

Year to date capital additions, including software, are $144 million.

For the full year, we now expect them to run in the 200 to $210 million range due to the acceleration of several projects.

Dividends paid year to date are $134.5 million, for the full year we expect dividends paid to be about $185 million.

Depreciation and amortization for the first nine months totaled $134 million and we now expect that for the full year that number will be $180 million.

And finally, net interest expense for the full year is expected to be approximately $66 million or about a million dollars higher than our previous guidance.

That concludes my comments and now we'll be happy to take you questions.

Cheryl, the first question, please?

Your first question comes from David Nelson with CSFB.

Hi, good morning.

Good morning, David.

Good morning, David.

Just, Frank, back to the 6 cent charge, what specifically is that related to?

Is that the DCs in Redlands, Atlanta and Hershey?

Yeah, that's right.

And they accounted for about $7.4 million charge after-tax or 6 cents a share.

And that's essentially the change in the accounting to the cumulative accounting loss that would have been built up by that time.

To understand it, it was on a sale on leaseback and those costs, as it's going back through your prior Qs, would add up to about $240 million, so are you going to have a $240 million cash outflow now?

No, we're not going to have any cash outflow at all.

In fact, what gets recorded on the balance sheet is an increase in PP&E for that $108 million.

Right.

It's still financed the same way, we're just recognizing and bringing it on to the balance sheet ourselves because it was what used to be termed a synthetic lease.

Right.

And from a cash flow point of view, it will have no impact.

And what was the 115 again, please?

The $115 million is what we will recognize as long-term debt, essentially offsetting the increase in PP&E.

Okay, great.

Great quarter!

Congratulations!

Thank you.

Your next question comes from John McMillin with Prudential Group.

My congratulations, too.

Thank you, John.

There's been, as you know, a lot of promotional activity in the biscuit area and obviously ongoing growth in Granola and you've done a great kind of job just keeping your growth going in your core business.

Rick, can you just kind of help us understand the way the consumer looks at it?

Do you worry about competitive activity increasing in related categories hurting your growth?

And have you changed your fourth quarter growth assumption -- I guess the second half you were looking for 3%.

Is that still in tact?

Yes it is.

Largely in line with what we turned in in the third quarter, John.

And as far as increased competitive activity in related categories, and I know you've announced the new snack head, just how do you look at that as pertaining to your business?

There are a couple of ways to look at it.

I think if you go back to the chocolate segment, which is obviously the largest and most profitable in candy, gum and mints, the segment on the 12 weeks grew 10%.

We had a 12% increase in takeaway.

So we feel good about the innovation that's's coming into that particular segment of the category.

And there's always intensified competitive activity in one aspect of the broader snack market, one way or the other.

And where we feel pretty good about is how we've been able to match up well against a broader snacking environment within convenient stores, which is where there is, within a small amount of space, a large number of competitive snack items.

We continue to look for areas that we think both our brands and our supply chain and selling capabilities can be leveraged and we have some things under way that we're working on.

But as it stands now, whether it's the growth in our limited editions, certainly sugar-free has been a good boost for us and some of the new items we have coming out either in the fourth quarter or the first quarter of next year, which we do believe appeals to a broader set of consumer benefits, we think we're in pretty good shape.

And as far as the price realization in the quarter being less than it was in the third quarter, does that reflect increased promotional activity on your part?

John, I think you meant as compared to the second quarter.

The price realization was essentially the same.

It was about 3% in both quarters, so we're starting to get the full price realization.

Remember, we had a 10%, in round numbers, increase essentially on our standard bar line, but that makes up about 30% of the total line.

And so for the second consecutive quarter now we've gotten pretty much full price realization.

Okay, because I guess at last December you talked about 3 to 4% total full year price realization because of this price increase and it doesn't look like you're quite getting that amount, but you're getting what you -- is that a fair statement?

No, we're getting pretty much what our expectation was.

