好時 (HSY) 2004 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Hershey Foods Corporation quarterly earnings conference call. (OPERATOR INSTRUCTIONS) I would like to turn the conference over to Mr. James Edris.

Good morning ladies and gentlemen.

Welcome 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 for the quarter.

Frank will provide the specific details and then we'll take your questions.

We welcome those of you lisiting 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 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 2003 filed with the SEC.

If you have not seen the press release, a copy is posted on our corporate website, www.Hersheys.com, in the investor relations section.

Included in the press release are the consolidated balance sheets and summary of consolidated statements of income, prepared in accordance with GAAP, as well as our proforma summary of consolidated statement of income, quantitavely reconciled to GAAP.

As we said in the press release, the company uses this non-GAAP measure as the key metric for evaluating performance internally.

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

Rather the company believes the presentation of earnings, excluding certain items, provides additional information to investors to facilitate the comparison of past and present operations.

With that, let me turn the call over to Rick Lenny.

Rick?

Thanks, Jim, and good morning.

We have a lot to cover so I'll begin with an overview of our performance during the third quarter.

Hershey had excellent results during the quarter, with solid gains in sales, market share and profitability.

These results reflect the contuation of the momentum from the first half of 2004 and clearly underscore balanced and sustainable performance.

Let me turn to the specifics.

Net sales increased by 5.3 percentthrough a combination of continued momentum in our core confectionary business and a solid start to our new entries snack adjacencies, most notebly, snack bars.

The sales growth was a combination of strong unit volume gains and better price realization.

Our ability to achieve both volume growth and better pricing is the result of focusing our resources on key growth opportunity areas.

Within core confectionary, new platforms and products such as caramel filled Kisses, S'mores, Swoops and Ice Breakers Liquid Ice were strong contributeors.

We continued good growth from our secondary brands.

This growth reinforces how a little bit of news combined with effective merchandising can unlock the latent demand in these equities.

We continue to benefit from our scale leveraging trade-promotion strategy.

Sharper in sights into what drives category sales and growth by customer is being reflected in better directed spending and merchandising activity.

Seasonal sales have been in line with expectations, slightly above a year ago.

Initial Halloween merchandising and sell-through are in line with expectations as well.

This above trend sales growth is clearly benefitting from excellent take away and share gains.

For the most recent 12 weeks and channels that account for about 80 percent of your retail business, take away increased by 10 percent bringing our year-to-date increase to 6 percent.

As a reminder, these channels include food, drug, mass including Wal-Mart and convenience stores.

This take-away is well balanced with gains coming from both price and volume.

In the reportable FDMXC universe, we gained one full share point with share growth in all classes of trade during the quarter.

Our year-to-date increase is.0.4 points.

This performance is broad-based behind our strategic growth initiatives.

For the 12 weeks our scale brands were up 11 percent with year-to-date growth now at 7 percent.

Instant consumeables expanded by 9 percent during the quarter.

Convenience stores continue to be a strong area for us with take-away of 9 percent and market share up half a point for the 1-week period.

In terms of segment performance we expanded our leadership in both chocolate and non-chocolate.

New items played a key role in the quarter.

With core confectionary, Hershey had four of the top five fastest turning new items.

Our Hispanic effort is off to a good start.

The combination of our new advertising with Talia and customer specific marketing programs has produced a 7 percent increase in retail take away with market share gain of 1 point in Hispanic-oriented retail outlets (technical difficulty).

The majority of this quarter's retail business is based on non-seasonal.

While it shows very good movement at retail, the next two quarters are more seasonally oriented.

And thus, take-away trends should be somewhat lower.

Nonetheless with the continued emphasis on value-added new products and a seasonal strategy of targeting modest profitable growth, we do anticipate ongoing gains in market share.

One of the enabling strategies of our sales and marketplace performance is to better utilize our total brand support.

Total spending for the quarter as a percentage of sales was down 50 basis points versus the third quarter of 2003.

Trade spending is becoming an even more cost effective way to build our brands at retail.

Spending was roughly in line with last year.

Consumer support was down year-over-year as we focused advertising on fewer bigger brands and on our new products.

We also scaled back less effective national consumer events.

Given the retail breadth of our brands, the highly impulsive nature of the category and our ability to execute unique customer by customer events, national promotions particularly couponing have been reduced significantly.

Our take-away and share gains reinforced the appropriateness of this strategy.

In terms of profitability, the third quarter was very strong.

EBIT increased by 10 percent with a 16 percent gain in diluted earnings per share on a proforma basis.

Now a few comments on our strategic initiatives for the balance of the year and early 2005.

Our efforts remain focused on leveraging Hershey's scale brands and creating new platforms within core confectionary and relevant snack market adjacencies.

First within core confectionary.

Hershey's take five has been extremely well received by the trade.

We're increasing production capacity to meet this initial demand.

The product begins shipping the first week of December.

Building upon the successful launch of Swoops, we've added a limited edition for the holidays and we will have two new permanent items and two new limited editions in the first quarter of 2005.

This quarter will bring innovation to the non-chocolate segment with Twizzlers twerps and sours.

The soft, chewy profile of these products appeals to a younger consumer.

Also Jolly Rancher rocks and on-the-go tubes which are similar to Reese's mini pieces in tubes will deliver added convenience to this brand.

There are several new limited edition items in the fourth quarter that will continue to bring news and innovation to our scale brands, including Hershey's, Reese's and Kit-Kat.

We'll broaden our Hispanic product line and strengthen our retail execution capabilities with key customers.

The acquisition of Groupo Arena (ph) with its iconic Pillobrico (ph) brand, is expected to close by month end.

This will provide additional product and packaging items for the high growth U.S.

Hispanic market.

In the first quarter of 2005, we'll continue a strong level of new product introduction, leveraging our scale brands and targeting on trend segments.

We'll launch Reese's pieces with peanuts in both single-serve and take-home formats.

Also, based on the excellent response to our limited edition version, we'll launch the Reese's big cups single-serve as a permanent item.

We'll build upon the momentum of Ice Breakers Liquid Ice, by launching a new wintergreen flavor.

They'll be several new limited addition item as well.

Let me now turn to snack adjancencies.

Our strategy for entering adjancencies remains the same -- extend our scale brand, capitalize on our advantaged business system and leverage our retail ubiquity through our dedicated sales source.

As I mentioned snack bar is off to a good start.

In addition to the take-home packs that were introduced to the third quarter, we're now shipping all single-serve varieties.

These items will gain placement at the front-end as well as broadly throughout the convenience store channel.

Today we are announcing a major new initiative within the close-in (ph) adjacency of cookies.

We're introducing a line of premium indulgent, single-serve cookies, that leverage our scale brand, show our confectionary expertise and our distribution and selling strengths in high growth classes of trade.

Initially, there are four varieties of cookies -- Reese's, Hersheys, Almond Joy and York Pepper mint.

