好時 (HSY) 2005 Q2 法說會逐字稿

Good morning.

My name is Katie and I'll be your conference facilitator today.

At this time, I would like to welcome everyone to The Hershey Company second quarter 2005 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 one on your telephone keypad. (OPERATOR INSTRUCTIONS) Thank you.

Mr. Edris, you may begin your conference.

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

Welcome to Hershey's second quarter conference call.

Rick Lenny, Chairman, President and CEO;

Dave West, 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 and the half.

Dave will provide the specific details.

We'll then discuss our continued efforts to advance our value enhancing strategy, and then we'll take your questions.

We welcome those of you listening via the webcast.

There are slides to accompany our presentation this morning, which can be accessed on our Website.

Let me remind everyone who is listening that today's conference call make 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 2004 filed with the SEC.

If you have not seen the press release, a copy is posted on our corporate Website, www.hershey's.com, in the investor relations section, as are the slides.

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

As we said in the press release, the Company uses this non-GAAP measurement as a key metric for evaluating 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 certain items, provides additional information to investors to facilitate the comparison of past and present operations.

Therefore, we will be discussing the second quarter and six-month results, excluding the benefit of the $61.1 million, or $0.23 cents per share diluted, tax reserve adjustment taken in the second quarter of 2004.

Any future projections will also exclude the impact of the 140 million to $150 million, or $0.41 cent to $0.44 cent per share diluted restructuring program we announced this morning.

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

Rick?

Thanks, Jim, and good morning.

We have a number of exciting items to share, and we'll do so in the following order.

First, I'll highlight our results for the second quarter and the first half of the year, and then provide an overview of key marketplace initiatives for the balance of 2005.

Dave West will follow with the detailed review of our 2005 financials.

From there, I'll provide the strategic framework and key aspects of the restructuring program that we announced this morning.

Dave will provide further details on this next phase of our value-enhancing strategy and we'll conclude with Q&A.

Turning now to the second quarter, I'm most pleased with our results.

Our performance clearly shows the continued momentum behind our value-enhancing strategy.

A combination of strong top line sales growth and solid cost control leveraged across the business system delivered record profitability, with diluted earnings per share from operations up 18.2% versus the year ago period.

For the quarter, organic sales growth of 7.6% was balanced between higher net price realization and new product innovation, both within core confectionery and our new snack plat forms.

The recently acquired Grupo Lorena and Mauna Loa businesses added about 3% to the sales growth, resulting in a total sales increase of 10.6%.

Our new product innovation was broad based against multiple consumer benefits and more than offset introductions from the second quarter of last year.

In the area of indulgence, Hershey's Take 5 and Reese's Big Cup delivered strong gains.

We continued to restore much-needed growth to our Twizzlers and Jolly Ranchers brands with single-serve products that deliver an intense flavor profile.

In refreshment, Ice Breakers has made great strides.

Liquid ice innovation has continued and Ice Breakers sours and tins is now the number -one turning refreshment item in FDMX.

In snacks, we're building momentum in cookies, particularly as we gain new distribution and merchandising in single-serve.

Snack Barz continued to perform well with upside in the single-serve format.

Turning now to our retail performance, with the Easter timing shift during the quarter, the relevant time periods are the most recent eight weeks and the year-to-date period.

In both timeframes, Hershey delivered superior value to consumers and customers, achieving gains in retail take-away and market share.

Here are a few specifics.

In channels accounting for about 80% of our retail business, consumer take-away increased by 6% for the eight-week period and is up 4% on a year-to-date basis.

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

In the reportable FDMX universe-- that DMXC universe which excludes Wal-Mart, we increased our market share by 0.7 points during the eight-week period, the largest gain of any manufacturer.

The year to date share gain is 0.8 points.

These increases were broad-based as we gained market share in all classes of trade across both time frames.

We increased our share leadership in both the chocolate and sugar confectionery segments, while stabilizing our position in the highly incremental and profitable refreshment segment.

Instant consumables were up 8% for the the eight-week period and have gained over 2 share points on a year-to-date basis.

A key contributor to our strong retail performance has been better price realization, particularly on loose bars.

During the most recent eight-week period, dollar take-away on loose bars increased by 8%, split equally between unit growth and better pricing.

This performance has significantly improved the ROI on our most profitable pack types.

These results further support our strategy of using new product innovation to offset the impact of higher retail prices.

We experienced some of this in early 2003, and we're doing a better job in 2005 in terms of leading with innovation.

In addition, better execution of our trade promotion strategy, as evidenced by more pay for performance and more quality merchandising, has enabled higher price realization at retail.

Our Hispanic initiative continues to gain traction.

Retail take-away is up 15% on a year-to-date basis, delivering a 1.2 gain in market share.

We've now gained share within IRI-defined Hispanic markets in 13 consecutive four-week periods.

In terms of the total snack market, which we estimate to be about $65 billion at retail, Hershey increased its snack share by 0.4 of a point during the most recent eight weeks, and is up 0.3 of a point through the first half of 2005.

These are the largest increases of any major snack company and have been driven by the strong confectionery gains and the growth of our new snack plat forms.

Our marketing investment has been more effectively deployed.

We're focusing advertising behind new items, as this delivers a higher ROI.

In terms of consumer promotion, spending is primarily focused on portfolio-wide scale events as opposed to individual brand programs.

Given the size, scale and retail ubiquity of our business, we remain disciplined in our spending behind fewer, bigger, more impactful consumer and customer events.

For example, we just announced an integrated 360-degree marketing campaign leveraging the scale of our core chocolate brands.

This promotion features Kerry Underwood, 2005 American Idol winner, singing remakes of several classics Hershey jingles, such as "Sometimes You Feel Like a Nut, Sometimes You Don't."

In addition, consumers will be able to receive free vintage Hershey T-shirts with the purchase of our major chocolate brands.

These types of events have worked well for us in the past.

Regarding profitability for the quarter, the balance of strong top line growth and better leverage across the business system delivered a 15% increase in EBIT.

While gross margins were off, EBIT margins increased by 60 basis points in total and by 90 basis points, net of acquisitions.

As we introduce new snack platforms and extend our scale brands, we're taking advantage of our fixed cost structure.

Diluted EPS from operations of $0.39 per share for the second quarter increased by 18.2% versus the prior year.

For the first half of 2005, our performance has been healthy and consistent.

Net sales increased by 10.9% with organic growth of 8%.

Despite higher input costs and new product startups, we've been able to deliver record profitability.

EBIT is up 13% and diluted EPS from operations is up 16.2%.

As we turn to the second half of 2005, our seasonal programs are off to a good start.

We recently announced several exciting new plat forms and products that will further extend Hershey's iconic brands.

I'll highlight a few.

Within core confectionery, we're introducing Hershey's with caramel and Reese's Peanut Butter Cups filled with caramel, two indulgent items in the higher margin, single-serve format.

To capitalize on the strong acceptance of Hershey's Take 5, we're adding a snack size to the existing lineup for the back-to-school Halloween period and introducing a new Take 5 variety enrobed with peanut butter cream.

