好時 (HSY) 2005 Q3 法說會逐字稿

Good morning.

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

At this time I'd like to welcome everyone to the Hershey Company third quarter 2005 conference call. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Edris, you may begin your conference.

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

Welcome to Hershey's third 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.

Dave will provide the specific details and bring you up-to-date on our business realignment program to advance our value-enhancing strategy, and then we'll take you questions.

We welcome those of you listening via the webcast.

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

These statements are based on current expectations which are subject to risk and 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.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 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 measure as a 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.

Therefore, we will be discussing the third quarter and nine-month results for 2005, excluding the pre-tax charges of $101.4 million or $0.27 per share diluted associated with our previously-announced realignment program which were recorded in the third quarter of 2005.

Also, the benefit of the $61.1 million or $0.23 per share diluted tax reserve adjustment recorded in the second quarter of 2004 is excluded from the nine-months comparison.

Any future projections of net income will also exclude the impact of charges related to our previously-announced realignment program.

To aid the listener, we will use the words "from operations" when referring to financial measures excluding these items.

Additionally, we will use the term "organic" when discussing sales excluding the impact of our recent acquisitions.

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

Rick.

Thanks, Jim, and good morning.

Our results for the third quarter were particularly encouraging given the difficult conditions within the marketplace.

Regarding hurricanes Katrina and Rita, they had relatively little impact on our business during the quarter.

For prospective, the affected area accounts for only 1% of retail ACV for the Confectionary category.

The longer-term impact on both consumer behavior and input costs continues to be assessed.

Most important, Hershey will take the appropriate steps to ensure the profitable growth of our business.

Turning now to the specifics of the third quarter.

It's clear that the momentum from the first half of the year has continued.

Strong top-line performance with tight expense control delivered record profitability with diluted earnings per share from operations up 13.6% versus the year-ago period.

A combination of new product innovation, strong seasonal sales and higher net price realization drove organic sales growth of 6.5%.

This growth was broad-based with strong gains in Chocolate, Sugar, Confectionary, and Mints.

In Snacks, both Cookies and Snack Barz added distribution and increased retail velocity.

Across our portfolio, we're driving growth in the more profitable single-serve format.

Our seasonal business is off to a good start.

Fall harvest and Halloween shipments were in the high single digits on a year-to-date basis with sell-through at expected levels.

This is generating solid gains in our seasonal market share.

The third quarter did benefit from some early holiday shipments at the request of our customers.

These earlier shipments enhance our competitiveness in two ways: First, product shipped earlier gets merchandise sooner, thus leading to quicker sell-through, and then the customer then replenishes with our regular stock.

Second, this quicker sell-through will free up the supply chain for our major new product introductions later in the quarter.

More on these new products in a moment.

Acquisitions added 2.6% to the total top-line sales growth.

Turning now to our marketplace performance.

During the quarter we experienced solid retail growth across the total snack market, clearly out pacing the competition.

Within the food, drug, mass, excluding Wal-Mart and convenience store channels, our retail take-away in total Snacks increased by 4%, resulting in a market share gain of 0.3 points.

This performance made Hershey the fastest growing major snack company.

Now turning to our Core Confectionary business.

For the quarter, Hershey's market leadership increased by 0.7 points, better than three times the increase of the next competitor.

We've now gained confectionary share in every measured channel across the four, twelve, year-to-date, and 52-week time frames.

This performance is being driven by continued momentum behind our strategic initiatives.

Here are a few specifics: First in the highly-profitable instant consumable format, our take-away increased by 4%, expanding Hershey's leadership by 1.9 points to 33.6%.

Two, our leadership within the Chocolate segment increased by 0.9 points during the third quarter and is up 1.2 points on a year-to-date basis.

Despite some challenges within the convenience store class of trade, we continue to outperform the competition.

Total C-store take away increased by 4% led by a gain of 6% in instant consumables.

This resulted in a market share gain of 0.5 points.

Hershey has now gained market share in convenience stores for 44 consecutive quad week periods.

Next, within the drug class of trade, we've gained 1.4 share points in both the 12-week and year-to-date time frames.

In this high-growth channel, Hershey has now gained share in 16 of the previous 17 quad week periods.

Next, innovation within the Ice Breakers franchise increased our leadership of the Mints segment by over five points.

For the quarter, Hershey had three of the top five fastest-turning new items and six of the top ten.

Within the broader Snack market, our Cookies and Snack Barz are gaining momentum.

Snack Barz have achieved an 8% market share in both convenient stores and drug stores, two very attractive channels.

Cookies now have over 4% market share in these same two channels and are clearly benefiting from distribution gains and the start of advertising support.

Take-away's up 30% in the post-advertising period.

Leveraging our scale brands in both Confectionary and Snacks is paying off.

For example, in the profitable convenience store channel, we have now linked distribution on single-serve snacks to our strong king-sized confection lineup to deliver an [impactful] dollar merchandising event.

During the quarter, Reese's was the fastest-growing brand within the entire Snack market, up 13.2%.

This reinforces the brand's broad appeal across multiple consumer snack segments.

In terms of brand support, total marketing spending was lower for the quarter as we better utilized consumer spending in a period where television viewing is down by about 7%.

For the quarter, our trade spending rate, despite higher selling prices, remained at about the same levels versus the year-ago period.

This reflects good discipline around pay for performance programming and the allocation of resources based on customer profitability and long-term growth potential.

Regarding profitability for the third quarter, the strong sales performance, combined with solid cost control to deliver 12% increase in EBIT from operations.

EBIT margins improved with a 60 basis point gain.

With the benefit of fewer shares outstanding, this EBIT growth led to a diluted EPS from operations of $0.75 per share, up 13.6% versus last year.

Through first nine months of 2005, our performance has been well balanced with record gains in sales, market share, and profitability.

Net sales are up 10.2% with organic growth of 7.4%.

EBIT from operations has increased by 13% with diluted earnings per share from operations up 15.8% for the year-to-date period.

We're anticipating a solid fourth quarter given the good start to the important seasonal period and the up-coming introduction of several new products.

Here are a few specifics: This month in October we expanded the successful filled Kisses platform with the introduction of peanut butter filled Kisses.

To add additional scale to this platform, there will be two limited additions, cherry cordial cream-filled Kisses in the fourth and coconut-filled cream Kisses in the first quarter of 2006.

In just four weeks we begin shipping Kissables, candy-coated mini Kissables in single-serve packages.

This product will be launched simultaneously across the United States, Canada, and Mexico.

Single-serve Kissables is a perfect item for convenience stores, given the on-the-go nature of this channel.

The absence of a single-serve Kisses products has previously limited this brand's presence within C-stores as we currently obtain less than 3% of Kisses retail take-away from C-stores.

This compares to much higher levels of 35% for Reese's and about 20% for Hershey's, so there's clearly upside for Kisses in convenience stores.

And Kissables has been well received by the convenience store class of trade.

Initial orders have resulted in the largest day one order ever for a Hershey new item.

There's also exciting news on Reese's, our largest brand.

In November, we're introducing Reese's caramel-filled Peanut Butter Cups, thus combining the three most popular confectionary ingredients.

To further extend our successful Ice Breakers franchise, we'll be introducing Ice Breakers Ice Cubes Gum.

These are small cubes of highly-refreshing gum that combine the cold tasting sensation of Xylitol imbedded with liquid-filled capsules.

The recent acquisition of the Scharffen Berger Premium Dark Chocolate Company underscores our commitment to this high-growth, and profitable segment.

Dark chocolate is a $700 million segment growing at double digits.

Hershey's well-positioned with a 45% market share in measured channels.

We have several initiatives planned to build upon this leadership.

We have recently introduced a six-item line of Hershey's Extra Dark Chocolate products with a 60% [Catal] content.