All of them will be enrobed in real chocolate.

Chocolate, mint, peanut butter and coconut account for better than 50 percent of total cookie sales.

Here's why the cookie segment is attractive to us.

It is large at about 6 billion dollars in retail sales.

The premium segment, in particular is large, profitable and growing.

The category is very responsive to innovation and it has a good margin structure.

And there is an opportunity for Hershey to gain distribution in high growth customers and classes of trade where cookies are not as well developed, such as convenience stores and drug stores.

Our focus will be on the higher margin, single-serve format.

This leverages Hershey's strong, instant-consumeable distributtion and merchandising base, as well as the classes of trade where we have scale and the categories underdeveloped.

Single-serve also meets the growing demand for convenient, on-the-go, snack products.

Although we will be testing take-home formats with several customers, we're not looking to compete broadly against the more everyday price competitive packaged cookies in the aisle.

Our products will be co-manufactured.

However, they will be distributed through Hershey's conditioned distribution network.

Initial reception from the trade has been strong, and shipments begin in December.

To wrap up about the third quarter.

Third quarter was solid as we turned in balance performance and gained momentum from the first half.

Given these results and the expectations for the fourth quarter, net sales growth for the full year is projected to be above our 3 to 4 percent long-term objective.

And diluted earnings per share growth for 2004 will exceed our long-term 9 to 11 percent range.

Turning now to the other important news that we announced this morning and that is I'm referring to the changes in Hershey's executive leadership team.

Earlier this year Frank Cerminara informed me of his decision to retire in 2005.

Fortunately, we have a disciplined and robust plan in place, and the board of directors has implemented this plan over the past several months.

As such, we are able to satisfy both Frank's wishes and insurea seamless transition to Dave West, a highly qualified and experienced individual.

More on Dave in a moment.

First on behalf of Hershey Foods, its shareholders, employees and personally me, I thank Frank for his stellar performance as CFO for the past four years.

His commitment, passion for the company, and high integrity have enabled us to produce record results during this time.

His role as CFO is the ideal capstone to an illustrious 33-year career with Hershey foods.

Frank's advice and counsel will continue to benefit all of Hershey during the transition period.

As mentioned, David West will succeed Frank effective January 1, 2005.

In the three plus years that Dave has been a member of the executive team, he's done a subperb job, no matter what the challenge.

Beginning in mid--2001, Dave played a key role in the assessment of Hershey's business, and the subsequent development our value-enhancing strategy which continues to benefit shareholders today.

Over the past two years, Dave has led the Hershey's sales team through a successful restructure and implementation of new selling capabilities.

Our results to date point to Dave's effective leadership.

As CFO, Dave brings a wealth of finance, accounting and control experience from large, complex businesses as well as his deep understanding of Hershey's business systems, accounting practices and control procedures.

Dave's appointment will insure that Hershey continues to perform well in all areas of finance.

The third executive announcement today was the appointment of Chris Baldwin as Senior Vice-President and Global Chief Customer Officer reporting to me.

No one is better suited to build on our momentum than Chris.

His vast experience spans all relative areas including field sales, customer marketing, and organizational development.

Equally as important, Chris has a stellar track record of accomplishment across numerous snack market businesses and all classes of trade.

Chris will quickly and effectively build opon the immense strengths of the Hershey selling organization.

In summary, I'm extremely thankful to Frank, look forward to working with Dave in his new capacity and eagerly await Chris' arrival on Monday.

Now let's turn it over to Frank.

Rick, thank you very much for your kind comments.

Good morning, everyone.

Before beginning my review of the quarter, I'd also like to take a moment to discuss the announcements made by Rick this morning.

As mentioned in the press release, I am grateful to be retiring at a time when the company is on such solid footing.

Having been revitalized, performing well in the marketplace and consistently delivering superior shareholder values.

I thank Rick for having been an outstanding mentor and colleague during the past four years, and for giving me the opportunity to serve as the company's and his chief financial officer.

Under Rick's superb leadership, Hershey has refocused on its core competencies, and is executing a well articulated strategy.

I believe we are better prepared than ever to meet the challenges of the future.

I also want to congratulate Dave West on his appointment as CFO.

Dave has excellent credentials to lead our finance team and I know he will continue to contribute substantial value to the company.

I will work closely with Dave throughout the transition period.

Lastly but certainly not least, I would like to thank all of you in the investment community for the dialog we have enjoyed over the last four years.

I have valued your perspective greatly and would like to thank you for the generous amounts of time that you have taken to meet with me, learn about our business and offer your counsel.

I have found our conversations enormously stimulating, and will miss the collegiality of our relationships.

Once again thank you very much for your friendship.

I have enjoyed every minute in my role as Hershey's spokesperson to the investment community.

Speaking of which let me now return to the business at hand, our third quarter results.

I am very pleased to discuss our third quarter results.

In order to give you the proper perspective on our business, I will be discussing our third quarter results excluding certain items from the third quarter of 2003.

These include the impact of the accountsing change for operating leases, the charges related to business rationalization and realignment initiatives and the gain on the sale on certain gum brands.

Elimination of these items would yield adjusted earnings per share diluted of 66 cents compared with 57 cents in 2003.

An Increase of 15.8 percent.

For the third quarter of 2004, record consolidated net sales increased by 5.3 percent.

As mentioned earlier, about two-thirds of the sales increase was achieved through unit volume growth, which was stimulated by the introduction of innovative new products and limited editions.

And one-third of the increase came from net price realization.

As was also mentioned by Rick in the latest 12 weeks, Hershey's retail take-away and outlets accounting for 80 percent of our sales, increased nearly 10 percent.

Attesting to the momentum in our business.

As you know, one of the major challenges for us in 2004 has been significantly higher commodity costs.

Despite these higher costs, adjusted gross margin continued to show improvement in the quarter.

In fact, by about 40 basis points, coming in at 39.7 percent versus 39.3 percent in 2003.

You may also recall that this is on top of a 150 basis point improvement in the third quarter of last year.

As throughout the first half, net price realization and productivity improvements throughout the supply chain, contributed to this gross margin expansion which now totals 70 basis points for the first nine months of 2004.

Adjusted selling marketing and administrative expenses decreased 50 basis points as a percent of net sales.

Coming in at 17.3 percent, versus 17.8 percent last year.

This is a result of discipline and in our (ph)spend areas and better targeted, more efficient brand and customer support.

Adjusted earnings before interest and taxes of $281.4 million increased by 10 percent compared with the third quarter of 2003.

In the EBIT margin was 22.4 percent versus 21.5 percent last year.

A 90 basis point improvement.

Interest expense for the quarter increased somewhat, coming in at 18.3 million versus 17.3 million in last year's third quarter.

This primarily reflects higher short-term borrowings, the $500 million share purchase from the Milton Hershey school trust which was executed in late July.