Dark chocolate continues to be a major growth opportunity, with the segment growing 12% over the past 52 weeks.

We have several efforts underway to leverage Hershey's 46% leadership position.

First, we're introducing a five-item line of Hershey's Extra Dark.

These products have a 60% cacal [ph] level with such high quality inclusions, such as berries almonds.

We're re-launching our existing Special Dark product and adding a new Swoops Extra Dark chocolate variety.

The big news is with the Kisses product line.

The previously announced peanut butter-filled Kisses builds upon the successful caramel-filled Kisses launched in mid-2004.

Today, we're broadly announcing the introduction of Kissables, candy-coated mini Kisses in single-serve packages.

This new platform leverages the most iconic shape in the category and will bring new users into the franchise and capture new usage occasions.

We see incremental growth opportunities in the faster growing, more profitable classes of trade.

It's here that single-serve items are most prevalent and where Hershey has a very strong position.

The Kissables line, which also includes take-home packs, will ship late in the fourth quarter.

We're bringing more innovation and scale to the Ice Breakers franchise.

Through the first half of this year, Ice Breakers has experienced a 20-plus percent increase both in net sales and retail take-away.

In the second half, we'll build upon this momentum, as we expand distribution of our existing items and bring innovation to the category.

We're introducing Ice Breakers Frosted Ice, a cube gum with Xilitol, providing an instantly cold refreshing chewing experience.

We're also introducing Ice Breakers Center Ice Mint, delivering a two-stage refreshment experience, a liquid ice capsule coated with a Xilitol fruit-flavored shell.

We'll also add scale and new items to our snacks business in the second half of this year.

Here it's important to keep in perspective how we view the snacks opportunity.

We typically think of Reese's as a confectionery brand with over $600 million in retail sales, growing at about 4 to 5% per year.

However it's really much more than this.

Expand the definition of Reese's to a snack brand and it now includes our new Reese's Cookies and Reese's Snack Barz entries.

This adds 1,300 new points of snack market retail distribution and the Reese's snack franchise is growing at over 6%.

For the Reese's brand, as well as for several others, we have scale to leverage and room to grow.

Here's how we'll to add our snacks business in the balance of 2005.

In cookies where we currently have only a 40% level of retail distribution, we have significant growth potential ahead.

First, we're expanding the existing line, primarily in high-growth classes of trade.

Two, we're introducing three new cookie varieties: caramel, cookies and cream, as well as a limited edition white chocolate covered Reese's.

And three, we're developing new advertising that will air later in the year to build awareness and trial.

In the area of snack and nutrition bars, we're building upon the great start to our Snack Barz line with new varieties and single-serve placements in convenience stores.

SmartZone will have a new crunchy caramel variety to add scale to the four crunchy textured items recently introduced.

There will be new packaging highlighting SmartZone's low glycemic index, a key benefit for those consumers seeking balanced nutrition and hunger satisfaction.

The combination of continued new product innovation delivering multiple consumer benefits and solid seasonal programs should position us well for the second half.

For the full year, we now anticipate 2005 net sales to increase at a rate somewhat above our long-term goal of 3 to 4%, with diluted earnings per share from operations increasing slightly above the long-term range of 9 to 11%.

Now, Dave West will review the results for the second quarter and first half in greater detail.

Thanks, Rick, and good morning, everyone.

Let me give you more specifics on the quarter and year-to-date numbers, first with respect to revenue.

For the quarter net sales grew 10.6% with 3 points from the acquired Mauna Loa and Lorena businesses.

Underlying organic growth approaching 8% was driven by strong strong price realization, nearly 3 points of the growth, with volume contributing most of the balance.

We did have some minor FX gain in the quarter.

Importantly, U.S. confections, U.S. snacks and international markets all contributed substantially to this volume growth.

New items such as Take 5 and our cookies line were strong, as were several refreshment items under the Ice Breakers franchise.

Our businesses in Mexico, Brazil and Canada all posted good results.

Year-to-date, our revenue growth stands at 10.9%, again, with about 3% from acquisitions.

Of the year-to-date organic growth of 8%, price and volume mix are strong contributors, with net pricing contributing between a quarter and a third of that organic number.

U.S. confections led the strong year-to-date volume gains behind innovation and strong retail execution.

Gross margin for the quarter of 39.8% was 50 basis below 2004's second quarter.

Excluding the impact of the acquired businesses, margins contracted by 20 basis points this.

Is below our estimates.

We did get price realization on shipments, as expected.

Our promotion allowance rate was also slightly improved versus the year-ago rate.

This price realization helped offset previously identified input cost increases.

The shortfall in margin is largely due to product mix within the quarter.

As you will recall, we previously shared that the timing of the Q1 price increase resulted in some extra volume of loose bars in the first quarter.

We believe that amount was about 1% of sales.

Q2 Loose bar shipments were slightly below our plans.

However, we are having a strong back-to-school Halloween season, our strongest in several years, with sales expected to be up in mid-single digits.

Some of this gain was shipped during this year's second quarter, as customers are planning to build displays earlier.

This mix shift in the quarter of loose bars to packaged goods caused some decline in year-over-year margin.

Also, our strong launch of cookies in the quarter, particularly in display-ready configurations also drove some unfavorable mix, as did much lower sales of high-margin 1 gram sugar carb items in the quarter, as compared to last year's launch period.

This also had a negative effect.

On a year-to-date basis, gross margin as reported, is 39%, down 20 basis points versus last year.

When when we adjust for the impact of acquisitions, gross margin is up 30 basis points year-to-date.

This is just below the range we had shared with you back in April, which is to have organic gross margin expansions between the 40 basis points we enjoyed last year and below our long-term range of 70 basis points.

For the full year, we continue to target this range as pricing, promotional efficiency, and productivity should help offset the rising cost of inputs.

Turning now to selling, marketing and admin. expenses, which declined by 110 basis points as a percentage of sales in the quarter to 22.3% from 23.4%, year-ago.

Relatively flat brand expenditures and G&A costs, which grew at a rate lower than sales, were leveraged against the strong sales growth.

EBIT increased by nearly 15%, as the strong top line was leveraged through the flattish SM&A spending I just described.

Interest expense in the quarter was higher, $21 million versus $15 million year-ago, reflecting increased borrowing, primarily for the purchase of shares from the Milton Hershey School Trust last year.

The tax rate in the quarter was 36.2%, reflecting a first half adjustment to a new annual rate of 36.4%.

So overall, EPS diluted from operations of $0.39 compared with $0.33 in 2004.

That's up 18.2% after adjusting for the one-time tax reserve reversal in last year's quarter.

Let me give you a quick recap of some six-month results.

Net sales increased by 10.9%, with 3% from acquisitions.

Gross margin, 39%, versus 39.2% last year.

The organic gross margin was up 30 basis points.

SM&A declined 60 basis points as a percentage of sales, coming in at 21.1% versus 21.7% last year, with brand spending relatively flat and G&A spending increasing due to compensation expense, but below the rate of sales growth.

EBIT increased 13.4%, and the EBIT margin increased to 17.9% from 17.5%.