Scharffen Berger will be expanded as we add new items and retail distribution to this high end platform.

In the area of consumer education, we've completed several studies within the medical and nutritional professions.

Yesterday we released the findings from a study conducted at Yale University's prevention research center.

This study reaffirms the link between dark chocolate, which contains natural flavinol antioxidants and health benefits.

These results will enable us to better communicate with consumers the positive aspects of antioxidants in cocoa and dark chocolate.

Overall, we see dark chocolate and the benefits of antioxidants as a sustainable platform within the health and wellness arena.

Unlike low-carb type products, dark chocolate speaks to the presence of a positive, meaning the antioxidants, as opposed to the absence of a negative, such as calories, carbs, et cetera.

Turning now to our Snack businesses, we'll continue to build retail distribution of Snack Barz and Cookies behind new flavors, additional pack types and increased consumer support.

One of our key growth opportunities is within the Snack Nut segment.

For prospective, 44% of Hershey's current portfolio contains nuts in some form.

As such, we clearly have both the technological capabilities and the broad-scale consumer acceptance with nut-based products.

To capitalize on this opportunity, we're pursuing two initiatives.

First is to strengthen our model lower franchise with value-added new items and broader retail availability.

While we've made some progress with this business, particularly in gaining distribution, our margins aren't where we expect them to be, and several margin improvement plans are underway.

The second initiative, that we're announcing broadly today, is the introduction of Really Nuts.

This is a 7-item line of single-serve sweet and salty nuts.

Flavors include: Reese's honey-glazed peanuts, Reese's trail mix, Hershey's chocolate cocoa peanuts and Mauna Loa trail mix.

This line offers consumers Hersheys promise of great taste while providing retailers with a major trade-up opportunity versus competitive snack nut products.

As with most of our Snack entries, we're initially targeting the faster-growing, more profitable classes of trade.

With a retail price of less than $1, the Really Nuts platform will add scale and portfolio breadth to Hershey's growing line of single-serve snacks that are retail for less than $1.

We currently have unit share leadership within this segment, and during the thir -- third quarter we increased our leadership of single-serve snacks for under $1 by 1.4 points.

To compliment these marketplace initiatives, we expect to maintain effective cost controls across the business system, thus yielding a gain in operating margins.

Therefore, for 2005 and total, we expect organic nut sales to increase a rate -- at a rate above our long-term goal of 3% to 4% and diluted earnings per share from operations should increase at a rate greater than our long-term range of 9% to 11%.

Looking to 2006, our objective is to build upon the momentum that's been established over the past several quarters.

Plans reflect a step-up in new product innovation while capitalizing on key growth opportunities with the more profitable classes of trade.

Against this backdrop of strong marketplace momentum are broadly higher input costs.

We're now developing plans to address these cost pressures.

These plans will include both productivity initiatives as well as the benefit of our -- of our recently announced restructuring program.

We're confident in our ability to achieve organic net sales growth in 2006 somewhat above our 3% to 4% long-term goal with an increase in diluted earnings per share from operations slightly above 9% to 11%.

Now Dave West will review the third quarter in greater detail.

Thanks, Rick, and good morning, everyone.

As Rick had described to you, our momentum continued in the third quarter, despite a more difficult environment.

Sales for the third quarter of 2005 increased by 9.1% with acquisitions contributing about 2.6%.

The 6.5% increase in organic sales was achieved through strong Core Confectionary volume gains behind good Halloween sales as well as in shipment of holiday items.

We also achieved net price realization during the quarter from the price increase instituted last December, especially for packaged goods.

Our international business is also delivered healthy sales growth and benefited from favorable exchange.

Based on current momentum and the new product introductions planned for the fourth quarter, we expect our organic sales growth for the year to be above our 3% to 4% long-term range for 2005.

Gross margins as reported for the quarter were down 180 basis points at 37.9% versus 39.7% in 2004.

This includes a 120 basis point impact for realignment costs primarily related to the closure of our Las Piedras facility.

On a pro forma basis, gross margin was 39.1%, down 60 basis points.

The acquired Lorena and Mauna Loa businesses depressed margins by 70 basis points.

The integration of Mauna Loa into our business systems is now largely complete.

Our top-line results have been decent, but we have not yet achieved the consumer price value equation that we need on a go-forward basis.

Plans are being put in place to improve profitability on this business.

So, excluding the acquisitions, margins expanded by 10 basis points.

As list price realization and productivity gains combined to offset higher input costs as well as a mix shift, which resulted primarily from stronger seasonal sales.

Selling marketing and Admin. expenses decreased 120 basis points as a percentage of net sales coming in at 16.1% versus 17.3% last year.

This resulted from the leverage of higher sales to our business system.

Direct brand expenditures declined a bit during the quarter, but trade promotion did increase slightly on a rate basis.

We con -- we continue to be very efficient in deploying our brand support, generating top-line growth being an effective bundle of trade and consumer support programs.

EBIT from operations of $315 million increased by 11.9% compared with the third quarter of 2004, and the EBIT margin from operations was 23% versus 22.4% last year, a 60 basis point improvement.

This increase continues to demonstrate the leverage we are creating across our business system.

Interest expense for the quarter increased to $23.7 million, versus $18.3 million in last year's third quarter, primarily reflecting higher short-term borrowings to fund continued share repurchases and additional funding of our pension plans.

The effective income tax rate for operations in the third quarter of 2005 was 36.4%, down a bit from last year's 36.8%.

Weighted average shares outstanding on a diluted basis for the third quarter of 2005 were 214.8 million shares, versus 252.7 million shares for the third quarter of last year, leading to an EPS of $0.75 per share diluted from operations, compared with $0.66 per share diluted for the first quarter of 2004, and that's an increase of 13.6%.

Now let me give you a brief recap of the first nine months results.

Net sales increased by 10.2%, with 2.9% from acquisitions.

This reflects a very good balance of gains and price realization, Core Confectionary volume, our efforts in Snack adjacencies and our international businesses.

Gross margin from operations which excludes the impact of acquisitions and the restructuring charges was 39.7%, versus 39.4% last year, an increase of 30 basis points.

This 30 basis point gain reflects price realization and productivity gains more than offsetting input cr -- input cost increases and a mix shift resulting primarily from strong seasonal and take-home sales.

SM & A declined 80 basis points as a percentage of sales, coming in at 19.1%, versus 19.9% last year.

This is a result of leveraging higher sales over a stable cost base, more efficient marketing spending, and tight control of administrative expenses.

Net income from operations increased 11.5% and EPS diluted from operations increased 15.8% to $1.61, up from $1.39 a year ago.

Our economic return on invested capital on a rolling 12-month basis increased 130 basis points to 21 -- to 20.1% from 18.8%.

Let me turn to our balance sheet and cash flow.

Versus prior year, the impact of the acquisitions and strong seasonal sales, both Fall, Harvest, Halloween and Holiday, did increased our accounts receivable, although our balance remains over 90% current.

We will be -- we will be collecting and reducing these balances in the fourth quarter.

Inventories were higher due to acquisitions, timing of raw material deliveries, and the build for significant Q4 new product launches.

During the quarter we spent $97.7 million to purchase 1.7 million shares in our open market share repurchase program.

Of this amount, about $11 million came from the previous authorization which has now been exhausted, and $87 million from the $250 million authorization approved by the Board of Directors in April.

Thus, we had approximately $163 million remaining on the current authorization at the end of the quarter.

Shares acquired through our repurchase programs are held as treasury shares.

During the quarter, we also repurchased an additional $61 million of our common stock in the open market to replace shares issued over the last several years in connection with employees exercising stock options.

Over time, our goal is to repurchase all such shares and we are current at moment.

So total repurchases during the quarter were $159 million.