The effective income tax rate for operations in the third quarter of 2004 was 38.6 percent up slightly from last year's 38.7 percent.

Early in the year our guidance was that our tax rate for 2004 would be approximately 36.4 percent for ongoing operations.

Our current expectation is a rate of 36.6 percent for the full year 2004.

Record net income from operations of $166.2 million was 10.1 percent higher than the third quarter of 2003, and our net margin was 13.3 percent versus 12.7 percent last year.

Weighted average shares outstanding on a diluted basis for the third quarter of 2004 were 252.7 million shares versus 263.3 million shares for the third quarter of 2003.

That led to an EPS of 66 cents per share diluted compared with the 57 cents per share diluted for the third quarter of 2003.

An Increase of 15.8 percent.

During the third quarter as part of our late 2003 share repurchase authorization, we bought approximately 400,000 shares for about $20 million To date on that $500 million authorization, we have repurchased 12.5 million shares for $445 million, or at an average price of $35.66 per share.

Thus we have completed nearly 90 percentof that authorization.

As a reminder during the quarter, we also purchased approximately 11.3 million shares from the Milton Hershey school trust for $500 million in a privately negotiated transaction.

Therefore, we have returned $945 million to shareholders in the form of share repurchases in less than two years.

Let me now turn to the nine month results and go through these pretty quickly.

Sales increased by 5.6 percentfor the nine months.

Gross margin has expanded 70 basis points coming in at 39.4 percentversus 38.7 percentlast year.

Selling, marketing and admin expenses decreased by 20 basis points coming in at 1.9 percent versus 20.1 percent.

EBIT increased 10 1/2percent.

EBIT March ij -- March engine went from 19.5 to 18.6 percent.

That's an of 90 basis points.

Net income increased 11.4 percent and finally EPS increased by 13.9 percent.

Now let me turn to our balance sheet, which remains quite strong.

At the end of the third quarter, we achieved a reduction in net trading capital of $33 million or 3.3 percent compared to last year.

On a rolling 12-month basis, net trading capital decreased 80 basis points as a percentage of sales as we continued to focus on collection of receiveables, controlling our inventories and expanding payables relative to the growth of our business.

Free cash flow is tracking ahead of last year and at this point by about $174 million.

As a result of higher earnings and tight control of working capital.

For the full year, we expect to generate free cash flow exceeding that of last year.

Now I will cover a few additional items of information frequently asked by many of you.

In the first nine months of 2004, a capital additions, including capitalized software were $156 million.

For the full year we expect capital additions to be about $200 million.

Year-to-date, depreciation and amortization totaled $141 million.

For the full year, we expect DNA (ph) to come in at about $190 million.

Dividends paid during the first nine months were $153 million.

As many of you know we have increased dividends annually for the last 30 years and our policy has been to increase dividends in line with earnings and cash flow growth.

That concludes our prepared comments and I will be happy to take questions.

The first question, please.

John McMillin, with Prudential Equity Group.

Congratulations on the sales.

Thanks, John.

Frank, good luck.

For your information, my son loves the Reese's cookie you sent, Rick.

I guess you know a thing or two about the cookie business.

We feel good about the opportunity and we think it is a good adjacency for us.

In terms of the not being delivered dsd -- how long do these products last?

Six to 12 months are the shelf life.

I think the important thing, as I mentioned John, is that these products will contain real chocolate.

So therefore they need to be shipped in conditioned distribution and the products are preferred on consumer taste test basis and they'll be shipped in condition distribution along with our regular confectionary products.

Now they're shipped that same way.

So that where we get efficiencies in shipping.

And just the Dow Jones said you reaffirmed guidance but actually you went from slightly above on your sales and earnings target to now just above so the word slightly is now gone.

I know we're playing semantics, but normally you earn at least as much in the fourth quarter as you did in the third.

Is that still a safe suggestion?

Two quarters, John, both top line and bottom line.

Third and fourth quarter generally about even.

Okay.

That's what I needed.

Thanks a lot.

Leonard Teitelbaum, Merill Lynch.

I only got through one case of those cookies, so I need another one -- to make sure we've got the full market test here.

We'll send you the rest if you promise (inaudible).

Rick, are you anticipating a margin on this product to fall somewhere between the single bar and the bag candy -- how do you look at this thing from a margin point of view?

First off, as I mentioned what is attractive about the category is the consumer dynamics and also our ability to bring news and innovation to a segment that responds to news and innovation.

Regarding the margins, it has a good margin structure overall and I think the way you characterize this is pretty close.

Now, would you consider joint distribution, with say, Godiva or somebody because it sounds like you are trying to go after a similar type market, although obviously on a much more common scale than an occasional purchase scale.

But do you see this coming through or is it going to be 100 percent controlled by Hershey?

100 percent controlled by Hershey, and it is going into classes of trade and customers where we are seeing good growth in our core confectionary.

We see good growth from our overall snack market.

That's why I highlighted they'll be in the type of formats, obviously single-serve, which plays well with particularly convenience stores.

You know -- let me ask a general question.

With companies talking about promotion.

You seem to be setting the stage on how you balance that out.

Are you getting any -- is the category getting support across the board.

I mean is Mars coming in and trying to broaden out the category now that it seems that the Atkins area is kinda fading and maybe opening that door a little bit more?

And along that line can you talk about how your low carb and sugar-free products are doing?

Let me start with the second part of the question and go from there.

Take a step back.

In early 2003 we launched our sugar-free line.

And for the past 18 months the sugar-free has done extremely well.

In the beginning of '04, we said we wanted to capture some of the benefit of some fast moving trend in the whole low carb area when we introduced very close-in items for us, the 1 gram sugar carb and they've done extremely well this year.

But what I think is important is those initiatives represent some aspect of our better-for-you strategy.

We're going to have a better-for-you growth plank, no matter where consumers and customers choose to go.

So we have attacked the two that seem to make sense at this point.

Going back to the first part of your question, we're seeing about 3 percent category growth overall and obviously we're going beyond that because we are gaining share.

But also we've talked about for the last two years we have continued to see good growth in the chocolates segment which is the largest, most profitable segment behind innovation.

Ours primarily, and some competitors, have brought out products that continue, with ourselves, to gain some distribution and traction with consumers.

And one final, your power bar entry, did you comment on that?

If you did I missed it.

Smart zone?

Yes, sir.

Smart zone, we started shipping Smart Zone in late September so it is just now starting to show up at retail.

Frank, we're going to miss you.

I know this is a little premature, but we hope to stay in touch.

You did a hell of a job.

Thank you very much, Leonard, and I hope to see you at Cagney.

Take care.

David Nelson, CSFB.

Good morning.

My best to you, too, Frank.

Thank you very much.

Seasonal, could you talk -- you are deemphasizing seasonal, not that you are trying to decrease, but you are trying to grow other more profitable areas.