Net income, excluding the tax reserve adjustment, increased 11.5%.

EPS diluted from operations increased 16.2% to $0.86, up from $0.74.

And our economic return on invested capital on a rolling 12-month basis increased 150 basis points to 19.9%.

Now let me turn to the balance sheet.

At the end of the second quarter, net trading capital increased $141 million, or 17.2%, compared with last year's second quarter.

This is primarily a result of the two acquisitions, as well as increased inventories from the timing of demand, that's both raw materials and both products, and higher accounts receivable, as our sales growth has been significant.

Our AR balance remains nearly 100% current.

On a rolling 12-month basis, net trading capital increased 20 basis points as a percentage of sales, again, due to the level of new product introductions and the acquisitions.

We continue to work towards reducing inventories and expanding payables, and plan to improve our working capital position by year-end.

Now I'll cover a few additional items which relate mainly to cash flow.

At the end of the second quarter, year-to-date total capital additions, including capitalized software, were $100 million.

For the full year, we continue to expect total CapEx be close to 200 million.

Depreciation and amortization totaled $98 million for the first six months.

We expect full year D&A to be in the $200 million range.

Dividends paid were $105 million.

Year-to-date pension contributions were $90 million, with $50 million occurring in the second quarter.

We did not repurchase any shares during the second quarter, as we were out of the market, pending the announcement of today's event.

You will remember that in the first quarter of 2005 we spent $44.2 million in our open market share repurchase program, leaving about $10 million on that authorization.

In addition, in April our Board approved add new authorization to purchase from time to time up to $250 million of our common shares in the open market or through privately negotiated transactions.

Also, as a reminder, during the first quarter we purchased $223 million worth of our common stock in the open market to replace shares issued in conjunction with our employees exercising stock options.

The net cash flow impact was $154 million, after netting proceeds received from employees.

Over time, our policy is to repurchase all such exercised shares.

Before I discuss our outlook for the year, Rick will highlight some significant new initiatives as we continue to execute our value-enhancing strategy.

Thanks, Dave.

Now we'll discuss the program that was announced this morning.

As background, The Hershey Company has made solid progress on our value-enhancing strategy over the past four years.

A major enabler of the strategy was the restructuring event that began in the fourth quarter of 2001.

This event enabled to us reset the cost base, invest in brand building and selling capabilities, and strengthen the organization.

As a result, we've accelerated profitable organic growth, expanded Hershey's marketplace leadership, and delivered superior financial performance.

We believe that a similar opportunity exists now and here's why.

First, Hershey is establishing a broader footprint in the marketplace, most notably within the U.S. snack market, and from a geographic perspective, in the Americas.

Second, we've established three business groups: U.S.

Confections, U.S.

Snacks and Hershey International.

These groups will benefit from leveraging and sharing the core competencies of Hershey's iconic brand franchises, our competitively advantaged value chain, and our superior selling capabilities.

Third, an opportunity exists to step up investment behind broad-based product and packaging innovation on a global basis.

Here are the major components of the program announced today.

First, we're rationalizing our our gum business so that we can more effectively compete in the broader refreshment segment, a strategy that is showing early success.

Our growth has been driven in the mint and liquid ice form, not the gum form.

This rationalization will result in the closing of the Las Piedras [ph] Puerto Rico gum facility.

We'll streamline our North American operations to better capitalize on Hershey's scale within both the U.S. and Canada.

Hershey's North America confections share of 27% represents a relative market share of 173 versus Mars, 337 versus Nestle, and our share advantage versus Cadbury is 4 to 1.

However, we've not taken full advantage of the immense potential this scale represents.

We now will.

To lower our overall cost structure within Canada, we'll consolidate some support activities covering North America, while strengthening marketing and selling capabilities within Hershey Canada.

Specifically within the sales group, Canada will adapt and leverage many of the new capabilities the U.S. sales force has developed since its restructure two years ago.

These capabilities include the deployment of hand-held terminals, applying retail coverage models against dedicated selling teams on the more profitable customers, and a stronger pay for performance trade promotion strategy.

In terms of winning with consumers, the U.S. and Canada will now work jointly on new product innovation to insure that, where and when appropriate, new platforms and items will be introduced at the same time.

Two examples of this are the upcoming launch of Kissables and peanut butter-filled Kisses mentioned earlier.

Three, we're now installing SAP in Hershey Mexico.

This will help us capitalize on Mexico's current strong results where we're clearly benefiting from the Grupo Lorena acquisition, and build new capabilities to capture future growth in both confectionery and snacks.

Fourth, we believe there's great value in establishing global centers of excellence.

We'll realize this by restructuring the global value chain, building several new capabilities such as centralizing purchasing activities into one global procurement organization, global sourcing capabilities, ensuring both visibility and access to the most cost-effective manufacturing options, and a new customer service and customer collaboration group established within our global sales organization to deliver superior value to the retail trade.

So that we can quickly and successfully execute this next phase of our value-enhancing strategy, we're offering a workforce reduction program.

Given the demographics of our work force, this will consist of an early retirement program and voluntary mutual separation program.

Both of these are similar to the programs offered in late 2001.

This workforce reduction component will enable Hershey to accelerate the development of new capabilities, while ensuring a smooth transition for those employees electing this option.

This program will provide for stronger organization at a lower cost and is consistent with Hershey's long-standing reputation for treatment of its employees.

The steps we're taking to advance our value-enhancing strategy will support Hershey's ongoing commitment to delivering superior financial performance and rewarding our shareholders over the long term.

They will allow to us build upon the successes we've achieved to date and sustain our strong performance, as marketplace dynamics remain both challenging and exciting.

Our value-enhancing strategy has served Hershey shareholders well since it was launched in late 2001, and we anticipate similar benefits from it in the future.

Now Dave will review the financial components of the program.

Turning now to the financial impact, the financial benefits are compelling.

The total estimated charges and savings represent a good investment on behalf of our shareholders.

The pre-tax charge cess mated at 140 to $150 million, or $0.41 to $0.44 per share diluted.

The cash portion is 85 to $90 million.

When fully implemented, we expect the annual ongoing savings to be in the range of 45 to $50 million.

This represents a payback of three years on the total charge and 1.8 years on the cash portion.

Some of these projected savings will be used to invest in key growth efforts in our core confectionery business, in relevant snack market segments, and in selected international markets, mainly through our expanding global customer alliances.

In terms of timing, it's expected that the majority of these charges associated with this restructuring event will occur in the third quarter of 2005, with the remainder in the fourth quarter of '05 and the first half of 2006.

Equally as important, we're immediately establishing the organization requirements and new positions so that we can get started quickly.

While this will take place over the next several months, we will be making several announcements very shortly.

The savings will not likely begin to occur until 2006.

I'll provide with you a breakdown of the components.

The estimated pre-tax charge of $145 million will include $41 million to close our Las Piedras gum facility. $80 million will be related to the voluntary workforce reduction program in the U.S. and $24 million to reorganize our international business, predominantly in Canada.

Let me now give you an outlook for 2005 and 2006.