Given interest and discount rates as well as equity market return assumptions, we elected to fund our pension plans with an additional $179 million during the quarter.

This brings total year-to-date fundings to $274 million.

With these uses of cash, our debt balances have increased by $638 million this year.

During the quarter we issued $250 million of 10-year notes in August, principally to retire notes which matured in October.

We also entered into a short-term facility in the amount of $300 million, which expires on December 30th, 2005.

During the quarter, capital additions, including capitalized software were $48.1 million, and through the first nine months totalled 148.8 million.

For the full year, we continue to expect total capital additions to be in the range of 190 to $200 million.

Depreciation and amortization totalled $65.2 million in the quarter and $163.2 million for the first nine months.

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

Dividends paid during the quarter were $58.4 million, bringing the nine-month total dividend paid to $163.7 million.

Now let me give you a pickup date on the realignment program, which we announced in July.

In September we completed our voluntary work force reduction programs in the form of early retirement and mutual separation packages.

These initiatives will resu -- result in a reduction of over 5% of our salaried work force.

The closure of our Las Piedras, Puerto Rico gum facility also remains on track for the fourth quarter.

During the third quarter we recorded $101.4 million of pre-tax charges or $0.27 per diluted share. $16.5 million was recorded in cost of sales with the balance in the business realignment charge aligned.

Our initial estimates of the total charge of 140 to $150 million and 45 to $50 million of on-going annual savings are still appropriate.

We will begin realizing the savings in 2006.

Approximately 90% of the charge will be recorded this year with the remainder in 2006.

Let me wrap up and then we'll take your questions.

Our performance for first nine months that's been strong and we anticipate a solid Q4.

As such, our organic top-line growth for the year will exceed our long-term 3% to 4% goal and diluted EPS from operations should increase at a rate greater than our 9% to 11% range.

Excluding the impact of the realignment and acquisitions, gross margins from operations will expand, although not quite up to our goal of the 40 basis point expansion we achieved last year.

As we look forward to 2006, we believe we'll achieve sales growth somewhat above our 3% to 4% long-term goal.

We are anticipating our input costs in a period of economic uncertainty.

We're now developing plans to address these issues and we expect to deliver diluted EPS from operations slightly above our 9% to 11% long-term goal in 2006.

Finally, I want to tell you all today that Jim Edris has announced his plans to retire.

On one hand, I am very thrilled for Jim as he begins to prepare to open the next chapter of his life.

However, on the other hand, we'll all certainly miss his experience, the value of his insights, and the relationships he's built during his 30-year career with Hershey.

We'll be announcing our transition plans shortly.

Jim has agreed to stay with us into next year so we can best provide continuity to shareholders and the investor community and do our best to continue the many fine relationships Jim has fostered over the years with Hersheys.

With that, Operator we'll take the first question please.

[OPERATOR INSTRUCTIONS] David Driscoll, Citigroup.

Hi, good morning, everyone.

Good morning, David.

Good morning, David.

I just wanted to ask you a question here, and I apologize if this will turn out to be nit-picky, but it appears your language has changed in your guidance going forward for 2006.

Before you were using the phrase "somewhat above" and now we've changed our phrase to "slightly above" and so forth.

Can you just-- I hate guessing as to what these words mean.

Can you help me out a little bit here by telling me what -- what's going on with the change in verbiage from second quarter to third quarter?

David, there's no -- there's no intent for us to change anything that we had indicated earlier.

We still believe that we have good top-line momentum and that, as we look at our organic sales growth for next year that we can be-- that we'll be somewhat above that 3% to 4% range.

On the bottom line, as we continue to develop our plans to address some of the cost pressures in the marketplace, that we will be slightly above our long-term 9% to 11% guidance.

I'd assume "slightly" and "somewhat" are interchangeable.

You would.

Okay, so then -- then -- cause -- your -- quite clearly, I think everyone is going to have the question today that the cost side of the equation has changed from your last conference call rather considerably.

So therefore, you know, from all of us out here not knowing exactly how far forward you are hedged.

We would then, make a presumption that it did seem logical to me, when reading the press release, that you had changed the language in the guidance, expecting higher costs to reduce it from your prior expectations issued in the second quarter.

But Rick, you're saying that that's not the case.

Your expectations have not changed?

No, I think what -- what's important is things have changed.

And what we've said is we -- we're all being hit with broadly higher input costs, and as we said in the press release and our comments, we are now working through plans to ensure that we stay on track with the commitments we have towards our business.

I don't want to get too much specifically into that in terms of "slightly", "somewhat", et cetera, I think the important thing is we still feel good about our business, we are facing higher input costs, and we are now developing plans so that we can maintain the level of performance that we've indicated.

Given your very significant exposure to the high-margin sales in C-stores, right now one of the major concerns, I think, that is also out there is a reduction in visits by consumers to C-stores because of gasoline prices.

Can you comment on what you saw in the third quarter?

I know you said those C-store sales were up, but if you could provide a little more detail here, and then your expectations as to what your -- your experts within the Company think that the trends will be going forward because of these higher gas prices?

I think that would be quite helpful.

Sure.

I think it's important to -- to reaffirm that we believe there -- there's long-term profitable growth for Hershey in both Confectionary and Snacks in the convenient store channel, contributing about 17-plus percent of our take-away.

While we did see some overall slowdown in category sales within C-stores during the quarter, our take-away for Confections alone was up 4%.

Within that 4%, our take-away on instant consumables were up for [standard bars] -- excuse me -- loose bars were up 6%.

One other number that's important, total Hershey Snacks within convenience stores, now combining Confectionary as well as the addition of our Snack Barz and Cookies, our total convenience store take-away for Snacks was up 7%.

Here's what we still like, the prospects for the channel.

Our total share in convenience stores from Confection is still a couple of points below our total FDMX share, so we see upside in that regard.

Secondly, as we talked about before, we have this Hershey's Top Performer program that awards C-store retailers for new item placement, merchandising, et cetera.

In 2005, the retail stores on this program were up about 60% versus year-ago, and the estimate for next year's will be up about 17%.

One of the key drivers of our business within convenience stores has been new items, and therefore the placement of new item racks.

In the fourth quarter of 2005, we will have placed 10,000 new item racks, and it's estimated that the first quarter of 2006 we will place 8,000 new item racks.

And again, the majority of our new items are instant consumables, which -- which play very well within convenience stores.

So the bottom line for us is, while it has slowed down somewhat, we continue to gain sales and share; we continue to add portfolio breadth to C-stores, picking up new item distribution; and we're going to continue to emphasize the channel going forward.

And if I may just ask one last quick -- quick question.

This is in response to your prepared remarks.

You mentioned that the seasonal business that you've had was shipped earlier.

This sounds to me like the seasonal period has lengthened.

I -- I have it back in my notes that -- that you had really talked to us previously about this by saying that the long seasonal periods that were -- that had gone on in years past were not a good thing as they where lower-margin candy sales.

And that it was your objective to tighten up those seasonal periods.

But now I feel like, today, you're telling me that you've gone the other direction and now you're lengthening that seasonal period again.

Can you make a few comments here?

Sure, a couple things.

We're not talking about or expecting the holiday season to lengthen.

Here's what's happened.

In Fall Harvest and Halloween we've had very good performance to date, and in fact our share over the past four weeks on an FDMX basis ending 10/9, the four-week share for Hershey is up 1.42 share points in FDMX, which is primarily more seasonal than C-stores.

So we're seeing good -- good early take-away in our seasonal merchandise.

That talks about Fall Harvest and Halloween.

What we did mention is that some customers requested earlier shipments on their holiday product, and as the category leader, I'm -- I'm more than happy to satisfy customers' request for early shipments on holiday.

As we said, it's going to get sold through more quickly and then it will free up the supply chain for -- for the new items that we described.