It's just that the 10.5% price increase, as I said, only applied to about 30% of the line, so, if you do the math, it's basically our expectation was to get about a 3% price realization, not all of it in the first half, but as we went through the year, that that would accelerate to about a 3% price realization.

Okay.

And just the old capital spending number was 175, is that right?

We had brought it up to between 185 and 190 had been the previous guidance and we're saying that's going to go to over 200, maybe as much as 210.

Okay.

And just my last question, Rick, you give us market share numbers and I don't know to what extent your categories get properly measured, but do you think, and you obviously have a good idea, do you think this 12% number accurately reflects your consumption trend?

John, the important thing for us, as we've said before, the FDMX, food drug and mass excluding Wal-Mart, only captures about 48% of our takeaway.

When we add in convenient stores it adds about another 15 or plus percent.

I can certainly add in Wal-Mart from our takeaway, but we don't cite that because they don't release it broadly.

But to answer your question directly, we believe the FDMXC number, including convenient stores, is a good representation of what's happening in the marketplace.

Great, thanks a lot.

Thank you, John.

Your next question comes from Evan Morris with UBS.

Good morning.

Good morning, Evan.

A couple of quick ones.

On the gross margin, obviously it, while improved a bit more than I was looking for, can you just talk about -- you cited some of the components that led to this expansion, can you talk about the mix of those and where we are, let's just say in the capturing the low-hanging fruit and how much of that was from higher product mix and kind of where that mix goes going forward over the next few quarters?

Evan, as we said, we did get pretty full price realization for this quarter, so, you should anticipate that a combination of price and mix would have given us most of that 150% -- or 150 basis point improvement.

But our supply chain continues to add some, as well.

Our commodities and packaging costs were pretty much flat as we've been saying for most of the year.

Our logistics costs are better.

So, I would attribute most of it to price realization, including mix.

And some of it to better supply chain efficiencies.

Okay.

And I wouldn't see a change certainly in the fourth quarter as a result of that and we haven't really yet given guidance for next year.

Okay.

Can you just give us also an update on the blue chip trade promotion program that you have out, a couple months ago you only rolled out like 30% of your business.

Can you give us a sense of where that is and what some of the early - what some of the findings are?

How you're really able to leverage that now?

A couple of things.

We introduced what we call blue chip, which is our name inside here, at really the beginning of the year.

And it's where we're able to go to our customers with a larger source of funding and total for the total Hershey portfolio as opposed to simply going with the program for a certain brand or certain pack type.

But the other key components are the key components of our trade promotion strategy is that it does pay differentially for different levels of growth, which we negotiate with the customer on and it also pays for key instore drivers such as merchandising, displays, racks, et cetera.

So, we're seeing the combination of better in-store execution and these growth programs helping drive our sales and share.

Okay, but how much of that blue chip -- is that rolled out completely now?

It's broadly -- I'd rather not get into what percent of our business it's covering, but it's broadly in the marketplace.

Okay.

And just last question on the debt number.

It was up, I think, about $300 million, a little bit more on total debt, 115 related to the accounting change.

The other $200 million, was that just related to the share buyback?

Or what caused that increase?

Yes, it is mostly the share buyback that takes place.

And then during this period of the year, of course, even though our net trading capital improved a lot compared to the same period last year, our third quarter is when we are still building up seasonal inventories and have a reasonable amount of receivables on the books.

So, you're looking at it compared to year-end, both of those items would be greater, so, working capital needs are bigger this time of year, but obviously most of that cash went to buy back shares, almost $300 million of it for the first nine months.

Okay, thank you.

Thank you.

Your next question comes from Christine McCracken with STN Research.

Yeah, good morning.

Hi, Christine.

Wanted to touch on Halloween.

Obviously the early trends look fairly positive given the fact that Halloween is on a Friday, but it seems like at least from conversations that we've recently had that lower inventories might limit how much growth you might see for the holiday.

Could you comment on maybe what you're seeing initially?