Our business has performed strongly over the past several quarters and the program we announced today is designed to help us continue the marketplace capabilities required to carry our momentum into the future.

For the balance of 2005, our sales growth rate will moderate in the second half, but we certainly see organic sales growth for the year before the benefit of acquisitions above the upper end of our 3 to 4% target.

I mentioned earlier that we continue to target organic gross margins above the 40 basis points we gained last year, but below the 70 basis points long-term goal.

We now see 2005 EPS diluted from operations slightly above our long-term goal of 9 to 11%.

Looking to 2006, the innovation that Rick covered earlier behind the Kisses franchise and in snacks should deliver net sales growth slightly above our 3 to 4% long-term range for next year.

We do see continued pressure on achieving our long-term gross margin target in 2006.

Input cost pressures continue, particularly in fuel, transportation, pension and other cost components.

Our goal for now in 2006 is 40 to 70 basis points of expansion.

Some of the 45 to $50 million savings from the program we announced today will be utilized to build new organizational capabilities in customer service, the supply chain and North American operations.

We'll also step up brand investment behind our new initiatives, such as Kissables and our cookies platform.

A portion of the savings will fall through to the bottom line.

So, as we begin to firm up our 2006 plans, we're confident that our EPS diluted, excluding the charge, will be slightly above our long-term 9 to 11% goal.

We'll have more details as we finalize our plans for next year, and we look forward to sharing those with you as we host Holidays and Hershey Part 2 on December 12th and 13th 2005.

With that, I'll conclude and we'll be happy to answer any of your questions.

Katie, the first question, please?

(OPERATOR INSTRUCTIONS) Your first question comes from John McMillin with Prudential Equity Group.

Good morning, everybody.

Good morning, John.

I just can't understand why you don't give earnings guidance for 2007 and 2008.

And you know I'm joking, because I got so many companies that aren't even barely giving us for 2005, so we appreciate the 2006 guidance.

And I guess, Dave, that reflects some hedging that's been taking place on your part.

I mean, you feel like you've got your costs pretty well locked up, if you could talk about that specifically.

John, we're not-- I wouldn't say that we're locked up for 2006.

There's some moving parts.

I mean obviously fuel and transportation, and then fuel as it relates to packaging components for next year.

And we all continue to look at the return rate and the interest rate in the marketplace around pensions.

So there are some moving parts, and we're not fully hedged, obviously, all the way out for 2006.

But we're starting to have good visibility with that.

And then we couple that with the growth plat forms that we're talking about and some of the capabilities that we're going to build, and we have a pretty good visibility into what our business looks like for 2006.

And right now we believe we'll be slightly above that 9 to 11% long-term goal for 2006.

I know you said the FX impact was minor, but do you have what the impact was?

It's about a half a point of sales growth from FX.

Okay, and Rick, if you could just talk about where acquisitions, or further acquisitions, I know you've made some [inaudible] acquisitions, but you know just kind of bigger scale ones, kind of fit.

I mean and I'm not talking about Cadbury in particular.

I'm just talking about your willingness to consider opportunities, even big scale one.

I mean you come from a Jim Kilts [ph] background and we have-- all know what he did.

Just kind of what's your feeling in that regard and Hershey's willingness to look at something big?

John, I think as we've said all along and we wanted to restore profitable organic growth, which we have done over the past several quarters and that's why we feel good about where we're expecting this year tent to up, and next year.

And we've said all along that any acquisition has to be a multiplier to top line growth, not a substitute.

So we feel that we're headed in that direction.

Found right now, the buy-and-builds seem to be the right ones for us.

As for your question about is there something bigger or would we do something bigger?

You know, hypothetically, I wouldn't respond to that. .

I think the important thing for us is it strategically relevant, does it enable to leverage our core competencies, whether it be our brands, our value chain or our selling capabilities or in-store presence.

We would not go out and buy something for the sake of doubling the size of the Company just to get that type of gross, quote, unquote, scale.

So for us, it's remaining disciplined around leveraging our core competencies.

And I'd leave it at that, if I might.

Okay, and just my last question just deals with the weather.

You know, I'm not saying your 6% volume gain last year was helped by cold summer weather to any big significance, you know.

But it was extremely cold last summer and ice cream was down a little bit and chocolate maybe was helped a little bit.

And this year so far we've kind of seen the reverse or more normal patterns, it's a little hotter than normal.

Without-- and I know we're early in the summer, but is that having any impact?

Because I've seen product at Rite-Aid, your product, and I understand it's Rite-Aid's problem, not your problem, but I've seen a lot of markdowns on chocolate, $0.33 a bar.

You know, is the weather having any impact?

No, John, I think as we said before and that's why I think the eight-week take-away numbers are relevant on a year to date basis.

We're gaining take-away and gaining share.

I think the big issues for us is what happens with shopping trips, particularly as gas prices increase?

What's happening with convenience store shopping trips and others?

And we have not seen a major change in that regard.

And we're seeing good take-away in share growth.

We're not seeing-- we never have really attributed any positives or negatives to weather, and so wouldn't cite any in that regard at this point.

Congratulations.

Thank you.

Your next question comes from David Nelson with CSFB.

Good morning, and congratulations.

Thanks, David.

Good morning, David.

I would like to ask you about the charge.

I know lots of companies do this, but why is this really one-time?

You just did a big charge a few years ago and that one is pretty big.

And it's-- most the things you mentioned seemed like things you need to do anyway to grow at that 9 to 11% rate.

Did you consider at all just running that through your income statement, like Kellogg does?

We do look at this as certainly one-time, the closure of the Las Piedras facility and then the retirement program.

We talked about it.

And what's really, I think, important for-- the way we look at the business, we'll obviously account for this as per GAAP.

But from a visibility standpoint into the way we think about running the business, we will provide you with the reconciliation to internal management reporting the way we'll track the business going forward, David.

So I think that the reality of it is where we are right now as a company, this is the logical next step for us to continue to build the types of capabilities that are more market-facing.

Would we expect to see one of these about every three years, do you think?

David, I don't think that-- that's certainly not the way we think about the business.

We're at a-- you know we said we're at a point where we have some market-facing capabilities that we need to develop to continue to grow, and we certainly don't have any intention to look at them that way.

There is one other question.

You've got a huge lineup, and this is fantastic, of new products.

I guess analysts are paid to worry.

Could you talk about how you expect to manage so many new product introductions, all the new SKUs?

I don't know if there's going to be new net SKUs, but the sales force focus and then the returns on these new products, and that they didn't sound like limited editions.

There's a couple of things, David.

This is Rick.

One thing about limited editions, that continues to be a major source of profitable growth for us, but we will have limited editions at about the same level of contribution that we've had over the past couple of years.

So we seem to have found a good level in that regard.

It's important to note that, as we add new items, we discontinue new items, primarily as we focus on the more scale items around the seasons.

So we continue to reduce the lower selling levels of seasonal items, and that gives us more capacity from a selling organization, certainly from a retail acceptance of new items.

The items that we've spoken about are really further leveraging our scale brands.