Another thing that's important.

We're not talking about expanding the season, we're talking about expanding our market share.

That's our strategy, is to expand our market share within a season that we view long-term is contracting, which is why the majority of our new items innovation has been outside of seasons.

Lastly, I would like to thank Jim Edris for all of his help and really wish you all the best.

Thanks a lot, everyone.

Thank you.

Thank you.

Rob Campagnino, Prudential Equity Group.

Good morning, gentlemen.

Good morning.

Just to follow up on one of Dave's question, and Rick, I know you don't provide quarterly guidance.

I know you don't manage the business for the short-term.

I don't want to debate the meaning of "slightly" and "somewhat", but could you give us an idea as to where the quarter fell with respect to your internal expectations?

In terms of the third quarter?

Third quarter, yes.

It was -- it was a good quarter.

I mean, in terms of -- I'm not going to compare it to any numbers we might or might not have had, but I think the important thing is we feel good about the balance between top-line growth market share and profitability.

While Dave had mentioned what was happening in the gross margin line, as we've talked about, expansion of operating or EBIT margins, I think were up 60 basis points in EBIT margins for the quarter.

That's were we get leverage through the business system and through the P&L..

If you think about what might be a drag on -- on gross margins as we introduce new snacks and we're just getting up and running in the initial phases, they should have slightly lower margins.

They will down the road.

So in terms of comparison to our expectations, I -- I won't comment on that other to say that we feel that we had a very good quarter and we like the momentum and the broad-based performance that we had.

I think that's more telling for us, is how broad the performance was.

Okay, that -- that's fair enough.

And just as a quick follow-up.

This is your second quarter of -- of excellent performance in the SG&A line, and you did talk to us a little bit about what was driving that.

How should we manage our expectations around that metric going forward?

I guess the question is basically, is that sustainable?

I think -- on a ongo -- on a go-forward basis, you probably won't see the same type of reduction in SM&A.

You know, our goal has always been to keep SM&A as a percent of sales flat to slightly down.

We still believe that that's the right approach for us.

With G&A going down, the admin. part going down, and the brand investment part increasing, as you look forward to 2006, as we've gone through the realignment initiatives, we are taking out approximately, let's say, about 5% of our salaried work force on a net basis.

So you should see a -- an improvement in that metric next year, probably a little bit more aggressively than the, you know, the on-going flat to slightly down because we will have some significant reduction in admin expense for next year.

Okay, thank you for your time this morning.

Thank you.

Terry Bivens, Bear Stearns.

Hey, good morning, everyone.

Hi, Terry, how are you?

Hi Terry.

Pretty good.

Hey, listen, just for the record, I went back and checked your second quarter press release.

The wording is exactly consistent, slightly above the 9% to 11% long-term range, just for the record.

That was a comment.

Question is this: Rick, you know, you've talked before about the pricing chaos in the Bar catagory .

There's a pretty good sense there that consumers aren't really sure what price points are.

As you look into your 2006 guidance, have you built in any implicit price increases?

Or have you haven't, do you feel there's ample price flexibility still in that regard?

Terry, I won't certainly comment on -- on any potential pricing actions or -- or lack thereof.

I think what's important, as we discussed previously, the way we look at pricing is from a broader strategic stand point of price realization. therefor it could contain -- and we have, in the past, done things such as raise list price, better manage our trade promotions, shift the mix to more profitable pack types, do price -- or weight-outs, things of that nature.

So when we think about pricing as a strategic initiative for us, we think of it more broadly in terms of price realization, but I certainly wouldn't comment on any specific actions in that regard in the current or for next year.

Okay, but would you agree there is some flexibility there?

No.

What -- what I will say is that over the past quarter, at retail, we've seen about a 5% increase in average price paid on a take-away basis across the universe, and that's on loose bars, and again, our strategy, all along has been, let's innovate into price increases.

When -- when you had used the term "chaos", I think what I was referring to that there's so many single-serve products out there in bar forms for consumers to select from, whether it be in -- in health and wellness, certainly wether it be in [dulgence] variety across the category, it's -- it's much different from everybody priced at the same level going up at the same amount and going up at the same day.

And I think the breadth of our distribution across so many different channels, that have many different pricing strategies, makes it a little bit different in that regard.

Okay.

And just one quick one for Dave West, perhaps.

Debt is a little bit higher now.

How does that affect your outlook on your uses of free cash?

As we've gone through, we had just filed a shelf registration, and we extended a new $300 million short-term facility, and as we went through that process, our ratings have been reaffirmed.

We have a very strong balance sheet.

We are generating good operating cash flows.

I think what's taking the balances up in the short term, Terry, is really more around share repurchases and the pension fundings.

So nothing structurally has changed, and we still have the same flexibility that we've had.

So I don't think it changes our outlook any in terms of -- of looking -- continuing to look for bolt-on acquisitions that make some sense and that -- that are accretive.

And also then, we will continue to look at CapEx to fund innovation, but I don't think our flexibility has changed in any way at this point in time, Terry.

Okay, great.

Thanks very much.

Thank you, Terry.

Eric Katzman, Deutsche Bank.

Hi, good morning, everybody.

Hi, Eric.

I think the biggest surprise is Jim's announcement. (laughter)

Well, I hope that that doesn't move the stock in any one way, shape, or the other, but we'll see.

Well, Jim, congratulations.

You've done a great job over time.

Best of luck.

Thank you very much.

I guess just kind of dealing with some specifics here, the core was up 6.5.

Rick, did you just say that pricing was up five in your -- in Chocolate, single bars?

And should that mean that pricing for you is maybe up in total three to four?

No.

What I was referring to was, I think Terry had asked the question, in terms of pricing impact and things of that nature, and what we said was that on a measured channel -- and again, this is FDMxC, so it's still only picks up about 60%.

Loose bars had an average price increase of 5%, that has nothing to do with shipments or net sales in the quarter.

The best way to think about the quarter is about 1/3 from price and about 2/3 from volume, of the 6.5 that you were asking about, Eric.

Right.

Okay, so we have, maybe 2% price and 3.5 or so -- sorry, four to five from volume.

And how much of that four to five in volume is early shipments on the season?

About 1% on the Holiday stuff.

Okay.

So that's not that much.

Okay.

And then, I guess the question was already asked about the gas price impact.

And Jim, you and I have been kind of trading some emails about this -- about this -- the hedging stuff.

And I -- I know you're somewhat reluctant to talk about it, but given the volatility out there in the market, I'm kind of wondering, Dave, if you could maybe comment yes or no on whether this is right, but again-- and this is all on the -- the proper way to do it.

But you've said in your 10-Q's that you get some gross margin benefits over the last few years kind of flowing through from comprehensive other income.

So how does volatility, I guess, affect that flow-through in terms of what -- whatever you're hedged or however long you're hedged?

Like how does -- how does that -- I mean, the way I understand it, as you produce items, you kind of get the credit from the comprehensive inc -- other income and kind of flow it through because your spot -- spot price is above where you're hedged.

So you have that kind of -- that -- that kind of like bucket to mark to market.

Is that right?

Eric I think -- when -- as we think about our overall -- our over-arching program of -- of looking at the entire basket of inputs, we -- we are hedged on a number of inputs, some of them commodities out -- some out anywhere from three to 24 months.

And as we receive those -- those -- as we receive those materials and then -- use them in production, at the time that we use them in production, that's when we recognize that -- that, you know, that hedged advantage or disadvantage.

And in a period of -- of increasing volatility, I think what you, you know, what you see is, depending on how -- how far into the past you bought thinks, you know you can have bigger spreads, both positive and negative versus what the current market is.

So I -- I think that -- would you expect to see more volatility in the overall kind of market-to-market aspect of commodities for everyone in this kind of market?