And what you -- if, in fact, there has been any impact from stores inability or reluctance to carry high inventory?

Well, a couple of things that.

If we take a step back and remember what we've talked about, how we want to approach the seasons in terms of profitably building our share and not chasing that last case, which tends to be an unprofitable one.

We've seen our total seasonal shipments in the third quarter up about a percent and its early days on retail takeaway from Halloween, but early indications that we're getting from major customers is that we're seeing a pretty good sell through at this point.

All right.

So, we're not seeing any issues that you might be asking about.

Sure, but it seems surprising that, in fact, shipments wouldn't be higher given the timing of the holiday.

Are you surprised by that?

Or was that in your plan?

It's in our plan because the important thing is planning the seasons correctly and then ensuring that we continue to build our core brands either during the seasons or outside of the seasons.

And that's what we've been talking about for the past couple of years, is a better balance, because building our brands is critically important for 12 months of the year, not just relying on seasonal spikes.

Great.

And then just on coca costs.

I know that you guys are covered for the remainder of this year, but looking into next year, and I know, Frank, I think you mentioned you haven't provided guidance, but would it be fair to say that you will actually face higher cocoa costs and is there anything you can do incrementally to help offset that?

Yeah, in fact we disclosed the fact that we were going to have significantly higher cocoa costs in our 10K back in March.

That also should have warned you all that we knew about it well head of time, we're planning for it and I mentioned that there were various marketing levers that we could be pulling in order to offset that kind of cost increase.

Part of those things, of course, are continued net price realization, especially as we go into the first half of '03, compared to the first half of '02.

As Rick has stressed many times, we have a continued program for improving our mix, not relying near as much for our growth on the seasonal business as on our everyday and particularly our business that is more profitable, like instant consumables.

And we've got a variety of cost reduction initiatives across the supply chain.

So, we've been thinking about this for a good portion of the year and keep in mind that we do have a lot of marketplace momentum.

We do have a lot of cost discipline in place and we will still expect to hit our long-term guidance relative to certain measures, although we haven't provided very specific items for next year.

Any other commodity cost pressures aside from cocoa?

I think it's generally known that dairy products are probably going up some next year, at least that's what the market certainly believes these days.

Great.

All our other commodities seem to be in reasonably good shape.

All right, thanks.

Thank you.

Your next question comes from Leonard Teitelbaum with Merrill Lynch.

About damn near as good as I can see it, I guess!

I've got a couple of questions here.

First of all, Frank, just on this growth in unit volume or tonnage, however you want to characterize it, let's assume last year you break your SKUs down into two parts, one would be core and one that would be either held for or divested product lines.

And just take that core business.

How fast did that grow year-over-year?

Not the SKUs or those that were in last year's that had been disposed of, but rather than look at it unit over units, how about just the core business versus the core business?

It would have risen about another percent, Leonard, if that's what you're getting at.

In other words, the comparability of the two years, as we've said all along, could add a percent to a percent and a half, for this quarter it's closer to a percent.

So, on a comparable basis, you're safe to add about a percent to the 3.4%.

And now going into next year, of this year's units, and let's stay with the core again, how much would be a reasonable expectation for that growth because, as you have indicated, you're still going to have a couple hundred unit of SKU reductions.

We would still be in the 3 to 4% range, Leonard.

And remember, we're going to be cycling some of the discontinuances and some of the businesses brands that we sold.

Those things could account once again for another percent or more of sales, but if we look strictly at the core, I think that's what Rick has been saying, that we would expect core business to continue to grow 3 to 4%.

All right.

Now, the new - I guess, Rick, you're using some of these special edition products as really a market share test.

Some have made it, you've indicated at least one.

How much does that add to the unit growth and are you including that in your core analysis?

Yes.

Okay.

Now, is it your intention to have the same number of "special edition" or trial or whatever we want to choose to call it every year?

No, because limited editions for next year are not necessarily going to be the foundation of our growth.