And we've said all along that the percentage of take-away we get from our largest brands is not at the same level as some of the major snack competitors.

And that's where we see great growth potential, and we happen to have a broad retail distribution base.

So it's not as though we have to get all of these into all of the grocery stores, but we think about our retail ubiquity.

And there's plenty of opportunities that remain within convenience stores, drug stores, et cetera.

I would like to get back to your first question that David answered regarding the charge.

It is a restructuring charge, and it's one that we see as now a good time to take the Company to the next level.

And for us, it's about building the capabilities that will continue to deliver superior financial performance as we had before.

And we learned a lot from the one in the fourth quarter of 2001, and then shareholders have benefited.

And we see similar opportunities at this point.

Okay.

Thank you very much.

Thanks, David.

Your next question comes from Chris Growe with AG Edwards.

Good morning.

Good morning, Chris.

Hi, just had a couple questions for you.

The first one, relative to the gross margin being down 50 basis points in the quarter, a little more aggressive decline than I thought.

Is there-- as you look to the second half, is it the pricing realization that gifts you comfort around your ability to meet your target for the year for gross margin expansion?

On a year to date basis, once you take the acquisition effect out, we're at 30 basis points of expansion, which is just a little bit shy of the 40 to 70 range we've been talking about.

So I think the-- part of what happened in the first and the second quarters is we had a stronger first quarter related to loose bars because of the timing of the pricing.

And then in the second quarter that created some mix going the other way, because we had more take-home package candy in the quarter.

So if you balance those two things across the first half, we're about where we would be, probably a little shy, a few basis points shy, of where we wanted to be in the range.

So, part of it is going to be the mix of the product going forward, but we certainly will continue to get better price realization from the price increase as the year goes forward.

Related to that point, Dave, the mix contribution in this quarter, you said it was negative.

Can you quantify that?

So I think you said pricing was up 3%.

What would mix have been?

I would rather not get into the specifics of the mix because it does relate to some margins related to the product line.

But the pricing was, again, pretty strong and then there was a negative mix component.

But when I talked about the pricing earlier on, I was talking about the sales mix effective pricing.

When you get down into the margin mix, it's -- there are a lot more factors in there because obviously the margins of the products are different.

So I would really rather not get into the price mix effect on the margin.

I actually was interested in the sales effect from mix.

The sales effect really from mix and price was, like I said, around-- figure about 3%.

That's like a net number, you're saying?

Yes.

Okay, so price could have been a little more higher-- a little higher than that mix a little--

I would really rather not get into the--

Okay, understood.

And then the other question then, just on the SG&A side being down over 100 basis points, is that a sustainable figure?

I know your marketing was flattish in the quarter.

Was that the major driver, or was there some sort of cost efficiency still coming through there?

We continue both.

We continue to get great leverage out of our fixed cost base.

And we said all along, or at least as we have started to expand our business, that EBIT or operating margins would be more important for us because we have a lower selling expense as a percentage of sales.

We do have a slightly lower trade rate.

We get better leverage with our advertising and consumer promotion, and lower G&A.

So that's really why we look at the SM&A line.

As you bring these cost savings through from this new program and it sounds like you're going to pretty much invest those back in the business, are you doing this to reflect the need for more marketing dollars for your business?

Is it something you think you need today or is it just a reflection of the evolution of the product and more new products coming through?

I think it's a couple things.

I think, as we said, as we broaden our footprint in the the U.S. snack market and then in some key markets and with global customer alliances, we see significant upside potential in our brands and-- with our customers.

And for us, we talked about we talked Kissables, we talked about the filled Kisses platform, what we are doing in refreshment.

And we have several other new innovations on the drawing board that we certainly won't reveal here.

And that's-- we're exciting about investing in these next year.

Okay.

Thank you.

Thank you.

Your next question comes from Eric Katzman with Deutsche Bank.

Hi, good morning, everybody.

Good morning, Eric.

I got a few follow-up questions on Dave Nelson's kind of approach to the restructuring.

It's-- it seemed when you were going through the details, you talked about giving hand-held computers or-- to consumer sales force, rolling out SAP in Mexico under the international part of the restructuring.

I mean are you saying that that-- you're viewing that as one-time as opposed to something like-- like those specifics that in my view, certainly versus the rest of the industry, should be run through the P&L?

Or is the international charge something, you know, different, like a facility closure?

David, actually the international charges related to doing the early retirement and mutual separation program in our Canadian operation, it is a reduction in force in Canada, as well as certain other smaller geographies.

We're not-- when we're talking about the things that you're talking about, hand-held terminals, et cetera, that's not part of the charge.

The charge is related to-- specifically to operations and people.

And the gum facility closure in Las Piedras, again that is a specific one-time event, and then the early retirement program in the U.S.

Those are the components of the charge.

What Rick was describing, and what you just described there, are the capabilities that we're going to build going forward.

Okay, and then obviously you guys have done a fantastic job with the Company, but I just kind of, you know, to say kind of-- I guess it depends on your definition of "slightly" or "somewhat," but in terms of growth, I mean, you know, you can do the math.

I mean slightly above 4% for the year would imply barely any sales growth in the second half.

Is that really what you're indicating?

I mean slightly, to me, would say, you know, not 5% or 6% growth as opposed to, you know, the run rate that you've been doing.

I mean I just-- obviously at the end of the day it's up to us to figure it out, but it-- I just am not really sure what to take from such cautious comments, given, you know, 11% first half top line growth rate.

We feel that the current guidance range on the 3 to 4% and 9 to 11%, effectively that assesses the long-term capabilities of the company.

We have been performing at a level above that and, given the strong recent performance for the six months, it's clear to us as we look for the next 12 to 18 months that we're comfortable that we're going to be above those ranges, the 3 to 4% on the top and the 9 to 11% on the bottom.

But what we really want to do is make sure we continue to remain focused that for the long-term view of our strategic planning horizon, 3 to 4, 9 to 11 is kind of of how we continue to think about the business.

That said, Eric, you know, you can do the math and you know where we are for six months.

You know, we're going to be above that, but we just don't want to get into the business of forecasting exact, precise numbers because we really continue to look at the business for the long-term.

Okay, and then just a follow-up with the final question.

The-- in the past, Rick, when you've made presentations to Cagney and held your own events, you've talked about a lot about these new snack initiatives as being margin-enhancing.

And I'm kind of wondering, was that margin-enhancing kind of assuming that you were going to take this charge and have these cost savings to kind of plow back into the business?

Or are you seeing a somewhat more competitive environment than maybe you originally expected.

You know, so for example, when I've gone around, I've seen Mars giving-- going a two-for-one on Snickers bars, which I've never seen before.

So how do we read the kind of the restructuring and the savings, vis-a-vis what you were originally anticipating for margins on these new snack products?

I think a couple of things, Eric.

First off, we had talked about increased margins.

We were saying primarily dollars and not necessarily percentages.

But that aside, we certainly did not say we were going to get into snacks and now we're going take a charge down the road.

That had nothing to do with why we chose to get into snacks, or more important, how we chose to compete within snacks.