Yes, you would.

But I think what we try to do is we manage our -- our P&L and think about pricing and other aspects of our business over time is, what we're trying to do is get cost certainty.

And what -- the hedging program's really intitled -- intended to do is get rid of the volatility that I just mentioned.

And so I think we've done a good job over -- of that over the past.

We have visibility into 2006 at this point, although certainly not complete visibility because the market is -- is fairly volatile out there.

So I think what -- to answer your question more specifically, what we really do is try and price to the entire basket or assess the cost structure of the Company and the initiatives to that entire basket of -- of inputs and try and take that volatility out.

Okay.

And then there's one other point that I wasn't exactly clear on.

I think you said that advertising spending was down a bit, but trade was up.

In terms of the impact on SG&A.

But I thought trade promotion was a deduction between gross and net sales, so why would that impact SG&A?

No, we actually -- what I was talking about in the SM&A, the direct brand expense, which is advertising and consumer was down, but then I -- I made a following reference to total brand expense, including trade promotion.

Trade promotion was up slightly on a rate basis in the quarter.

You're right, it's in the SM&A line, but I was talking to the -- the entire brand spending bundle.

Okay.

So if you took those two together, even though they're not -- there not together in SG&A?

Correct.

Okay, all right.

So can you say how much advertising was down in SG&A?

No, we don't break out any specific components such as that, Eric.

Okay, all right.

Thank you.

Thank you.

Chris Growe, AG Edwards.

Good morning.

Good morning, Chris.

I just have two questions for you.

First off, in terms of the categories where you've taken pricing up, I know Barz and packaged candy are two of those.

You gave some share fares, I was curious if you've seen a real slowdown in volume as a result?

Seems like you're balancing that pretty well across the business, but are those two sub-segments of the category slow because of pricing in your view?

We typically only relay dollar growth.

As we said, I think what's important in the higher-growth channels such as C-stores, we are seeing some continued increase in unit sales.

We're seeing some slowdown, and it's across the segment, as within the food class of trade, as I think has been backed off of higher promotional pricing.

And for us, that's not our highest growth, nor more -- the most profitable class of trade, particularly for loose Barz for more broadly instant consumables, so we've seen very good take-away and dollar growth -- take-away -- excuse me -- dollar take-away and share growth in drug mass, excluding Wal-Mart and convenience stores.

Those are the three reportable channels.

So well above 6% in -- in each of those three.

Okay.

And then have you given even an indication or a general number around what new products have added to your top line, in terms of volume or -- or I don't know how can you quantify that -- or dollar sales, whatever?

We haven't specifically given that number.

We continue to have very good performance, and I think we're excited about the launches that are coming in the fourth quarter.

Our confectionary volume was a good contributor in the quarter, and you know, I think what you'll see coming from us in terms of Kissables and peanut butter-filled Kisses in the fourth quarter.

We're very excited about the new items.

And my last question is, you've had about six quarters now of inventory growing at a much faster rate than sales and receivables also have jumped up.

I know you gave a little explanation on the call, Dave, but is that a -- a trend that is sustainable?

Will we see that back off in the fourth quarter when some of the new products are launched?

Is it, I guess, totally related to commodities?

Is that what's driving it?

The inventory-- remember, we made some acquisitions--

Sure.

We've made -- we've had the acquisitions, Mauna Loa, Lorena, as well as the Joseph Schmidt and Scharffen Berger acquisitions.

That's a -- that's a component of that.

We have timing of raw materials deliveries, which is also a part.

But our finished goods are higher.

As you launch a number of new platforms such as we have in the Snack adjacencies and then some -- some of the bigger newer items coming in the fourth quarter, you will have some increase in inventory levels.

It is not a -- not a long-term, sustainable goal of ours for sure to have inventory growing at a -- at a rate greater than sales.

So you'll see some -- some reduction, but again, obviously, the raw material part of it and the -- the acquisitions are -- are just -- that's kind of systematic and those I wasn't see turn around.

But the -- the new products and the platform ones, we need to do a better job.

And you know, when you look at gross margins, as you have more inventory at times, you have more obsolescence as well and some of that shows up as -- as part of a little bit of pressure on the margin line.

That occurred in this quarter?

We had a little -- we did have a little bit of pressure in terms of obsolescence.

We have a number of new platforms and we have some businesses that -- that didn't do quite well, and so we did have some obsolescence in the inventory.

Okay, thank you.

David Palmer, UBS.

Hey, guys.

Hey, David.

Good morning!

Good morning.

I think Rick, you mentioned previously that 10,000 new merchandising racks were going into place.

I think that was during the fourth quarter, and 8,000 new ones in the first quarter of '06?

That was new item racks within convenience stores, correct.

Okay.

So that's just in C-stores.

And can you give us a sense of how unusual or usual that may be in terms of that being a year-over-year impact?

I don't have it as year-over-year, but it is -- it is an increase, because if you think about introducing Kissables in single-serve, which is a major C-store item, caramel, peanut butter with caramel and several others, that's really where we see a lot of increases in new items within convenience stores.

Plus, the -- the Ice Breakers items that we've talked about.

So I don't have a year-over-year percent, but I know it's up from last year.

The productivity initiatives that you mentioned, which presumably, you know, to address energy costs, can you give us a sense of what these pr -- productivity issues might be, and perhaps you can assure us that this won't lead to additional charges in '06 above and beyond what we've already announced?

We won't comment on any specific productivity initiatives, and I think what's most important is we talk about, as Dave has said, and we've always said, is looking at the total bundle of input costs, not any one component.

And I guess it's safe to assume too, and I know you already said that you're not going to comment on your pricing actions, but it's safe to assume we wouldn't be hearing about it now anyway given the fact that I guess in December last year you announced the last wholesale price increase and you probably, you know, wouldn't hear anything before December of this year even if, just on a timing basis.

Would that be fair -- fair to say?

Well we don't -- we don't comment on any speculation about any -- any pricing actions one way or the other.

Alright, thanks.

Thanks.

David Adelman, Morgan Stanley.

Good morning, everyone.

Hi, David.

How are you, David?

Fine.

Dave, when -- when you reported your second quarter results, you gave a preliminary goal for gross margins in '06.

Can you update us now?

Obviously, things have changed somewhat, on what your expectations would be for the delta in gross margins next year?

I think we -- we -- as we're developing our plans for 2006, I'd rather not give that.

As I said, we're looking at the -- the volatility in -- in the number of input costs, and so at this point in time, I'd rather not give any kind of specifics.

I think by the time we -- we get to the Holidays and Hershey event in early December we'll have a much better idea of where the market's going, of what consumer sentiment looks like at that point in time.

And that, I think, will help us crystallize our thinking in terms of -- of some of the underlying business drivers.

But at this point in time, we are continuing to look at our productivity plans and initiatives, the impact of our realignment, and then also as the -- kind of an overall macroeconomic environment as we've put our plans in place for 2006.

So I think we'll have a better idea by the time we get to December.

Okay, and David, when you were talking about price realization in the quarter, you flagged the fact that you were particularly successful on loose bar -- I'm sorry on packaged candy.

Is the implication from that that you've had -- that the realization of pricing on loose bars has somewhat lagged that?

No.

I think -- I think the reality of the mix within this quarter between, in the third quarter is a -- has a lot of Hal -- Halloween and packaged candy type events between Holiday, and we have a Fall Harvest line.

So there's a lot of packaged candy volume.

It's a relatively lower loose bar quarter.

That was my only indication.

We have -- we, you know, we basically have the list price increase where we expect it on all items.

But as we mentioned, the mix between instant consumable and take-home in this quarter is particularly skewed toward take-home.

Okay, and then lastly, Rick, you've -- you've -- you're alluding -- you've alluded several times to the overall consumer environment and the uncertainty that that creates.