If you think about the major new items that we have, that we're introducing at the end of this year, which would be Swoops, which would be S'more, they're certainly not limited editions.

The addition of our sugar-free items is a whole new platform for us.

So, we will continue to use limited editions as a marketing strategy where it helps build the equity of the brand we're referencing.

For example, last year in '02, we did limited editions, we started with Kisses, we came with Kit-Kat and then this year we went on our largest brand, Reese's.

There's still one or two other very large brands that we haven't yet capitalized on the limited edition opportunity.

But don't think of it as the sole source of core brand growth next year.

Okay.

Now, is it safe to say from a margin point of view that the limited editions are break-even?

No.

They're profitable.

They are profitable?

Yes, they are.

Okay.

And just a quick addition to that, they're profitable because it's very cost-efficient way to expand our brand.

It's a relatively straight forward sell for our sales force and it can be merchandised with the parent brand it retails.

So, it's a very cost-effective way to bring news and excitement to our brands in the category.

And again, the majority of them are in the higher margin instant consumables or loose bars.

Thank you.

Now, Frank, considering where interest rates are today and your dividend payout, would you borrow to buy in stock or are you going to fund it all out of cash flow?

I think it depends on what the other needs of the business are, Leonard, but we certainly would not shy away from borrowing in order to achieve getting both the buyback completed that we've announced, but if we have other needs to fund those, as well.

So, that's not a limiting factor, if that's what you're getting at.

Certainly we would consider it and short-term money we would like to be using because it is very cheap.

Right, and one final question.

Can you give me a level of debt you anticipate for the end of the year?

It should be pretty much our long-term debt that's on the balance sheet right now, Leonard, because the fourth quarter, unless something were to happen like an acquisition or something that we don't comment on, our fourth quarter is a very, very high free cash flow quarter.

So, the anticipation is that by year-end we will pay down the short-term debt, barring something like an acquisition taking place.

Okay.

And the final thing is if you sent me several pounds of those Kisses with carmel in them, we'd be glad to do a taste test.

As long as you have [INAUDIBLE] scan them, we'll be fine.

I could put dirt in a box outside my office and it would go in about 30 seconds.

Thank you very much.

Thank you, Leonard.

Your next question comes from Andrew Lazar with Lehman Brothers.

Good morning.

Good morning, Andrew.

Rick, I was wondering if you could comment a little bit about the sales realignment that was done, but more importantly, try and give us a better sense of what benefits that you're starting to see?

You put more effort in C stores a while back and that's led, obviously, to a nice benefit.

Are you starting to see similar type of benefits from the realignment that you've done or how would you, not quantify, but give us a better sense of that?

Sure, there are a couple of things.

The sales force realignment began, I think, in July, is when we announced it and started to implement it.

And what's good about that is those results that we just commented on for the quarter are pretty strong and they were done at the beginning of the realignment, so, thus, little disruption has occurred.

I think to answer your question directly, one example is Club Stores.

Club Stores was one of the classes of trade that we had identified as a growth opportunity area for us and, in fact, we had a very strong quarter in the third quarter and now we're positive on a year to date basis.

We continue to add our resources and capabilities to convenient stores because we see that as a high growth channel and one we don't spend as much time talking about, but it's provided a great source of profitable growth are drugstores.

And you know what's happening with the growth in drugstores.

A lot of it on the pharmacy and we're able to put many of our items, particularly sugar-free and duel placements within drugstores.

So, we're seeing growth there, as well.

It's early day in terms of the sales force realignment, but again it was more of an evolution to even building a higher level of capabilities and necessarily dramatic restructuring of the sales force.

So, we're building on some strengths, but also adding some capabilities, both at headquarters selling and at store level.

Got it, okay.

And just on, you signaled back in December a sort of willingness to look at different structures to get some growth overseas, perhaps, that you might not have considered before, to conserve on sort of how you think about your resources and capital and whether that's joint ventures or other things.

I'm just curious, how active are you?