To answer your question specifically, we said at the time cookies margins will be somewhere in the middle to the lower end of our full line average.

And we're in the start-up phase within cookies.

We are very pleased with our results to date, and we think, as we get more merchandising behind the single-serve pack type, we'll do even better.

We only have a 40% level of distribution on our cookies, yet it's already one of the fastest-turning items within convenience stores and drug stores.

And, as I mentioned earlier, we will be providing new advertising to build further trial on that.

That that's cookies.

Within the snack and nutrition bars, snack bars are doing very well, again off a small base now.

Nutrition bars, primarily SmartZone, did not get off to the type of start that we would like.

We are seeing much better acceptance and traction with our crunchy, textured varieties.

And there's a bar-- or there's a product, excuse me, that has very strong margins.

So, we're so much in the infancy of building out our snacks platform that it's early stages.

It's no different than Take 5 in the early stages didn't have the same type of margin that it does today.

So that's really what we had talked about in terms of adding margins dollars and broadening the footprint of our brands.

Okay.

Thank you.

Thanks, Eric.

Your next question comes from Christine McCracken with FTN Midwest.

Good morning.

Hi, Christine.

Good morning, Christine.

I wanted to touch a little bit more on the customer alliances that you mentioned in the release and your comments earlier, relative to acquisitions.

Is it your strategy then to possibly go further into international markets via relationships rather than straight acquisitions?

I think it's a couple of things.

We've had some good experience to date with some global customers, most notably Wal-Mart, 7-Eleven, some success with Costco.

And we see opportunities, as they expand globally, for us to be able to grow with them.

That's not an either/or condition in terms of how we may want to compete in other markets.

Obviously, last year's acquisition of Grupo Lorena in Mexico added some much-needed scale to the Hershey Mexico operation, and we see other opportunities like that within Latin America.

So it's not an either/or proposition.

Right now we see-- we have good visibility and we see good potential with some key global customers.

And that's why we announce add few months ago that we put in place global customer teams that we had not had before.

And now with the streamlining of our North American operations as opportunities between Canada and the U.S. that we have not taken advantage of before.

Great.

Just on seasonal, you talked about getting off to a good start, but at the same time you talked about sales possibly getting pulled forward, more of a timing issue as they try to get the displays out earlier.

On a net basis for second half, are you expecting an up year, or are you following kind of your historic trend, where you're kind of moving away from a heavy focus on seasonal sales?

For back-to-school, Halloween specifically, we're looking at up mid-single digits, which is one of the better seasons we've had in a few years.

Importantly, and I think for-- the good news is that some of that did ship in June, more than last year.

And I think some of that is, as we've tried to separate back-to-school from Halloween, we're getting earlier display.

Because the overall season is going to be up over last year, when you look at our Halloween shipments, for example, in the third quarter, they will probably be comparable year-over-year.

So the overall season is going to be up.

We got a little bit of a benefit of that in Q2 and then Q3, Halloween looks comparable to last year.

Any way to quantify how much is add to the quarter?

Is it-- ?

In the current quarter, second quarter?

Yes.

Probably about a point, so think about it as a point of loose bars moved to first quarter and a point of Halloween came in to replace it.

Okay.

And then just in terms of your shift in global supply chain, it sounds like you're consolidating a lot of your purchasing, but it seems like you had mentioned in previous meetings that you had actually done a lot of that already.

Can you talk about what's new about these initiatives and what it might mean to potential-- if it might imply any potential disruption or if it's fairly minimal in scale?

I would rather not get too specific on the strategy.

We certainly don't envision disruption.

While we had done some previously, we see we are now able to take a much broader view of other parts of our business and broader geographically in terms of where we have international, going particularly with the growth we have seen within Mexico.

So it's-- we certainly don't anticipate it being disruptive.

We anticipate it being a good way to leverage our global value chain, which we have not done heretofore.

And one of the items that we talked about, I think in the last call, think at the last call, was the production of a loose bar product in Brazil that has global applications right now within Mexico, Brazil and the U.S.

Same product under three different positionings and three different brand names.

Those are the tape of capabilities we need to develop more broadly.

Fair enough.

Thanks.

Thanks, Christine.

Your next question comes from Eric Larson with Piper Jaffray.

Hey, good morning, everyone.

Congratulations.

Good morning, Eric.

Thanks, Eric.

I got on the call just a few minutes late, so if you have talked a little bit about this, I apologize.

Can you give me a little bit better idea of what your performance was in the non-measured outlooks in the quarter?

You may have touched base a little bit on that in the front part of the call.

Well, we talked about our take-away in all measured channels for us, which represents about 80% of our retail business.

And then we talked about what our share gains were within the FDMXC universe, the one that excludes Wal-Mart.

So in the all measured take-aways -- all measured channels, excuse me, our eight-week take-away was up 6%.

There's obviously no share change with that, and then no share performance that we cite with that.

There is in the FDMXC universe, and that we were up about 4% on-- I'm sorry, 5% on the eight weeks and a gain of .7 of a market share and .8 of a market share in the year-to-date.

Okay great.

And then just one follow-up question kind of on the current acquisitions in terms of margin structure.

Do those acquisitions have the potential to carry margins equal to or greater than your corporate average?

Probably in the long-term, the Mauna Loa business will not.

Because it's such a high percentage of that product line is in the raw material costs, it probably won't, which is why we-- when we started talking in the beginning of the year, we knew that would dampen reported margins, and we've been talking about that organically.

That said, there are a number of things that we can continue to do to increase and improve our margins on Mauna Loa.

Over time, as we integrate Grupo Lorena, we believe it will look like the average margins of our portfolio or should.

But Mauna Loa probably never will, but it can continuing to improve.

There are a lot of opportunities there.

Okay, great.

Thank you, everyone.

Your next question comes from Terry Bivens with Bear Stearns.

Hi, good morning, everyone.

Good morning, Terry.

Two quick things.

Rick, you usually, in quarterly updates, give us a report on just the C-store take-away.

Do you have that?

Yes.

C-stores, our take-away was up 7% for the most recent eight weeks, gaining .6 of a market share point.

And on a year-to-date basis, our take-away and convenience stores was up 6%, gaining .7 of an increase in market share.

So, we continue to see very good performance within the convenience store channel.

Okay.

And I guess this kind of goes back to Dave Nelson's question, but I think the last time I discussed it with you guys , you felt capacity utilization was somewhere, I guess, around the 60% level.

What does the shutdown of the Puerto Rican facility do?

And I guess that would bring you to 16 plants.

How many more do you think it would be reasonable to assume could be closed if we looked out over maybe, you know, a five-year horizon?

I'm trying to get at potential for rationalizing your manufacturing base, obviously.

The Puerto Rico facility closure will improve utilization, but only by a very small amount, Terry.

Okay.

What we're really focus on, as we talk about looking at the value chain, is the opportunity for us to continue to make better internal, versus external, sourcing decisions.

So we're looking at some things that we currently are co-manufacturing that we ought to have in-house and maybe some things that we make ourselves that ought to be out, particularly as we start to talk about snack adjacency, something like cookies where we're making it on the outside.