Could -- could you put some numbers behind that in terms of what you're seeing, whether it's, you know, consumer traffic through different channels or what's happening as best you read it on the most broad basis to overall Confectionary category take away please?

Well, I think, nothing.

We don't have any specifics in terms of what's happening from consumer behavior, et cetera.

We are seeing some very good growth in -- in key retailers.

One channel or class of trade we don't talk about is mass, excluding Wal-Mart, because it's smaller within the IRI universe, but for the 12 weeks, our dollar take-away, dollar take-away in the MX channel is up 7%.

We gained 2.2 share points.

We're up 6% year-to-date, gaining 1.3 share points.

So while we talk a lot about convenience stores winning and drug stores, the mass class of trade continues to be a big opportunity for us.

So while we are seeing pockets of some pull-back in -- in Confectionary, that's more due to what competition's doing, or not doing, and where we are putting our resources, and we keep talking about where we see more profitable and high-growth, not just classes of trade, but customers.

We continue to increase take-away and gain share.

But on the margin, is the business drifting at least short-term towards channels that have a less attractive product mix for you or is that not necessarily the case?

No, that's not -- that's not the case.

I think the important thing is what we've been saying is we had, in the third quarter, a very strong seasonal performance as we expand our seasonal share.

We have gotten net price realization from both price -- from both components that we took price increase, and we're seeing very good loose bar sales both at the factory level as well as at take-away and we're seeing them outperform competition in all measured channels, yet where we put our emphasis,which is primarily the higher growth more profitable we've seen even gate -- greater gains in take-away.

And one the last thing, Rick, I think in the second quarter your ACV distribution on Cookies was 40%.

Can you update where that is now?

I don't have the specific number, but I know it's -- it's up from that.

We can get that to you, but I know that we built ACV distribution on Cookies, and that, along with the start of the advertising that I referenced, has generated a 30% increase in velocity post the start of the advertising.

Okay, thank you.

Thank you.

Eric Larson, Piper Jaffray.

Yeah, good morning, everyone.

Congratulations, Jim.

You know, one always tries to time their retirement at the top of their business game, and so all the best!

I hope this isn't a signal.

But anyway, no, my question [statement] --

Upwards and onwards.

was really on the gross margin.

With all the moving parts on your gross margin, your guidance is still -- correct me if I'm wrong, 70 to 90 basis points a year on average.

Is that correct?

Our long-term guidance that we set back in 2001 was three to four in the top-line, 70 to 90 basis points of gross margin expansion, and nine to eleven EPS.

We haven't changed from that, and we know from time to time, in any given year, on some of those components we're going to do better and on some we're going to do worse.

So you know, we think for the long-term, as we look out in long-term being three to five years, that's -- that's probably -- those numbers are still where -- where we believe the business will be.

But in, you know, obviously in any given year or any given time period we're going to do better or worse.

Okay, and then just -- just a quick, I guess flavor for your -- your level of innovation for 2006.

Would you expect the same -- would you expect an increased number of new products?

And would those ideas be bigger or smaller this year?

I mean, how -- how -- how should one -- how should we kind of think about that?

Well, that's a good question.

I think in the -- in the commentary what we said was we would step up our innovation in 2006.

So when we start shipping Kissables in four weeks and then we have just started with peanut butter-filled Kisses and we have several other items planned for next year, we do expect to step up in innovation because we've -- we've also seen that every time we bring news to the category and certainly innovation has helped us, we've had pricing initiatives over the past few years and we lead pricing with innovation.

We see that as a good strategy for us.

So the short answer is, you can expect to step up in innovation and in Core Confectionary as well as in our Snack adjacencies.

Okay, thank you.

Leonard Teitelbaum, Merrill Lynch.

That's pretty close!

Good morning.

Len, how are you?

Good.

I think we've -- we've pretty well beat up on the gross margin thing, but I just have one or two more questions on it.

The cost saves that you're going to have next year, can you break that down about where they're going to appear?

Is it going to appear in gross margin and SG&A and to what degree will that 60 mill or whatever it is be a recap.

Where will we see that mostly?

The realignment savings, Len, are 40 to -- somewhere around 40 to 45 million on an on-going annual basis.

We haven't specifically given the -- given the breakout between cost of goods and SM&A and at this point won't.

I think as I said, by the time we get to December and Holidays and Hershey, we'll have a much better idea, I think, and give you a little more specificity.

We are looking at our on-going productivity.

Most of the -- most of the 40 to 45 is going to be down in the SM&A line, although that is before, you know, spending back on capabilities and brand-building programs.

So at this point in time, I think I'd rather not give you specifics.

Thank you.

You have or if we were a retailer and had a plan-o-gram on a wall, when would we start to see new products in '06?

Are you going to roll out one a quarter or twice a year or has that decision not been made?

Well there's -- there's a couple ways to think about it.

We obviously have presented a -- a lot of new products already to major customers.

If you think about it's not one a quarter or anything such as that because we're introducing a major one such as Kissables and the first packaged format is single-serve, that will be followed up with packaged candy.

We have the filled Kisses platform.

And then each season, while we're not expanding the season, we do bring some new seasonal items, so that obviously follows the seasonal calendar.

And limited editions continue to do well for us, and as we said, we would use limited editions as a cost effective way to bring news to the category, and that flows in and out on a quarterly basis.

So there's really not any one specific each quarter.

There's X number of items.

Is it safe to say the new products are coming in at a higher end so there's an effective price increase along that line?

I think we have said as -- as we continue to introduce new items, they're going to be primarily in the single-serve format for a lot of reasons, and typically, those will have a higher margin than what -- then the full line, and that's what we strive to do.

Second of all, just on a personal note, Jim, I think you've just done a hell of a job there, and I'm sure the SG&A line is going to go up significantly next year as Rick pays you the huge bonus you deserve for [inaudible].

I think [I have that right.] You sent it to me, I'm just not sure I read it right.

Thank you for your help, Leonard.

You bet you!

Thank you very much guys.

Andrew Lazar, Lehman Brothers.

Good morning.

Rick, I realize you've -- you've upped the efficiency your marketing spending significantly over the past several years.

With all the up side Hershey has seen to -- to earnings also the last couple of years, I wonder if there -- there's not been, more opportunity to reinvest in marketing more aggressively?

I'm not talking about throwing money away on insufficient spending, but you certainly haven't had a lack of innovation and new product activity around which to spend, so I'm curious to get your -- your thoughts on that and then I have a follow-up.

Sure.

A couple of things.

As we continue to do our marketing mix modeling trade promotion given the expandable consumption nature of the category, the responsiveness to merchandising and all the other factors we typically cite, trade promotion con -- continues to have the highest ROI for us, followed by advertising and after that is consumer promotion.

However, when we get a specific customer to run advertising and support of a new item, and we've seen, and we've talked about it publicly, is what Target has done for the Kisses brand.

While that's not advertising per say, that's an excellent opportunity to build brand equity on Kisses.

So we look at the entire bundle of options to build brand equity.

You raise a very, very good point.

We continue to spend behind news in the category.

So when we introduce caramel Peanut Butter Cups Reese's with caramel, we are going to advertise that.

Kissables, we're going to advertise that.

I mentioned the advertising on our Cookies.

We're just very selective about which brands and it has to be behind news where we -- where we will provide advertising support.

But there's so many opportunities to build brand equity beyond advertising, and we think limited editions is a great way to do that.

So is that advertising?

Not in the traditional sense.

And with -- with the continued erosion of network ratings and the continued increases in prices, we see -- see it to be a -- a very inefficient to pay more and get less.

As a bigger part of your, higher-quality brand-building budget been moving towards -- not more trade, but in-store advertising, if you will?