Do you see a lot of different opportunities in that regard?

I'm just trying to get a better sense of which ones work or is that just still at this point not really the focus?

There are a couple of things.

As we've seen in calendar year 2003 and the struggling global economies, we still see the best use of our resources is here building our presence in the very large and profitable core U.S. confectionery market.

Having said that, as Frank commented on at least in North America, our Canadian business is doing well, as is our Mexican business in Hershey Mexico.

We're seeing an improvement in our Brazilian operations and in the Far East we're seeing a couple of markets doing well and a couple of markets not doing as well.

We continue to look at ways to smartly build our brands outside of North America, but it's not something that we're shying away from, it's just a little bit more difficult than continuing to do well here in the states.

All right, thanks a lot.

Your next question comes from Terry Bivens with Bear Stearns.

Good morning, everyone.

Good morning, Terry.

Good morning, Terry.

Let me add my congratulations, as well.

Although, Rick, I was a little bit disappointed not to hear that that inside-out Reese's didn't make the cut as far as a permanent product.

I didn't say that.

All I said was what we were shipping in the first quarter.

Well, let's --

I have to leave something for Cagney.

Let's keep that one in mind!

Okay.

Just a couple of things.

Frank, how much did SKU rationalization subtract from the top line in the quarter?

I'm not sure I got the number.

Altogether, almost a full percent.

About 1%.

Would you expect that to be kind of run rate for the fourth quarter?

Yes, yes we would, Terry.

Okay.

Have you seen anything, obviously cocoa is somewhat of an issue next year.

As we're getting ready to go through the harvest over there, could you comment on what you're looking at in terms of the harvest on the Ivory Coast?

Well, as has been widely reported, the Ivory Coast crop has certainly bounced back quite well, so that fundamentally the market is not expecting any shortages of cocoa.

So, from a supply/demand fundamentals, the cocoa market seems to be in pretty good shape and that's pretty widely reported and I think that's why you've seen the market set back to the level of 14 to $1500 on New York futures as compared to $2,000 to $2400 as it was some months back.

So, I think the crop seems to be developing fine, we're right at the start of the harvest right now and over the next four to five months, we will see how that crop flows out of the country.

So, there hasn't been anything happened that would lead us to believe that there will be shortages of cocoa for next year, certainly from a fundamental perspective.

Would you expect the price to come down as we move through the harvest?

We generally don't comment, Terry, for obviously reasons, competitive reasons, on our view of the market direction.

But I think from a market structure viewpoint, what market observers are saying is that because the crops look reasonably well, we shouldn't see market that goes up terribly, but that's not sharing our own point of view, which we don't really do with the market for competitive reasons.

Okay.

And I guess last question, Rick, you did mention you felt that you could do a little bit better this year than you may have thought earlier in the year.

Care to put any dimensions around this?

I guess the market is around 355.

How much higher could it be?

No comment on that, Terry.

Okay.

I didn't think so.

All right.

Thanks very much.

Thank you.

Thank you, Terry.

Your next question comes from Eric Katzman of Deutsche Bank.

Hi, good morning, everybody.

Good morning, Eric.

Good morning, Eric.

Congratulations from me, as well.

And my team.

Thank you.

A few questions.

I guess first, Rick, one of the first new products that you introduced when you came in was the Fast Break line and that was supposed to be kind of a market segmentation, maybe taking on M&M Mars and their nougat category.

You haven't commented on that in a while.

Has that segmentation been successful for you, from your view?

Fast Break has been very successful and it's really found it's strength in the convenient store channel, which we would have expected given that it's an instant consumable and it's under the Reese franchise.

Despite all the limited editions that we have under the Reese's name, which has done very well, it has not negatively impacted Fast Break.

And we also include Fast Break in our seasonal tax, as well.

So, it happens to have been a very good brand for us.

And what we're now thinking about is are their other opportunities to expand off that platform.

When you say off of that platform, do you mean kind of like in the nougat category, if that's a fair way to describe it?