Could you comment on what percentage of sales that was three years ago, where it is today and where you think it might be three years from now?

I don't have the specifics.

I think seasonal business accounts for about 25 percent or roughly 25 percent of our total business, maybe closer to 30 percent,.

And it is down over the past few years.

I don't have the specifics.

I think what we are do is continue to focus on what consumers are look fog and what the retailers are looking for, and seasons represent a profitable business for us but it doesn't represent the same level of high growth as some of our other initiatives.

And that's where the balance is coming in.

How much of the growth came from the adjacent categories, the bars in the quarter?

You said they just started shipping?

It was modest.

I think the important thing is to look at our take away which I cited on the 12-week basis was 10 percent on the year-to-date basis was 6 percent , and that excludes any of our adjacencies whether it be snack bars or smart zone.

On to cookies please.

You commented on that being a $6 million category.

How big would you define the premium segment?

it is about 20 percent of the total.

Something like that.

We can get the specifics.

And your price point would be similar to the candy bar?

Our single-serve is going to be priced at 99 cents.

And you emphasized --

You get four cookies in a package.

Excuse me David.

Four cookies in a package, merchandised primarily at the front end of convenience stores and it is going to retail for about 99 cents.

The front end of traditional grocery stores and convenience stores?

No, convenience stores and drug stores primarily, and some other high growth classes of trade.

I'll leave t at that.

Are you trying to get additional rack space or will you have to take out existing products to get this in?

We are looking at incrementall merchandising opportunities, and for competitive reasons, I would rather leave it at that.

With all of these new products is marketing gonna have to go up a lot in the next three, six, nine months?

As we mentioned for the third quarter, we've even scaled back some as we focused on the fewer, bigger items that we have and new products and we continue to look at the entire balance between advertising trade and consumers.

So I'd expect it to go up modestly, but not a dramatic ramp up.

Great quarter.

Congratulations.

Thank you.

Thank you, David.

Your next question comes from Ken Mazlow (ph) .

Good morning.

Good morning.

Can you discuss your relative performance by your key distribution channels and even go into some of the small ones such as dollar stores?

What I had said was that we had picked up take-away and shared growth in all classes of trade and I might have cited a convenience stores specifically, and I'd rather not get into the rest.

We're doing better in club stores than we were a year or so ago and we are looking at what's the right items to do well within Dollar stores.

But let me leave it as saying we gained share in all major classes of trade.

Let me rephrase it then.

Which distribution channels do you think Hershey's still has the most work to do and where are you the furthest along on?

Because I know you've been focusing a lot on convenience stores?

We've been focusing on convenience stores for close to three years and we continue to gain traction and do well there in terms of putting growth on top of growth.

As I mentioned before we have seen the club channel, a very profitable class of trade and we're doing better in club.

And as I might of mention on the last quarterly call -- Dollar stores represents a good opportunity for us and we have work to do there.

And just on a different note, cocoa prices seem to on a year-over-year basis have been coming down.

When does Hershey get to realize this lower year (ph)?

I know you keep on talking about how, you know, commodity costs keep on having a head wind.

When do we get to laugh at it and enjoy a little bit of lower commodity cost?

Well, rather than talk specifically about cocoa, though it'strue if you look at year-over-year costs.

Cocoa costs seem to have come down.

There are also periods where cocoa costs were up $28 hundred a ton and $24 hundred a ton.

To a large extent, From an industry perspective it depends on when you did your forward hedging.

We tend to be pretty good forward buyers.

We look at fundamentals very closely .

So rather than give, you know, any information away relative to our competitors, let me just say that for 2005, we would expect moderate increases in our total input costs if you look at it that way.

Rather than trying to single out one commodity in particular.

And my final question is: How effective has the restructuring of your promotional spending activity been?

Is there a way to quantify it?

Or give us some -- at least anecdotal.

I know you were one of few who have really -- changed this whole bundling of promotional spending.

How does that kind of work its way through and if you could give some sort of anecdotal or quantify?

I think the quantifiable indications are that the sales and share growth.

That we had a balance of both price and volumes gains.

That we had take-away and share growth.

Also a little bit deeper dive into it, we had both base and incremental components gain volume or have increases in the quarter.

That's a good combination.

Because the new products helped drive base growth.

We also had some new plantagrams(ph) and shelf sets.

And the incremental growth clealry reflects a trade promotion programs that are being executed effectively at retail.

Great.

Thanks a lot.

Thank you.

Chris Growe, A. G. Edwards.

Good morning.

Good morning.

And, Frank, we pass along our congratulations on that retirement.

Thank you very much.

My first question -- I may have missed it--but like a breakdown of the sales growth to what percentage of your growth came from volume?

We said about two-thirds of it is unit volume related and about a third price realization related.

And I assume that price realization is mixed?

Is that correct?

Or is there some pricing in there?

It is a combination and some of it is outright pricing.

Some of it is mixed but mostly it is outright pricing.

And then sort of following up on that c-store question.

I know you've had pretty specific projects for the c-stores.

So your expectations for that channel in the coming year.

Would they be as robust as they were, say, this year or should we see that natural slowdown there?

I think the important thing for us is we've been generating increases of 9 percent and 10 percent on a consistent basis and the channel has shown some good growth overall .

And we feel if we continue to bring news and innovation, whether it is in chocolate, nonchocolate or the refreshment segment, and certainly with our introduction of our single-serve cookies, we want to continue to maintain that growth.

But I don't have any specific forecast about the numbers.

Just as curious in terms of your new products-- maybe it is the products you have launched in the last two or three years.

What percentage of your sales those are now?

And then perhaps you could talk about the mix enhancements (ph) from these products, Sort of an index or how you've given that information before?

The important thing is that we say our new products have contributed somewhere between 5 and 10 percent of our sales.

I think anything too much above 10 percentyou start to create inefficiencies within the business system.

And anything below 5 percent you wind up with not bringing much news to a category that clearly responds to news.

And just in terms of the mix enhancement of the new products, are they all mix enhancing your business?

As we talked about it at Cagney and also repeated through the year, we continue to introduce new items that are more in the bar format.

They naturally have a higher net price per pound and we'll continue to do that, and continue to focus on bringing net price realization through a shift in products mix as well as a shift in customer mix.

And then my last question, there has been quite a bit of speculation around a couple of big brands and when they come available for sale.

Not to get to that detail, but are there areas in non-chocolate confection where you may need greater scale, for example?

Or would a brand become for sale be an opportunity for Hershey if it became available?

I think what is important over the past few years, or many years, Hershey has been successful in terms of acquiring and folding in businesses.

And as we had said a few years ago and continue to stand behind that, that we won't look on acquisitions as a substitute to top-line growth.

It must be a multiplier to top-line growth.

And over the past couple of years, we've started to see a major rebound in our top-line growth.

But for us any potential acquisition has to be a strong strategic fit and then we take it from there.

Okay.

Thank you.

