好時 (HSY) 2006 Q4 法說會逐字稿

Good morning.

My name is Luana and I will be your conference operator today.

At this time, I would like to welcome everyone to the Hershey Company fourth quarter 2006 results conference call. [OPERATOR INSTRUCTIONS].

Thank you.

Mr. Pogharian, you may begin your conference.

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

Welcome to The Hershey Company's fourth quarter conference call.

Rick Lenny, Chairman, President, and CEO;

Dave West, Senior Vice President and Chief Financial Officer, and I will represent Hershey on this morning's call.

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 2005 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 these non-GAAP measures as key metrics for evaluating performance internally.

These non-GAAP measures are not intended to replace a 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.

We will discuss our fourth quarter and full-year results for 2006 and 2005 excluding net pretax charges associated with our previously announced business realignment initiatives to advance the Company's value-enhancing strategy.

These net pretax charges were $5.6 million in the fourth quarter 2006, $17.6 million in the fourth quarter 2005, $11.6 million in the full-year 2006, and $119 million in the full year 2005.

Any future projections will also exclude the impact of net charges related to these business realignment initiatives.

During the fourth quarter, the Company adopted staff accounting bulletin 108 as required by the SEC.

As a result, prior periods have been adjusted for the impact of the adoption of SAB 108 as required by the SEC.

Adjustments for the fourth quarter and year 2005 are reflected in the press release and adjusted prior period numbers for the first three quarters of 2006 and 2005 are provided on our Website for comparison purposes.

Lastly, another company in the peer group is holding a conference call later this morning, and as a courtesy, we will end promptly at 10:00 a.m.

Therefore, we ask that you be respectful of all analysts in the question-and-answer queue.

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

Rick?

Thanks, Mark.

Results for the fourth quarter were below expectations.

While end market performance improved, with retail takeaway of 3%, net sales were off 1% as growth from our new product platforms and seasons didn't offset slower-based business shipments.

Within this 3% gain in retail take away, we did experience an improvement in both our chocolate business and in convenience stores.

Profitability for the quarter was impacted by the lower sales level and a sales mix that was less profitable than anticipated.

In addition, as we continue to shift the portfolio and focus our efforts against fewer, more sustainable initiatives, we're incurring the costs associated with this shift.

The product recall in Canada negatively impacted both sales and profitability for the fourth quarter.

Now, a few comments regarding 2006 in total.

For the full year, net sales increased by 2.6% with diluted earnings per share from operations up 4.4%.

These results reflect a solid first half with sales, market share and profitability all experiencing good growth.

In the second half of the year, we experienced a slowdown in retail performance which negatively impacted sales and earnings.

Quite simply, the required shift to the more sustainable new product platforms took longer than anticipated, and the base business was impacted by poor merchandising activity.

Most important, our consumer and customer plans, as well as our investment profile for 2007 clearly reflect a learning from 2006 and the immense opportunities for Hershey.

More on this later.

First, Dave West will discuss the fourth quarter and full-year in detail.

I'll then highlight the key priorities for 2007 and the plans to deliver upon our goals.

Before turning it over to Dave, I want to mention something else.

Earlier this morning we announced that Dave West has been appointed Executive Vice President and Chief Operating Officer effective immediately.

Dave will be responsible for the day-to-day operations of the Company across our North American and international commercial groups, as well as the global supply chain.

In Dave's close to six years at Hershey, he's held a number of key positions, including strategic planning, sales and currently as CFO.

As such, his broad experience throughout Hershey and strong track record of accomplishments make him well-suited for this new position.

I look forward to working with Dave in this key operating role.

Dave, congratulations.

Thanks, Rick and good morning, everyone.

Q4 results came in with a 0.7% decline in net sales, and EPS diluted from operations to $0.67, down 8% versus prior year.

This brings full-year performance to a 2.6% increase in net sales and a 4.4% increase in EPS diluted from operations.

Let me gave you some details starting with marketplace performance.

Hershey's retail take away improved in the quarter.

Hershey's consumer takeaway for the 12 weeks ending December 31, in channels that account for over 80% of our retail business, increased by 3% versus a 1% gain in Q3.

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

In the reportable FDMxC universe, Hershey's 12-week market share declined by 0.8 share points, although performance was sequentially better throughout the quarter.