Well, it's just what the Fast Break product is and what benefit it satisfies in consumers' snacking behavior.

I'd rather leave it at that than go any further, Eric.

Okay.

And I'm not sure, Frank, that I understood exactly what promotional spending, either added or subtracted to your top line?

Well, promotional spending, remember I said that our spending on direct brand expenditures, which happened to be below the line, were about 40 basis points higher.

But I said the total spending was about 100 basis points higher, so subtracting the two, our promotional spending would have been about 60 basis points higher than in the past and obviously, as we've inferred, put to good effect.

Right.

That's pretty clear.

And I guess last question, Rick, more of a strategic question, I know you can't necessarily comment on this specifically, but we've been hearing kind of rumors that COFCO, which is a large Chinese agri business conglomerate, has one of the top chocolate brands for sale over there.

And I guess the track record of the company before you got there has been mixed in terms of international acquisitions.

And I suppose that, if my memory serves correctly, even your background is more domestic oriented than international.

How do you feel about staking or putting up the Hershey flag in another kind of far-flung region?

And what's the appetite for dilution when the base business is doing so well to do something like that and put capital overseas?

I think there's a couple of ways to think about that, Eric, is we've talked broadly about three major strategic opportunity areas for us.

First and foremost is the core U.S. confectionery market.

Second, we see ourselves competing successfully in the broader snack market.

And third is what can we do outside of North America to build our brands?

And that's what I talked about earlier, some improvement in Brazil and some spotty successes and still some issues in the Far East, but we're not going to, as we said repeatedly, let ourselves get way ahead of our capabilities.

The goal is how do we build our brands, not how do we invest in a potentially costly infrastructure outside of the U.S.

Okay.

Thank you.

Thank you, Eric.

Thanks, Eric.

Your next question comes from George Askew of Legg Mason.

Yes, hi, George Askew here.

Congratulations.

Thank you, George.

Hi, George.

Hi.

On the guidance issue, if I can just address that for a second.

The previous guidance as I understand it for EPS has been the top end of your 9 to 11% goal and the characterization in the press release is that you would be slightly higher than that.

Am I thinking about that properly?

Yes, you are.

We've talked about our guidance range being 9 to 11% excluding one-time items and that is a long-term guidance.

So, we've said we're going to be above that range, excluding one-time items.

Right.

Okay, good.

The share repurchases a little lower than I expected this quarter and I know seasonally low quarter in the markets, generally with the summer holidays.

Should we expect to see share repurchases pick up in the fourth quarter?

And are you still looking for kind of an early '04 culmination in that program?

George, in a lot of ways, it depends on the liquidity that's available in the market and I think you know pretty well that the first and second quarter, our trading was a lot more robust and more shares traded on an average basis.

In the third quarter, that trading slowed down and most of the third quarter our stock was rising up and there are various rules that keep us from buying, for instance, in a rising market.

We can only buy on downticks.

You know, the general rules.

Sure.

So, the third quarter made it more difficult for to us to execute that game plan.

So, we will stay flexible as we need to be, depending on what the market trading is like.

And so I wouldn't want to comment further, but obviously our intent has been to execute that 500 million share repurchase in a smart way and in a way as the market allows to us do it.

Good.

All right.

And then last question, Rick, in the past there's been some discussion about snack bars, energy bars as adjacencies, can you give us a little bit of an update on the company's thinking there --

As I just mentioned before, we fully believe that several of our brands and combined with our supply chain and selling capabilities make it attractive for us to look at close end adjacencies.

We have work under way, but obviously I wouldn't want to comment any further than that.

Good enough.

Thank you.

Thank you.

Thank you, George.

There are no further questions at this time.

Mr Edris are there any closing remarks?

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

Montifern 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 held January 28, 2004.

Thank you for your interest and good day.

Thank you for participating in today's Hershey Foods Corporation quarterly earnings conference call.

You may now disconnect.