Christine McCracken, MidWest Research.

Good morning.

Good morning, Christine.

We'll miss you, Frank.

Thank you.

Just to follow up on an earlier question relative to the commodities.

I know you've made a blanket statement ,but some of your competitors have been talking about packaging being a big cost pressure for the coming year.

You do use a lot of film.

Is that going to be an issue for you?

As I said, Christine, rather than comment on one specific commodity or input cost, you know, we do expect -- we manage our input costs relative to fundamentals.

We really do expect just a moderate increase in our cost structure.

Relative to film we're not particularly concerned about film.

We have a lot of programs that insure certainly of the supply, the right kind of film at reasonabley attractive prices.

Good to hear.

And then relative to your Hispanic initiative, it's kind of a new project for you.

But it seems like you are getting some traction there.

Can you talk about has distribution to these outlets been an issue?

I've heard in the past that because of the nature of some of these retail outlets that getting the product into the stores is sometimes difficult.

Is that something you are facing or are you having more success than that?

What I was referring to where we've seen the growth and where we have IRI tracking it is primarily the supermarkets that have a high concentration of the Hispanic shoppers.

It's not some of the smaller markets that you might be referring to.

You are really focused on mainstream outlets?

For the time being if we think about the opportunity with the Pelo and Pelo brico (ph) brands that I mentioned once we close on the Aqua Merano (ph) acquisition, then we see that as an opportunity in smaller markets and broaden the distribution as well.

And then finally on these new bars you do have a number of new initiatives.

Is this something you are constantly looking at in terms of, if you are happy with the rate of success with these products?

Is there any opportunity to go in with some in and out type products or a similar strategy to what you have been doing confectionary, or are you going to stick with -- maybe give it a year or two to see kind of how it does?

I think that is a good question.

Take a step back.

Our initial fore was with limited editions.

And that is the quinessential in and out type of introduction, and we continue to see success with limited editions and that's going to continue to be part of our strategy going forward.

We may see that as an opportunity within adjacencies as well.

It is too early to determine that aspect.

And your positioning those products in different parts of the store.

Are you still figuring that that kind of placement out or have you had success in certain parts of the store with these bars?

I'm sorry?

Which bars are you speaking of?

Well, for example, snack bars it seems like you are kind of targeting a few areas of the store whereas with some of the low carb bars are being marketed in that healthier area.

Are you trying different areas or are you set on where you want them?

No, I think for something such as our adjacencies, whether it be Smart Zone or snack bars, a lot of it depends on where the retailer think where they can maximize sales and profitability.

And where we know we have enough information customer by customer where the products will sell the best and then we will work to putting it there.

It is not any one section in every store.

Like it has to be in the nutrition bar or has to be the health oriented section.

It really varies based on how the retailer wants to market the category in their stores.

Thanks.

Andrew Lazar, Lehman Brothers.

Good morning.

Frank, let me add my congratulations as well and obviously you don't have time to talk about it.

Thank you.

Rick, as you talk a lot about the new products and adjacencies that you have been discussing and kind of ramp up the now product effort.

One of the things I think about a lot that companies need to start thinking more about also when they do that is also being willing and having the data to pull the products a lot more quickly, you know, when they are not delivering what you want.

And as you keep moving forward, I'm sure, will hopefully that is limited, there will likely be opportunities when that happens.

And I'm curious on what your outlook on that is and do you have the data and the willingness to say this one is just not working?

Pull it, limit the downside and keep moving forward?

Yes, we do.

Otherwise we wouldn't be able to get the type of support that we're geting from our customers because we have to walk in.

They have a lot of data, they sometimes have better data than we do.

We sometime have better data than they do, and we work together.

And that's why we have ramped up our customer marketing capabilities.

In particular, our category management capabilities within customer marketing.

That's been one of the key aspects of our sales restructuring over the past year or so because we have to go in objective and we have to go in with the right data or it will only succeed once and that's not long-term success.

I think to answer your question specifically, we've scaled back significantly the number of seasonal items and that's a clear indication that we will go to the retailer and say here's what we think makes sense for the season.

As we come in with new items, we will be the first to say in this particular set of stores, maybe you ought to think about discontinuing maybe some of our smaller selling items which has been part of our SKU reduction efforts over the past year or so.

So you're exactly right.

We have to go in and be up front and certainly be objective with the data.

And even some of these newer items going into areas, hopefully you've done all of the work and you aren't going to go where you don't think there's little opportunity.

But I'm sure along the way, here and there, one of these may not deliver what you want.

And I'm trying to set expectations where one day you come out and say, hey, this just wasn't working.

But obviously we've got all of these other things in the pipeline.

That's maybe something we need to get more comfortable with going forward.

That's something that we need to do.

I think the important thing is if we introduce a line of blank, that has x number of items, we may see that one or two are turning significantly faster than the other two and then we say, what should we replace those with.

So it is less about, okay, we are going to pull it.

It's more about, if we believe the platform is a growth platform what did we miss and which items do we replace with the ones that's not growing?

I know you've got a couple of questions around the c-stores.

But as we look at the data you have come around with,the data that covers 80 percent of your business, clearly the momentum you mentioned, is very strong and the data differs a lot of course from what we get.

And that's the alternative channel piece.

I remember when you first came in you saw early the c-store opportunity and I think you saw how Hershey was sorely under-indexed in that channel relative to Hershey's national shares.

And you've obviously made a lot of progress there and while that channel still grows well and you've got new adjacencies to be focused there.

I'm curious where Hershey stands at least now, relative to your comments a couple of years ago.

Are you now more in line with the average where Hershey should be in that channel?

Or are you not even there yet?

We're gaining on it.

We're up maybe a couple hundred basis points from where we were and we still have a couple more hundred to go.

That's helpful.

Thanks a lot.

Eric Larson, Piper Jaffray.

Congratulations.

Frank.

Thank you, Eric.

Couple of real quick questions.

Two of them for you Frank.

Inventories in the quarter, obviously you are comparing third quarter with year-end '03 and I don't have the Q3 '03 inventory figures out.

Did you make progress in the inventory in the third quarter as a percent of sales, downward?

No, we're slightly up in inventories if you compare them as you are doing properly to the third quarter of '03.

Obviously they would be up from year end '03 because of seasonal build up.

And as I explained last time that's one area where we expected to have higher inventories.

First the cost to send those inventories is higher, right?

And then secondly as we are building up for a lot of new product introductions, frequently we need enough to make a national scale introduction.

So for a period of time we're willing to live with that in order to make sure that our supply chain is aligned properly to get all of the product out everywhere across the country.

So the inventories are up a little bit from -- on a percent of sales basis certainly.

As you look at our total net trading capital, it's actually down.

Both on a percent of sales and on an outright absolute basis.

And then the final financial question, you are carrying the share buy back debt from the Milton trust, a short-term loan.