Our take away in chocolate improved somewhat but we didn't keep pace with the segment.

The conversion from Limited Editions and closer in new items to premium and dark chocolate platforms continues.

This brings full-year FDMxC share performance to a decline of 0.2 points, with strong first half share gains offset by losses during the second half portfolio transition.

We expect our share performance to sequentially improve as we restore core brand growth and support our new platforms with enhanced customer and consumer activity throughout 2007.

Our retail coverage initiatives should also improve our merchandising.

Rick will have the details on these initiatives shortly.

Turning now to net sales, during the quarter, net sales declined by 0.7%.

We are encouraged by the early performance of our new dark and premium chocolate platforms and refreshment items which were up in the quarter.

Additionally, a strong holiday season benefited the quarter.

We have now gained market share for eight consecutive seasonal periods with gains in both Halloween and holiday.

However, we did experience somewhat higher markdown expense in both seasons as a result of lower than expected sell through.

While new platforms in seasons performed reasonably well, our underlying core business was soft.

Rick will cover the customer and consumer investment plan to reverse these trends later today and in more depth at Cagney next month.

Also within the quarter we had a recall in Canada on certain chocolate items.

Our manufacturing facility was shut down for six weeks and we estimate that we missed end-market sales amounting to approximately one point of total company growth in the quarter.

This business outage resulted in lost profit of about $0.01 per share.

We also incurred costs for unsalable product inventory as well as for product retrieval and plant cleanup.

We recorded a receivable of $14 million for these costs on our books at year-end.

We are actively pursuing collection for these damages.

Most importantly, we are now back up and running and meeting demand in Canada.

For the full year, net sales grew 2.6% with the gain principally from volume driven behind new products and platforms.

Turning now to margins.

During the fourth quarter, gross margin was down 330 basis points.

As expected, overall input costs were higher year-over-year, as has been the case throughout 2006.

However, we did not achieve price realization to offset this in the quarter, as we invested in trade promotion in support of our new platforms as well as behind core brand initiatives in the convenience channel.

Costs of obsolescence did not abate during the fourth quarter.

While the shift to new product platforms is on track, the rationalization of existing items has taken longer than expected as take away was slower than anticipated.

As such, we continue to generate higher costs.

This should improve throughout 2007.

EBIT margin was down 160 basis points as SM&A was favorable 170 points, due to lower administrative expenses resulting partly from lower incentive compensation costs.

For the full year, EBIT margin expanded 10 basis points.

Strong G&A cost controls from our realignment initiatives as well as reduced incentive expenses more than offset the fourth quarter increase in consumer and customer spending and a 140 basis-point reduction in gross margin.

The gross margin decline was the result of higher input costs as expected, but was exacerbated by poor product mix and the obsolescence issues I detailed a minute ago.

Interest expense for the quarter increased coming into $31.5 million versus $24.3 million in last year's fourth quarter, reflecting higher short-term borrowings to fund continued share repurchases.

For the year, interest expense is $116.1 million, up from $88 million last year.

The tax rate for the fourth quarter was 37.3%, this is 90 basis points higher than last year.

For the full year, the rate was 36.2%.

We expect 36.2% to be the rate for 2007 as well.

Weighted average shares outstanding on a diluted basis for the quarter were 235.3 million, versus 245.4 million shares for the fourth quarter of 2005, leading to EPS of $0.67 per share diluted from operations.

That's a decrease of 8%.

For the year, shares outstanding were 239.1 million, versus 248.3 million last year.

EPS diluted from operations for the full year was $2.37, up 4.4% versus $2.27 in 2005.

You'll note that we've adjusted 2005 EPS by $0.01, as during the fourth quarter, the Company adopted Staff Accounting Bulletin 108, or SAB 108, as required by the SEC.

As a result, the Company changed a long-standing aspect of its revenue recognition policy to delay recognition of revenue on goods in transit to customers at the end of each period until they are received by the customer.

The change was not material, and had no significant impact on Q4 and full-year 2006.

As permitted by SAB 108, we adjusted all prior periods for comparability.

So as you're completing your models for 2005 and 2006 you'll want to check our website for adjusted quarterly and full-year splits for 2005 and for the first three-quarters of 2006.