We also have plant-by-plant, as our product line has changed over time and we continue to grow, our loose bar business as a percentage versus the seasonal component, we have some plant-by-plant optimization.

And we also have country-by-country sourcing decisions, as Rick said, now that we have a much bigger business in Brazil and in Mexico, we have some sourcing decisions that we can look at country-by-country.

So those are the things that we're looking at.

And I would say at this point in time we have no other plans for looking at any facility rationalizations.

We're going to focus very much on optimizing our current network.

Okay.

Thank you very much.

Thank you.

Your next question comes from David Adelman with Morgan Stanley.

Good morning, everyone.

Good morning, David.

Hi, David.

A couple of things.

First, David, just following up on the Puerto Rican issue, do you get tax savings from being located there that you'll lose at all as a result of the closure?

There is a Section 936 of the IRS code, which was related to income generated from Puerto Rican manufacturing.

That sunsets, that provision sunsets, at the end of 2005 anyway, so really no effect on the tax rate from that.

Okay, and then on the guidance that you're giving for '06, are you making-- are you assuming on an existing option expensing treatment basis, in other words that doesn't take into account the changes that you'll have to make?

Correct.

We have not-- we have not factored in the adoption of option expensing into the numbers that we're talking about today.

Okay, and then on the gross margin in the quarter, is it correct to say that input costs were not greater than you had planned?

In other words that, that was not really a factor?

That would be correct to say.

Okay, and then the observation on second half growth, top line growth moderating, is that out of conservatism on your part?

Is it something you see in the marketplace?

Is it a function of the timing of new products?

Well, I would think that we probably aren't going grow at 11% into perpetuity.

That would be a bit much.

It really is timing of initiatives.

I think realistically, as I said, we continue to look at that 3 to 4% top line as a long-term growth goal for the business.

We believe we're going to be ahead that, based on momentum in the marketplace, but I really don't want to get into specifics predicting quarter-by-quarter growth rates.

Okay.

And then lastly, could you comment on the manifestation of your price increases at retail as you went through the second quarter and the impact you think that's having on consumption, if at all, by product or channel or category or overall?

I think a couple of things.

First off, we're seeing about 60% of the ACV having reflected the higher pricing on loose bars, but what we said earlier, what's most important is that our loose bars increased, had an increase in take-away of 8% with a 4% increase in unit volume.

And that really shows that we're getting some good take-away in our innovation.

While we're seeing slightly higher, maybe 2 to 3% average prices at retail, please be reminded in this category there's no one uniform retail price.

What a consumer sees in convenience store is different than what they will see in a drug store within what they will see in the front end of a traditional supermarket.

So we have a much broader retail price range than perhaps other categories where the predominance of their business is in one class of trade.

So we-- at this point, we have seen a good take-away and price realization as on our loose bars, primarily the more competitive of the items on pricing.

Okay.

Thank you.

Thank you, Dave.

Your next question comes from Leonard Teitelbaum with Merrill Lynch.

Good morning.

Good morning, Leonard.

I'm not in the office, so I don't have the balance sheet detail and it may be very obvious, but given the cash component of the charge, how does that impact your plans for share repurchase for the balance of the year?

It doesn't really, Len.

We continue to generate good operating cash flow.

The overall cash component of this is something that we can certainly handle.

And by the time you get out into the end of the second year, as we've got the operational savings, it's essentially a cash flow neutral event.

So it's a short-term financing, the way we look at it, and it shouldn't affect the buyback program.

Okay, I was really referring to the second half of this year.

Dave do we expect to see resumption of your activity in the market the second half of this year?

Yes, Len, you should see some.

We have the $250 million authorization out there, and we will purchase from time to time in the market.

Secondly, if I take a look at some of the products that you came out with, for example, the low carb bar and SmartZone, you had indicated maybe it was a little bit softer than you might have thought.

Are these just basically to hold market share position in that category, or do these things really have legs ?

I think it's a couple of ways to think about it.

We've said that we look at the health and wellness platform very broadly.

Our first entry was sugar-free, almost three years ago, which continues to do well.

Then it was 1 gram sugar carb, which was a very cost effective way to get-- for us to get into a growing segment.

We got some decent sales from that last year.

And equally as important, we got very good learning, which enabled us to introduce SmartZone.

And what we've learned from SmartZone is going to enable us to even broader-- broaden out our portfolio in health and wellness.

So for us, it's much more about this is a strategic growth area for us because it's a benefit that continues to be on trend from consumers.

So it's less about holding market share and it's more about ways to further extend our brands, so stay tuned on some other opportunities in this area down the road.

Now, let's see, you got Kissables and I guess you get Huggables.

I can't wait for the third one.

Thanks a lot, guys.

I appreciate it.

All right, thanks, Len.

Your next question comes from David Palmer with UBS.

Hi, guys.

Hi, David.

Hi, hi.

Two questions.

First is kind of a blocking and tackling one.

When you were talking about energy costs being a likely drag on gross margins next year, could you give us a sense, maybe your base assumption there on oil costs, maybe kind of a barrel oil type assumption?

We don't-- not willing to give that kind of specific margin intelligence or look forward on that basis.

Okay, and the second one's kind of a big picture question.

You know, product innovation, growth in year two is pretty rare in the consumer world on new products.

Perhaps you can give us a sense, maybe looking at consumer repeat levels on products such as Take 5 or your cookies platform, and tell us maybe what that tells you and what that convinces you about growth in year two on those products, excluding of course distribution gains and the impact of additional line extensions on the core.

Take 5's a good example where we continue to build trial, but based on the research we have to date, we have very high levels of repeat, which is why we are adding a Take 5 snack size for back-to-school, Halloween, which is why we have a couple of limited addition items that we have come out with and will come out with Take 5.

But I think more important, as you've heard us talk many times, we see these as growth platforms.

So, Take 5 for us is really a growth platform within salty/sweet and how can we further extend that.

Cookies is too early to get repeat rates back strictly from consumer metrics.

We're getting very good trial and we see good velocities.

So, based on the qualitative assessment we have, we're getting very good repeat rates on cookies, which is why we have couple of new entries and a limited edition as well.

And again, for us cookies is a platform, and we see further opportunities down the road to broaden out that platform.

Great, thank you.

Thank you.

Thank you.

Your next question comes from Pablo Zuanic with JP Morgan.

Good morning, everyone.

Hi, Pablo.

I just understand over the last six, eight months, has Kraft in any way dropped the ball on Lifesavers and Altoids as the transition was taking place?

And did that provide an opportunity for you guys to gain market share?

We're not going to-- certainly wouldn't address any competitive actions, one way or the other.

I think what's most important, as we talked about sugar confectionery, we brought news and innovation to our Twizzlers franchise, to our Jolly Ranchers franchise primarily in single-serve and instant consumables, which is our growth area and then as we've spoken within refreshment, which is a much broader benefit.

You know, we were trying to sell the gum in mint form and consumers were seeking the refreshment benefit.

As we've taken a better positioning behind Ice Breakers, as we've said, both sales and take-away are up 20%, each, through the first half.