Is that going to get refinanced into different rates and how should we look at interest expense going forward?

I think for the time being we certainly have the ability to finance it with short-term debt.

Short-term debt is still relatively it's much cheaper than longer term debt.

If we have some additional financing needs, then I think we have to look at potentially expanding that to some intermediate term debt.

But for the time being if this is all there is, you know, we have free cash flow after dividends and CapEx that approaches $300 million a year.

So it wouldn't take long for us to repay that back.

That's fair enough.

And then the final question is for Rick.

Rick, obviously, you know, Lifesafers has been talked about as potentially being sold by Kraft.

My question to youis, given you are doing such a great job on your chocolate-based product lines and new products, where does non-chocolate confectionary strategically sit in your thinking right now?

I'll answer it and it has nothing to do with any potential acquisition or divestiture by anybody else.

As we said before, and I mention in the comments, we're bringing new innovation to our non-chocolate business.

We have a leadership position in non-chocolate and we gained a share for the most recent 12 weeks, is a very important component of our overall portfolio and we see great opportunities to grow our non-chocolate business organically.

Okay, thank you.

Pablo Zuanic, J. P. Morgan

Good morning, everyone.

All of the best, Frank.

Good morning, Pablo.

I want to touch on your profit margin trends and maybe playing devil's advocate a little bit.

You have given a value of 70 to 90 basis points margin expansion over the next three years, and that is supposed to be driven mostly at the gross margin level.

And if I understand correctly half of that is going to come from cost savings and the other half from mixed.

But in this quarter you mentioned all of the pricing was really, you know, outright price increases.

So it seems there was no benefit of mix at the top-line level, at least based on your comments.

In this particular quarter you have to remember, Pablo, that not at the retail level but at the wholesale level our seasonal business does account for much more of this quarter and next quarter. than the first half of the year.

So our expectation was that we would not expand gross margins as much in the second half of the year as we did in the first half, where we expanded it at 90 points.

And that's why I guided to the lower end of our range for the full year.

You see what I mean.

Right.

Although on a year-to-year basis, we are comparing apples to apples, right,.

In the second half of '03 you had the same situation with the seasonal busines I suppose?

We did, but this is also 70 basis points year-to-date coming on top of 100 some basis points a year ago.

And as we said, this is a long-term guidance, you know, 70 to 90 basis points.

Some years we will be at the lower end and some years like the past several, will be above the higher end.

I think what's important, though, is as Rick has reminded us many times, aside from that expansion, it is how do you work it down to the EBIT line.

And as you look at EBIT we're up over 10 percent.

So it is a combination of things looking at different places to create the affordability.

Some of it comes from margin expansion, which we been alot out of the last three and a half years.

And some of it of course comes from watching our other expenses like GNA and other parts of the income statements.

So EBIT eventually becomes maybe the best place to look at to see how we are running the business because there are various places that you can create affordability.

Before I ask another question just on that point then, you are telling me over the next three years we should assume this GNA line could continue to show improvement as percent of revenues.

I thought that really the expansion would come at the gross margin level.

We're saying both and we haven't changed our long-term guidance.

We do continue to expect to keep expanding margins in the 70 to 90 basis points long-term and continue to watch our expenses so that SGNA remains relatively flat as a percentage of sales or maybe slightly down.

Rick, just trying to understand the cookie opportunity.

My understanding is that the Oreo cookie bars didn't do so well and I assume because this didn't place them at the front ends of the stores as you were planning to do.

Where that form would probably do better.

But you know spent all the time in the call talking about the cookie opportunity and I would expect you to talk just as much about Smart Zone and we didn't hear much comments there.

If you were to try to quantify the opportunity, say over the next two years in terms of the sales, do you think the cookie opportunity is larger than smart zone?

I think it's too soon to tell.

I think what's important is we've talked about Smart Zone for a couple of quarters and now it is out there and we're shipping and we will see what happens with consumer acceptance over the next several months.

The point of today's call was to say we see opportunity in another adjacency.

And we've talked about being smart but being prudent about which adjacencies we think we can do well in.

So we've talked about the snack and nutrition bars, that's where we went first, whether it be snack bars or Smart Zone.

Now we're saying for us this opportunity is within cookies.

And I think what's important -- we are going to be introducing our cookies in a format very similar to our candy bars, which is single-serve, and it is going to be placed in retail outlets and in reasonable proximity to where we currently are.

So it is not as though we need to go somewhere new with a new set of capabilities either from a manufacturing, distribution, selling or merchandising standpoint.

So I can't begin to tell you what I think either one will be a few years from now.

What I can tell you is we see consumer opportunities regardless of which benefit stream it is in.

We're going to be aggressive about pursuing them.

Provided we can leverage our sources of competitive advantage

And just the last question.

So the front end of the store -- check-out counters, c-stores, drug stores -- can you compare your capabilities with say, for example, when I look at Kraft with balance and some of their confectionary products at the front end -- what they have done with power bar at the front end.

Do you feel that you have advantages in those logistics and into the refrigerator equipment?

Just trying to get more clarity or details in terms of how your capabilities at the front end in terms of logistics in this situation are superior to other direct competitors.

I'm certainly not going to speak about any other direct competitor but what I will continue to cite is when we said we were going to go into convenience stores and be more agressive, we were questioned how are you going to compete with all of the other competitors within the broader snack market and I say we do it every day within convenience stores.

So we do have the capabilities because we are delivering the type of benefits that consumers want and giving the type of profit structure that the retailer wants or the distributor wants.

And we're able to merchandised our items and get take away our share.

I'm not going to respond to any one specific competitor but I think we've done pretty good to date in terms of getting our new items merchandised.

And as I said before, based on initial reaction from the trade they're very excited about our entry into the premium.

And again it's the premium, not the price oriented cookie segment.

Thank you very much.

Thank you, Pablo.

Eric Katzman, Deutsche Bank.

Good morning.

Good morning, Eric.

Frank, I wish you all the best.

I'm kind of fearful that your new time is going to be spent improving your tennis game.

And you'll have a chance to revenge.

I guess a few questions here.

First on the cookie line.

I ate them so quickly I failed to see if they had any trans fats in them.

No, they don't.

Trans fat free.

OK.

Second.

I guess on the -- I'm kind of wondering, how many of these limited edition products are now unlimited.

I mean, it seems like I can't think of one that you've introduced that's been a limited edition, that isn't now a permanent product.

You have a percentage that you could give me of how many you kind of turned over to a permanent line?

No, the big ones, there is a few.

White Reeses became a permanent item.

We announced today that I think Big Cup is going to be a permanent item.

There were a couple of Kit Kats that were limited edition.

We've had Kisses, particularly during the spring and summer months that have been limited items that won't be permanent items.

Conversely caramel Kiss became a permanent item that was never limited edition item.

So it's not that many.

It's really like a third or less, you know, Eric.