Now, let me turn to the balance sheet and cash flow.

In 2006, net trading capital increased around $40 million compared to last year.

Trade accounts receivable grew by about $15 million.

Our AR balance remains extremely current and of high quality.

Inventories were higher by $14 million compared to last year.

The balance sheet also reflects the adoption of FAS158, employers accounting for defined pension and other post-retirement plans.

Other assets decreased by $144 million, and long-term liabilities increased by $88 million with offsets in deferred taxes resulting in a $138 million reduction to equity.

This reflects the required new accounting for our pension and retiree medical plans.

Let me give you some cash flow items.

During the quarter, capital additions including capitalized software were $69 million, and the full-year 2006 was $199 million.

Depreciation and amortization totaled $51 million in the quarter, and was $200 million for the full year.

Dividends paid during the fourth quarter were $61 million, bringing the full year to $235 million.

During the quarter, we spent $115 million for 2.2 million shares in our share repurchase programs, completing the $500 million authorization approved by the Board in December 2005.

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

In addition, during the quarter, we repurchased $16 million of our common stock shares in the open market to replace shares issued in connection with employees exercising stock options.

Our goal is to repurchase all such shares.

In December 2006, the Board of Directors authorized the purchase of an additional $250 million of our stock in the open market.

Let me give you a quick update on the impact of various business realignment initiatives recorded in the quarter.

During the quarter, total business realignment charges of $5.6 million pre-tax were recorded against the initiatives we announced last July.

This reduced reported EPS by $0.02 for the quarter.

This essentially completes the July 2005 program with $110.6 million in realignment charges and $21 million in cost of sales, a total of $131.7 million pre-tax.

After tax cost of $82 million was $0.33 per share diluted, spread over the past six quarters.

The savings are tracking in line with expectations.

Let me now talk about 2007, where our focus will be on restoring Hershey's marketplace momentum and the overall confectionery category growth.

We will continue to sharpen our consumer and customer programs behind our core brands and new platforms .

Incremental investment in advertising, consumer promotions, retail coverage and merchandising events will be made in the U.S. and in other selected geographies.

This enhanced activity gives us confidence that we can deliver net sales growth within our long-term 3 to 4% target range during 2007.

For 2007 we expect to see a return to gross margin expansion.

We have good visibility into our 2007 total cost basket.

We see input costs for 2007 being higher than 2006, but with the increase less than that which occurred in 2006 versus 2005.

We are confident in the productivity and cost control initiatives planned to help mitigate these cost factors.

In addition, lower year-over-year obsolescence costs and an anticipated favorable product mix from growth in higher margin platforms in our core brand initiatives will improve gross margin in 2007.

This improvement will grow as 2007 progresses.

We'll provide more visibility into why we are confident about our margin expansion plans at Cagney.

Expanded gross margin will provide the fuel for increased marketing and selling support in 2007.

This investment in the U.S. and select geographies will result in an EBIT margin profile for 2007 which is roughly flat to 2006.

As such, we continue to expect 2007 EPS diluted from operations to increase in the 7 to 9% range.

Our long-term goal remains 9 to 11% growth.

We expect our performance in the marketplace and within our cost structure to improve throughout the year as our productivity and reinvestment programs continue to gain momentum.

Now, Rick will provide some specifics.

Thanks, Dave.

Our number 1 goal is to restore Hershey's performance in terms of sales, market share and profitability.

For 2007 our plans are focused, and the investment profile was concentrated in the areas where Hershey is advantaged on our iconic brands and where we've demonstrated good results with new product platforms.

We have three key priorities for 2007.

I'll highlight these three, recognizing that our plans will be discussed in depth at Cagney next month.

The first priority is to restore core brand growth, primarily on Kisses, Reese's and Hershey's.

These brands have strong marketplace positions and clearly respond to news and programming.

Over the past three years, their contribution to the Company's total retail takeaway has increased from about one-third to over one half.

As such, we're confident in their ability to grow when supported.

Let's start with Kisses. 2007 marks the 100th anniversary of the Kisses brand.

We have broad support scheduled throughout the year, including new advertising, custom Kisses flavors for specific retailers and unique consumer events that capture the magic of the Kisses brand.

The first such event was the commissioning of the Love and Kisses stamp from the U.S.