And that's where we've been benefiting from innovation.

So we feel very good about what's taken place and the foundation we're building in that regard.

So right now, in terms of total sales, your mints and refreshments would be larger than your sugar confectionery business?

No.

Can you give us a sense of-- relatively speaking, is it 2 to 1, 3 to 1, just to have a sense?

We really don't get into that level of specifics.

We've said all along we're number one within chocolate.

We're number one within non-chocolate or sugar confectionery.

Everyone knows we're number three in refreshment overall.

But what we're talking about is having stabilized our total refreshment business because of the terrific innovation and growth on the intense mint side of things.

And that's where the innovation's coming.

Okay.

And just one question for Dave.

The $250million share buyback, is that in addition to the buybacks you need to do to offset options, or is it part of it?

No, the options exercises, we'll continue to replenish as those come up.

The $250 million buyback is on top of that.

Okay, and can you just repeat the number for the first six months in terms of what you had you to buy to offset stock options, you say 150 million?

I think it was a net 154.

If you give me one second, I'll find exactly that page.

It sounded pretty high.

Yes, if you'll remember-- it's an accumulation in the first half.

I got it right here.

Give me a second. 223 million gross and then after-- after the cash that we get back from the optionees, it was $154 million.

Okay, thanks.

So it was a net $154 million.

But, remember in the first quarter, or in the first quarter conference call when we talked about that, we had a number of optionings that were expiring out there because of the timing of vesting related to people who retired in 2001.

That was why we believe between the good stock price appreciation we've had, plus that back, that's why we believe we had such a large option in number of option shares in the first quarter.

Okay.

One last question.

Rick, I know you don't talk too much about the competition.

But with all these market share gains and great performance you're having in chocolate, what's happening with Mars?

I mean are they becoming more agressive from a price point or do they really follow your price increase?

Are they spending, are they allocating more direct people to their merchandising?

Just give us a sense in terms of how your competition is responding to your great performance.

Well, I think there's a couple things.

We won't get into too many of the specifics.

And as we've asked from time -- we've been asked from time to time, we see more rational pricing broadly in the marketplace than not.

Once in a while there will be little skirmishes that flair up in certain geographies with certain customers.

But as we continue to focus on the higher growth and more profitable classes of trade and customers, that's what we pay attention to, not necessarily is there an aggressive pricing in one customer and one geography.

So Pablo, let me leave it at that, if I might.

Okay.

That's good.

Thanks.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from David Driscoll with Citigroup.

Hi, good morning.

Hi, David.

Good morning.

Thanks for taking the call.

I know we're a bit over the hour timeline.

I'll make it quick.

The first thing I wanted to ask you was simply that your expectations for price realization for the second half, would it be fair to say that the 3% that we saw this quarter would continue for the back half of '05?

I don't think you can really look at it on that basis.

If you think about the second half of the year is a much larger sales base.

The mix of products is different as you go out into the out part of the year because of the Halloween shipments and some of the holiday, there's less loose bars.

So I don't think I would give you a number to think of it in that perspective.

We tend to look at it as holistically we're -- across the entire portfolio, we were looking at a 3% list price gain in the entire year, across the entire portfolio.

That's still where we're headed.

That sounds to me, if we have less loose bars and more package, then the number would be less than 3%.

David, it's really hard to say because we also took the increase on the package candy, but, again there are certain merchandising price points that we'll trade spend on.

So it's a blending of promoted price points as well as a list price increase, and it's a product mix issue.

I would really rather not get into any of the specifics other than to say that we continue to track where we thought we would for the entire year.

Okay.

On-- Rick, you said basically that your cookies ACV was only, I think you said 40 or 50%.

About 40%, that's right, David.

Yes, Take 5, when you launched that product, reached, I think, 90% ACV almost immediately, just within a few months after the launch.

So cookies, in comparison to a Take 5, would appear to be, you know, much less successful.

But I think you presented this as an opportunity rather than a disappointment when I look at it compared to Take 5.

How do you respond to that?

There's a couple of things.

First off, Take 5 was a one-item loose bar entry in the-- in December of last year to offer to all classes of trade, all at the same time.

As we said when we would introduce cookies, we were going against the incremental category opportunity where the category wasn't as well developed, yet Hershey was very strong.

Primarily that meant drug, some mass customers and convenience stores.

We have better than a 75% distribution currently within the drug class of trade.

It's 90% plus within mass, and we're building it within convenience stores.

I won't give that specific number, but it's close to 50%.

The food class of trade is much lower than that, so the weighted average is what gets us to about the 40%.

We do not necessarily want to wake up and have a 90-plus percent ACV level because for us with cookies, it's where can we capitalize on the indulgent single-serve variety that leverages Hershey's instant consumable leadership primarily in the high growth classes of trade.

And that's the discipline, so we don't get into price competition with some of the other cookie competitors.

My final question relates to your 2006 earnings guidance and sales guidance.

You indicated in the press release 45 to $50 million was the savings, the ongoing savings, from your restructuring program, with most of it going into your U.S. snack business.

Now, this means to me that what-- when I look at the components or the breakdown of the sales growth in '06, that more of the sales growth is really coming from, quote, unquote, snacks than would be coming from confection as we go forward.

Am I reading this correctly?

I don't-- I'm not sure what you're reading.

We did say the savings would be $45 to 50 million.

A portion of savings are going to be invested in key growth brands platforms and customers in the U.S., both confectionery and snack.

We'll also invest in selected international markets, primarily through customer alliances.

And a portion of those savings are going to fall through the bottom line.

I don't think we said anything about sources of growth for 2006.

What we did talk about was what the savings amount would be, and as I said, just how we might -- how those savings might be redeployed.

Just let me clarify.

So it specifically says a substantial portion of these savings will be invested in key growth efforts in the U.S. snack market.

It doesn't say confection, it says snack in the press release.

So then my read on this is that 45 to $50 million for a company the size of Hershey is a substantial number.

So then therefore, the thesis being that if you've got to earn a return on this, you're really going to be driving a significantly higher portion of the overall sales growth from the snack section.

No, I think, David, to make sure that we clear this up, we're saying that the estimated ongoing annual savings when fully realized will be 45 and $50 million.

A substantial portion of this will be reinvested in the business.

Our three growth priorities are to continue to expand our leadership within U.S. confectionery, build critical mass within the U.S. snack market and be smart about where to profitably invest in key global businesses.

Those are the three priorities.

When we do refer to the U.S. snack market, we're talking about the broad $65 billion snack market inclusive of confectionaries, which is the largest share of that market.

Okay, very good.

Thank you very much.

You're welcome.

Thanks.

At this time there, are no further questions.

Are there any closing remarks ?

Thank you, Katie.

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

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

As a reminder, our third quarter sales and earnings release and conference call is scheduled for October 20th, 2005.

We'll release earnings at 7:30 a.m. that day and our conference call is set for 8:30 a.m.

Thank you for your interest, and good day.

This concludes today's Hershey Company second quarter 2005 conference call.

You may now disconnect.