I think as we increase the racks, as we increase in-store merchandising, I think one of the things that we're doing will be announcing it probably at Holidays and Hershey's a major continuity events that really capitalize on the in-store real estate of our portfolio.

And so for us, there's many ways to build brand equity in-store as well as on television.

Plus, I think the other aspect of our business which differs from a lot of food cat -- categories, it's average selling price can be under a dollar for many of our items.

There's retail ubiquity.

It's a different shopper, and being there at point of -- point of purchase to capture the impu -- impulse sale is very, very important to us.

Okay.

And then given your previous comment on -- on continuity of -- of sort of real estate, this may be getting into too much what you might discuss in December.

But in thinking of all the -- the new products, particularly in single-serve that you have been doing and are still coming out with, comments around the additional rack space and things like that, and then I look at what other confectionary players in the -- in the broader category have been doing around new product launches, whether it's -- the both large [inaudible] players or the Pepsi-Cos.

Their pace of new products particularly aimed at C-stores and these -- these single serve channels has also been incredibly torrid, is the only way I can describe it.

And I don't think C-stores are getting any larger.

So I'm trying to get a sense of where is a lot of this space sort of coming from?

Was there a lot of un-utilized space?

Is it getting back to you just the -- the constant SKU line pruning and always kind of' coming in with things in replacement of other things that are faster velocities and more profitable?

It seems like the -- the acceleration is so dramatic.

I just wonder where it's all coming from.

It's a good question.

I think there's a couple of things.

Internally, we look at which items, are we no longer doing the type of job we'd like and phase them out.

Broadly across the category, we've seen -- seen some consolidation of smaller players.

If you think about the onslaught of new items last year, whether it be low-carb energy bars, snack and nutrition, et cetera, and as that has fallen off, there's a ready source of supply for new item availability.

And quite frankly, as we continue to do well, the customers are going to be more inclined to respond to our innovation because we are bringing them more profitability.

And Confectionary and Snacks broadly within convenience stores have a very good gross profit on a square-inch basis and they're not picking up that same level of growth in some of the other categories that typically had been strong contributors to convenient stores.

So you're right, there are a lot more new items, but given how successful we have been, at least up until now, we've not had difficulty in getting the placements that we -- that we need.

Okay, and the last thing, I promise.

Just with all of the new products, when you think about incrementality, has that bench mark that you look for in terms of how incremental a new product needs to be has to be moved, kind of up or down, as you've come out with so many new products?

I'm not certain what up or down means from the way you asked it.

I will tell you, we are going to -- we are much more disciplined now about the true level of incrementality than we might have been a few years ago.

So for us, a Kissable is certainly -- is something that's very incremental.

As we talk about Reese's, Reese's has shown a great ability to cut across Snacks segments.

Was the fastest growing total snack item in the 12-week period.

I think it was up 12 or 13% in retail take-aways.

So we are very cognizant of incrementality.

Because to your earlier point, if we don't bring something that's incremental then -- the retailer is going to be far less interested in what we have the next time around, so it's really a self preservation for us regarding incrementality.

Thanks very much.

And Jim, again, from -- from me, best of luck and we'll deal with your retirement offline.

I'm not very good with change, so you'll have to manage me through this.

We'll work our way through it.

Thanks very much.

Thank you.

Pablo Zuanic, JP Morgan.

Good morning, everyone.

Good morning, Pablo.

Just a couple quick questions.

One for Dave.

Dave, on Kraft does a good job in terms of quantifying the quarterly [inaudible] commodities, they say 200 million, 300 million.

Can't you do that for Hershey?

And then can you quantify what was the [interest] in the quarter in millions of dollars or less?

I can, but I won't.

And I don't mean that to -- to -- to say -- I think there's some things, Pablo, that -- that Kraft also has, you know, a huge number of categories that they compete in, and lar -- you know, they basically have -- are in almost every commodity.

For me to give that type of specificity, I think given that we are principally, playing in one country, in one category, I think gives too much insight into the way we are approaching our business and what our fundamental cost drivers are, so that's why we do not give that kind of specific detail.

We just think it is -- it gives too much insight into our business, and so we just are -- are not going to do it.

Okay, that's fine.

Just a follow-up on that.

In terms of hedges, would you normally have longer positions in cocoa and sugar?

I mean, systematically?

Or will that vary?

Again, I don't want to give out anything specific, but it varies from ti -- everything -- all of our positions would vary from time to time based on the market conditions and what we see as the balance of supply and demand.

Okay.

One last question, and then I was going to ask about real estate at C-stores-- but -- but just walk me through how you protect those -- those -- those shelves?

I find in many C-stores that there's Hershey chocolates, but I also find on the same Hershey shelf Nutri-Grain Bars, some [inaudible].

I mean clearly I suppose your [inaudible] made you a better [inaudible].

How do you [protect] all those shelves?

Because in many cases, I find products from your competitors on a Hershey -- on a Hershey rack.

That -- that'll happen in -- in any store, in any rack from time to time.

It happens to all competitors.

What we continue to do is as we've said previously, is we're going to allocate our retail capabilities to those outlets and channels and customers where we think we can have the greatest return.

So you will see that from time to time, but again, I think what I would point to is the absolute level of racks that are placed and certainly the take-away and share gains that we -- we've been able to -- to maintain, as we talked about 44 consecutive quad week periods of share gains in convenience stores.

So we -- we continue to see opportunities despite that growth, and we'll continue to focus on it.

So you know, you raised an observation, just something that happens in the marketplace, and we work through it as best as we can.

Okay.

But say over the next 12 months you're not planning to raise the number of people that you allocate to do your merchandising?

That will be -- just will -- will grow with the normal growth of the business or is that a plan to over index the direct merchandising?

No, but we -- we constantly look at reallocation of resources, and it could be based on seasons, it could be based on when customer "XYZ" is bringing in the new item.

And we can shift resources to merchandise because speed -- not speed to market, speed to shelf is the most important criteria for us in terms of getting more product trial.

So we'll shift it based on where the customer opportunity is, not so much in terms of any master plan regarding a strategy.

It really follows new product introductions and clearly what programs we have established with the customer.

Okay, and just one last question.

I understand that all these promotions and advertising are planned, I suppose way in advance, but in a quarter like today when your SG&A fell significantly, a basic question that some of that was done, that there were some trimming intentionally to fund the higher commodity cost in the quarter, or it really doesn't work that way?

I'm not sure, Pablo, I understood the question.

I think what we, we have-- we do plan our promotions out six to nine months, in -- in many cases with the customers.

That is the lo -- that is the lead time.

All right.

That's fine.

All the best, Jim.

Thank you very much, Pablo.

[Gill Alexandre, Darfeild Associates]

Good morning.

Good morning.

My congratulations.

Could you expand for us a little bit.

I don't know how much dark chocolates are as a percentage of your sales, and what you want to do in this area.

I think what we've -- we have not discussed what it is as a percentage of our business.

We don't want to give that specific of a -- of a segment detail internally.

What we have talked about is, in measured channels, that we have Hershey as a Company as a 45% market share, and we see it as a major growth platform as we introduce new items under the Hershey name and as we also expand distribution and trial of the Scharffen Berger Dark Chocolate Company we acquired in July.

So we see it as a long-term growth platform for us.

One we started to focus on last year and then with this acquisition it's really given us more scale and a much different consumer segment.

And in many instances, Scharffen Berger is available in retail outlets where Hershey -- Hershey currently isn't available.

So we see great opportunities of a complimentary nature between Scharffen Berger and our own existing products.

Thank you.

Thank you.

David Nelson, Credit Suisse.

Good morning!

Hi, David.

Hi, David.

The [inaudible] as -- SG&A as a percentage of sales has been down over 100 basis points for two quarters in a row now.

Is this a permanently lower level?