You remember last year we introduced five different versions of Reese, and we only went permanent with one and we may go permanent with one more.

But for the most part I'd say it's a third or less of the total limited editions that eventually have turned into full time items.

And then is it, Rick, unfair to look upon your limited edition strategy as essentially kind of replacing seasonal business with, more or less, single-serve higher margin product?

Because I'm not really sure what the differences between the limited item and the seasonal item.

I think that one of the differences is limited edition item doesn't get pulled off the shelf on November 1st, because it doesn't have that natural time boundary to it that a pure season would.

I think more important when we bring out a limited edition item we also get merchandising off the parent brand so to speak.

We saw great growth in base Reese's peanut butter cup last year because it was merchandised with white Reeses or inside out Reese's.

You would not get that kind of lift from another seasonal item.

But I think it's more a recognition that we are bringing news and renovation to a brand as oppose to trying to compete on a price bases with many competitors in a narrow window of time.

And most of the retailers at this point realize they're making more money off, I guess, the limited edition item than the seasonal?

Yes.

And then last question I guess, again, to you, Rick, instead.

I kind of, you know, I realize that you have to position the cookie line as not a direct competitor to the big boys, but, you know, when you look at Nabisco and Keebler and Pepperridge Farm, I mean every single one of them has single-serve, you know, product packaging.

And they're also trying to get it to the front end of the store and, you know, the enrobed like, for example, Oreo product which I would guess you have a lot to do with when you were over there -- I just am not sure, you know, why you kind of downplay the competitive aspect because they're very much, you know, going after that same impulse driven single-serve item.

I wasn't downplaying it, Eric.

That's a good question.

What I was getting at is we see growth in segments in classes of trade, and I mentioned too convenience stores and drug stores, where we are very well developed and where the confectionary or chocolate category is better developed than the cookie category.

So it's not as though we're talking about the front end of a traditional grocery store where the majority of packaged cookies are sold and somebody else might have more of a competitive advantage.

But again, we believe -- and again the consumer testing has said we have a very good product.

The trade is saying we have a product and a profit story for them that makes sense.

We're having a copacker manufacturer it for us, so it is a very inexpensive way to gain some share within a logical adjacency for us.

Thank you.

Thank you.

Terry Bivens, Bear Stearns.

Good morning, everyone.

Good morning, Terry.

Frank, a couple of questions for you, I guess, and best wishes on your retirement, obviously.

We're sorry to see you go.

Thank you.

Just in case I missed it, what is the share count at the end of the quarter?

Fully diluted?

I did not give it at the end of the quarter, but the total shares outstanding at the end of the quarter about 246 million shares.

246.

For calculating EPS, our diluted shares on average for the quarter were 252.7 million.

But looking forward, they are going to be much lower obviously.

Right?

Well, they'll be a little bit lower depending on how much more we end up buying.

We still do have about $55 million left on an authorization.

And just how -- what's your judgment on how the harvest is going in the Ivory Coast?

How much is still left over from last year?

What's that situation?

Let me comment on what's generally known around the market, Terry, rather than, you know, our own counts or our own views.

Your own counts are so much better.

But it looks by all means that the crop the way it is reported back by a variety of people who study those fundaments -- looks like an average crop.

It should be good.

The harvest is already starting right now and product will begin to move to port, and then to market fairly shortly.

So these next four or five months, November through February or March when most of that will come to market.

And so far so good.

Fair enough.

And last question just for Rick.

I guess, Rick, when you consistently exceed your long-term guidance year after year, I guess the question becomes when do you think about raising that long-term guidance if, indeed, you do?

We have a ways to go.

Long-term is long-term.

We feel good about the momentum that we've been building but it is a competitive marketplace and we need to stay after it.

So we're okay for now.

Congrats on the quarter.

Thank you.

Thanks very much.

Evan Morris, Banc of America.

Good morning.

And, Frank, let me echo the same sentiments that it's been a pleasure and congratulations and good luck.

Thank you so much.

I appreciate it.

Just following up on the gross margin question.

I know you cited that you faced a difficult comparison in this quarter but you did last quarter as well and still I think increased gross margin by about 100 basis points.

I understand the seasonal shift that takes place this quarter, but is there anything else in that number that, coming into 40 basis points which is a little bit below trend, is there anything else in there that we should, I guess, be concerned about whether it is cost pressures that could impact the next few quarters as well?

I wouldn't read much into it, Evan.

I mean, part of a quarter like it, as Rick pointed out, we've got a lot of new products that we're making.

Sometimes it takes awhile to get up to standard speeds on those new products.

It's part of the price you pay, you know, of course, and we try to plan for it.

The other reason that I mentioned was it's more heavily seasonal SKU quarter, so there's nothing in particular in it.

In the first half we had a little more advantage of our price increase, you know, coming around from a year ago.

So, it's a combination of things and that's why at the end of the second, you know, quarter, we guided toward the expansion wouldn't be as great in the second half.

But I wouldn't read too much more into it.

Rick, I guess the question goes to you.

When you started with the limited editions I guess you really weren't capturing the full profitability of those items since it was a little taxing on the organization from a manufacturing standpoint.

I guess they historically hadn't done things like that.

Where are you in that process?

Are you are becoming more efficient?

Would you say that you're capturing the full profitability of those items now that the manufacturing side of the organization is completely up to speed now?

Yes.

Evan, let me answer that.

I think you're right.

At the beginning of any process -- when you change a process pretty radically -- where we went from introducing one or two items over a year and 18-month period, you know, major items to speeding that up considerably, there is a lot for the supply chain to learn.

And that's frankly the benefit that we've gotten over the last two years, we've learned to do that pretty well.

So we're much better at it now than we were a year ago, and then much better than we were at it two years ago.

I know a lot of people were concerned, for instance, going through processes like these would almost force us to re-proliferate our product line.

Well, that hasn't happened because we've also put discipline processes in place with various hurdle rates and then taking out other items within the line.

So while it should be a concern, what we have learned to do -- it should be a concern when you enter a new process like that.

We've learned to manage it and have kept our SKU count down to, you know, 1400 or below.

So we've learned to do that thing quite a bit better and much more flexible in our supply chain's ability to respond to change as quickly.

But are you where you want to be?

Is that what you are saying?

Yes.

And last question just a little bit more housekeeping.

In the quarter was there any accretion to EPS or can you quantify from the repurchasing of the shares of the trust?

Yes.

There was a penny accretion as a result of repurchases.

David Adelman, Morgan Stanley.

Good morning.

Good morning, David.

The 10 percent increase you enjoyed over the 12 weeks in retail take-away and confectionary, do you have a number on what total category growth was over that period?

No, because that 10 percent includes what we do within Wal-Mart.

I could tell you that on a comparable basis of food, drug, mass excluding Wal-Mart and convenience stores, the category was up about 3 percent.

And I won't break out then what our FDMXC growth is because then you could back in what Wal-Mart was perhaps.

But within that measured, monitored universe, we gained a full share point.

So you can assume our growth was well above the 3 percent.

Finally, Rick, could you characterize the competitive environment in confectionary.

Over the last couple of quarters you've mentioned there have been selected pockets, particularly in the large format retailers in large pack types and you had a fair amount of price competition, but it's been selective.

Is that still the state of affairs?

Pretty much so.

Thank you very much.

Thank you.

Thank you, David.

David Driscoll, Smith Barney.

Good morning, everyone.

Thanks for taking it.

I didn't think I was going to make it in under the time.

And, Frank, also, it's too bad we are not going to get a chance to talk more, but congratulations.

And hopefully you've gotten a lifetime supply of these new Take five bars.

Thank you, and it was guaranteed to me.

That's fantastic.

Speaking of Take five, can you guys just give us a sense on what your expectation is for the size that this product could ultimately become in terms of dollars?

No.

I won't get (ph) appreciate the specific number.

But you can think of it along the lines of maybe what a fast break or some of the other major items are, but I'm not going to put a specific number on it.

We're just pleased that we've developed a product that obviously appeals to consumers and the retail trade is looking forward to merchandising for us.

Being on the new product lines, can you just, you mentioned this a little bit in your comments but maybe if you just reiterate.

Within the quarter, which of the new products had the greatest impact on your sales and volume growth.

Which of the new products?

Well, I won't get into -- I hear what you're saying.

I would say caramel Kiss has continue do extremely well.

Ice Breakers liquid ice because we came out with one flavor early in the year, and we've now added two to that.

White Reese's continues to do -- and there are several that do well.

But I think caramel Kisses we are very pleased with that one.

And then in response to John's question, I think you guys essentially have said that fourth quarter should grow approximately the same as the third quarter has.

This would --

actually we didn't say that just a correction.

I said the quarters are about the same size.

Typically both in top and bottom line.

We're within a penny or so, bottom line is the typical history we've had.

And top line they're pretty close in size.

But for the fourth quarter, we didn't give any specific guidance, other than at the end of the second quarter.

We would still stick, you know, with our long-term guidance.

So we shouldn't assume that fourth quarter grows at 5.3 percent, something lower like you said, 3 to 4 in long-term guidance?

That's where we've been for, you know, what we've said about the second half.

The third quarter was a little better than that.

But we're sticking at -- for the full year we'll be above the long-term guidance for the fourth quarter, we'll see.

And going back to the competitive environment.

This question has been asked a couple of times, but what I've seen here is that Mars is losing share to you in the core chocolate category.

It looks like in the latest 12 weeks they were down in the FDM channel 1.2 points while you were up about 2 points.

Rick, can you give us just a little bit more color as to what's going on?

Do you see a substantial response from Mars coming up?

Is there anything to suggest that we're going to see a much more competitive environment going forward or more of the same as to what we have been seeing?

Well, not knowing exactly the numbers that you are looking at David.

I think you said FDM, but I'm assuming you mean FDM and the source you are using excludes Wal-Mart.

Correct.

Well that excludes a decent portion of the category.

And then convenience stores excludes that as well.

What I will say, it goes back to one of the questions previously, Mars has done a good job of some of its new items.

We're not seeing broad based, aggressive pricing from any of the major competitors.

And outside of that, I'm surely not going to try to predict what they may or may not do going forward.

But in terms of the overall competitive environment, you don't really have a sense here that anything is -- we're not in store for any major changes?

I guess it's my expectation that when I see a big player like Mars start losing share, I think that you're likely to start to watch them, or we should all start watching them a little bit more closely?

Again, I won't speak specifically to them but I'd caution against the data because you're looking at a very -- you're looking at probably less than half of the total category and you may not be looking at the parts of the category that's growing.

I think what's important is that we continue to see when major competitors and specifically in talks(ph) to Hershey when we bring news and innovation we see good growth and then the retailers support of getting category growth and category profitability.

I think it is important to continually remind ourselves that we afford retailers that the combination of good growth as well as good profitability as opposed to many categories that can only provide one or the other.

Then just one final question.

Could you talk to us a little bit about your gum strategy?

It looks like in this business you divested a number of brands.

I'm looking at your major Ice Breakers brand and its share is down.

Share across all of Hershey's gum is down about four points in the latest 12 weeks.

Do you have a cohesive strategy, you know, that is going to be able to grow your gum brands going forward?

Or do you need to do some type of acquisition or something here to bulk this up?

I know you just divested some, so that wouldn't seem likely.

But I'm just curious as to your thoughts here.

I think it's important to think about how we segment the market.

And we segment the market based on how the customers do.

So we look at the chocolate segment, then the non-chocolate segment.

And then we combine into the refreshment segment -- mint, gums and breath strips.

So we look at how do we want to compete in that broader refreshment segment and right now we believe the Ice Breakers, and liquid ice in particular, is a very good growth platform for us and that will give us some opportunities to better compete within gum, and I'd leave it at that.

But gum hasn't been -- nearly received the level of focus over the past couple of years for a lot of reasons.

In particular we've seen great growth where we are and much more competitively advantaged.

Well, super.

I appreciate the time and the thoughts.

Thanks, everyone.

(OPERATOR INSTRUCTIONS)

Michelle Van Dyke, BB&T Asset Management.

Yes, good morning.

I wanted to know if you could add a little color with respect to the consumer acceptance of the new snack bar.

And whether you can address sort of initial turns with respect to your expectations internally.

And then maybe how that's coming back in terms of the retailer's decisions to broaden their take of the line.

I've noticed that here in Raleigh at least, that I saw a lot of the Hershey's snack bars on the shelves initially and I'm starting to see a few of the local grocery stores starting to take Reese's as well as Hersheys.

What you're saying is the way we started to ship the product.

So I mentioned in the third quarter, we've really started to ship the take-home variety and now we are shipping the single-serve as well.

So it's going to take a few weeks before we see a broader distribution base particularly of the single-serve.

I wasn't talking about single-serve.

I was talking about the boxes on the shelves.

Yes.

So could you give me any more color about sort of initial take-away that you are seeing and consumer acceptance?

What we've seen initially is good but it is so early on.

It would be inappropriate to make a statement one way or the other.

It is very, very early days.

So I shouldn't read anything into seeing Reese's as well as Hershey's on the shelves.

That's how the shipment plan was made up with retailers?

And one particular store at one particular time.

That's how the distribution got there.

It doesn't mean anything one way or the other.

Great, thank you.

Thank you.

(OPERATOR INSTRUCTIONS) There are no more questions.

We'll conclude today's session.

Monna Fern and I will be available to answer any additional questions you may have.

As a reminder our fourth quarter sales and earnings release and conference call is scheduled for January 26, 2005.

Thank you for your interest and good day.

(OPERATOR INSTRUCTIONS)