I mean, you talked about qualitatively with Eric's questions and Andrew's questions about, you know, trade spending efficiency.

Do you think this is -- ?

I think part of it is, and then as we talk about coming next year as the realignment initiatives affect our G&A, I think it probably is some -- some portion of it is the admin. spend portion of it, not -- not necessarily the brand spend portion of it, is actually going to be systematic and will be part of the on-going business model.

I think we, you know, what we've also started -- what you've all started to see is we've grown the top line, over 7%, 8%, and we are doing it through the same basic fixed-cost system.

We're starting to get a lot of leverage there.

Okay.

Also on -- don't want to take anything away from your outstanding performance the last few years, but do you think it's been an unusually benign competitive environment, less innovation from ours?

Well I think there's a couple of thing.

No, I don't think any environment is benign, except when -- when looking retrospectively.

I think we've seen a lot of competition.

There were quarters of very aggressive pricing competition from those that weren't innovating.

I remember that a couple of years ago.

We see a lot of new items, was one other comments about all of the new items showing up, not just in our category, more broadly, as we continued to look for merchandising opportunities in outlets and outside of the confectionary aisle.

That's obviously going to bring in major snack competitors, as we've talked about.

So there's nothing benign about competition in the marketplace.

I think we currently have a good approach to unlock the potential in our scale brands, and as -- and as Dave had said, in a business system that has, from a business system standpoint, not production capacity, but from a business system standpoint, excess capacity to build our brands.

Congratulations.

And Jim thank you, and best wishes.

Thank you very much, David.

Eric Katzman, Deutsche Bank.

Hey.

Just a follow-up.

I think I recorded that you said depreciation and amortization in the quarter was 65.2 million?

Is that right?

I think what -- I think what actually is in there is, I think what I may have done, Eric, is given you the number that also includes the affect of the Las Piedras facility closure.

That's up -- that actually would be recorded as accelerated depreciation, but I think what I will do is, let me look at those numbers again.

I believe that I probably gave you that number.

So on an on-going operational basis, it's not going to be that -- that number.

I think the impact of that in the quarter was I think $16 million, but we'll give you those numbers specifically.

So the 200 million for the full year, that's excluding that Las Piedras acceleration?

Correct.

That's all I had, thank you.

Thanks.

Ken Zaslow, Harris Nesbitt.

Good morning, everybody.

Good morning.

Just a quick question on Non-Chocolate.

Did Non-Chocolate Confectionary sales accelerate during the quarter relative to your expectations?

We saw good high-single digit growth, primarily on, we talked Non-Chocolate, we think Sugar, Confectionary, and Twizzlers, and Jolly Rancher behind new products and then Ice Breakers Mints had a very, very strong quarter.

Is that the way we should start thinking about this, is that you have actually fixed this business and the outlook looks, you know in line for the five to 10% going forward?

Well, it's -- it's more -- it's more a question of bringing innovation, which we said was always the opportunity that we needed within primarily the Twizzlers and Jolly Rancher brands.

And then as we continue to bring news under the Ice Breakers platform, we've seen good growth, but we saw very strong share gains in Sugar Confectionary and then within the Mints segment.

Great.

Just, I think you addressed this, but I want to make sure I understood it.

Did -- did you see other channels pick up for the slowdown in convenience stores?

Is that what kept your top-line growth still on a pretty high trajectory?

What we said was that we had very good growth within convenience stores.

Was 4% in Confectionary and 7% in total Snacks.

What we did comment on is that one channel we haven't spent a lot of time emphasizing is Mass X and we saw good take-away growth in that as well.

What about grocery channels?

How did that perform given people potentially getting, you know, afraid of, travelling too far and staying closer to home?

Did that get a pickup at all?

No, food class of trade was -- was slow.

It's one we gained share in and it's one that has typically, at least for us in the category, it's not been the fastest growing class of trade, it's not one where we're emphasizing as much.

We have very good performance in key customers within the food class of trade, and I think that's the most important thing we can communicate, whether it's food, drug, mass, or convenience stores, we don't view it as a homogenous class of trade.

There's -- there's specific customers within each of those, and clearly within the food class of trade, there's specific customers where we're -- we're gaining share and out-performing competition.

We've talked about it before specifically.

And my last question is, and I'm not even sure you'll answer it, but can you discuss examples of your efficiency program over the next year or so that, just ideas of what you might be doing?

Is it SKU rationalization, is it closing down facility -- what are the type of things you can do?

At this point in time we'd prefer not to discuss any of those -- any of the specifics.

As I said, I think over the next, four to six weeks before we get to the Holidays and Hershey, I think we'll be in a -- in a position to give you a little bit more specificity.

All right, I look forward to that.

Thank you very much.

Thank you.

Christine McCracken, FTN Midwest

Good morning.

Good morning Christine.

Thanks for being with us so early, your time, Christine.

It's not that early.

Just wanted to touch a little on the Mauna Loa business because that was a lower margin business, but you've made a number of changes there.

Could you give us some sense of as to where we are in the process of really boosting margins and what we -- we might be able to expect out of that?

I think there's a couple of things.

We talked about we're starting to see some good growth from a retail distribution standpoint.

We don't have the pricing and margin structure where we want it to be.

So we're in the very early stages.

I think what's most important about Mauna Loa is snack nuts is a major growth opportunity for us.

Mauna Loa is a leader in it's segment, and as we got into the Mauna Loa businesses and the catagory, that got us thinking about where we can broaden Hersheys overall reach which is why we're now introducing this seven item line of Really Nuts products.

So it's very similar to other segments that we get into.

As we get into it we learn a lot more, and then we're able to expand from there.

So the Mauna Loa business, we still feel good about the acquisition.

We have a lot of work ahead of us in terms of getting the margins right.

But from a consumer stand point wer feel very good about the business.

So if you talk about the commodity environment that we're in, clearly as Kraft has said, the nut environment has been tough.

That -- that I assume doesn't pertain specifically to macadamias but does it -- well I don;t know, maybe it does.

But maybe you can give us some sense as to how your managing nut costs?

Is that -- is this the best time to launch a broader nut program or -- ?

Well I'm not going to comment on any one specific commodity.

I think what we are saying is it is a good time to launch it because we have the product that our retail consumers have been -- initial consumer read has been very strong.

I think, Christine, what -- what we're also talking about here is really value-added in terms of -- of -- of flavors.

But also really focussed on our -- where we're strong in -- in certain classes of trade in that under a dollar price point.

So I think, what -- what we're really saying is as we look at a broader platform, it -- it's going to be more poignant toward what we -- what we really do from a strength standpoint.

That makes sense.

And just in terms of in and out programs, I think, historically you talked about co-packing some of that.

As you've been successful with a lot of these in and outs, have you -- have you moved to bring some of that in-house or maybe you can comment on that?

If you mean in and out, do you mean the limited editions?

Yes.

Many of those will produce on our lines because that's where they're so cost efficient.

It's a package change and a formular change but it goes in the same shipper and it's an easy sell for sales force and an easy proposition for both consumers and customers to understand.

We have gone outside.

We've talked about it particularly in the Cookie platform in using an outside manufacturer.

But what we're looking at is where's the most efficient way;

A; to get into the market, and B: if it is a long term initiative that's successful do we choose to bring it inside or do we strike a better agreement with the co-packer?

Great.

Jim, thanks.

We'll miss you.

Thank you.

At this time there are no further questions.

Mr, Edris, are there any closing remarks?

Hearing no more questions, we'll conclude today's session. [Monofer] and I will now be available to answer any additional questions you may have.

As a reminder, our fourth quarter sales and earnings release is scheduled for January, 25 2006.

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

Thank you for your interest and good day.

This concludes today's Hersheys Company third quarter 2005 conference call.

You may now disconnect.