Postal Service earlier this month.

Kisses is Hershey's most responsive brand in terms of advertising, therefore, consumer support will double with a significant increase in media support both television and in-store.

Here's an example.

Last month during the holiday season, Kisses advertising ran on network TV and on Wal-Mart TV in close to 3,000 of their stores.

The results were very strong, the lift in retail sales was well above the prior year and the return on investment was excellent.

The in-store TV had returns greater than that of the network TV advertising.

As such, reach and frequency will increase in 2007 for both network and in-store TV.

From a product standpoint we're now introducing single serve Kisses truffles.

This builds upon the learning from our very successful truffle nuggets.

It further extends Hershey's most iconic brand within the highly profitable single-serve segment.

Reese's, our largest and most profitable brand, will benefit from new products, increased brand investment and powerful in-store merchandising programs throughout 2007.

Here are the specifics starting with product news.

Reese's Crispy Crunchy, which began shipping in December is off to a good start.

Dedicated advertising to build awareness and trial goes on air this month.

In addition, there will be a new advertising campaign on core Reese's that begins airing later this quarter.

Total advertising and consumer investment in the Reese's brands will more than double in 2007.

In terms of in-store support, Reese's will benefit from specific merchandising events, such as the Elvis limited edition, and king size, of course, as well as offering a powerful partnership with Coca Cola and Reese's within the convenience store channel.

This partnership combines the number 1 selling confectionery SKU and the Number 1 soft drink in this high growth profitable class of trade, convenience store retailers are able to merchandise Reese cups and Coke throughout 2007.

Our second priority for 2007 is investing in our new product platforms.

This is the arena in which our flagship Hershey brand will be featured and will benefit from the explosive growth within dark chocolate as well as through the introduction of new products that offer unique consumer experiences.

Dark chocolate was our fastest growing business in 2006.

In fact, the retail take away of Hershey's dark chocolate has doubled over the past two years.

The segment's growing rapidly and we will accelerate our efforts to ensure solid marketplace performance.

Dark chocolate's part of the trading up experience for many consumers and the premium segment continues to offer strong growth potential.

Here's what we're doing.

Cacao Reserve by Hershey's was introduced by late 2006 and is gaining both retail distribution and consumer trial.

Cacao Reserve offers consumers a wide choice of products from Truffle Tins, a convenient bite size indulgence, to Country of Origin bars that deliver a superior taste.

The marketing plans include tie-ins with high profile partners such as the Wine Spectator and Cigar Aficionado.

From a retailer perspective, Cacao Reserve delivers greater profitability and cross merchandising opportunities with other premium products such as wine.

Innovative packaging is a key success factor within dark and premium chocolate.

As such, we are expanding the availability of Hershey's Special Dark and Hershey's Extra Dark chocolate in standup pouches.

These pouches, in addition to reinforcing the product's premium quality with consumers, deliver higher profitability to the trade and better margins to us.

From a brand-building standpoint, consumer spending on dark and premium chocolate will double in 2007.

This increase will capitalize on Hershey's scale within these high-growth segments.

To ensure that Hershey continues to build its leadership position within the total chocolate market, we're announcing the introduction of three new items.

There's Hershey Whole Bean Chocolate that offers consumers a great tasting chocolate experience with 40% less sugar and increased fiber.

The second item is Hershey's Antioxidant Milk Chocolate.

This product, targeted for the milk chocolate lover provides more antioxidants than the leading dark chocolate bars.

Third, we're introducing Hershey's Organic chocolate bars to take advantage of the explosive growth in organic foods in mainstream channels.

All three of these products have good incremental growth potential.

In addition, they have a reasonable investment profile given their loose bar format and leveraging of the Hershey brand equity.

These products will be available by midyear.

Portion control is experiencing great growth.

This segment, just within snacks, is five times larger than it was two years ago, and now represents more than $200 million in retail sales.

Within chocolate, our 100-calorie packs and 60-calorie sticks deliver great chocolate taste in a convenient portion-controlled format.

Snacksters, the 100-calorie line of salty sweet lunch box snacks extends our reach to new consumer segments and use educations.

The second key platform is refreshment.

Over the past two years, we've increased our market share within mints by 10 points and are now the mint segment leader with close to a 30% share.

This has been accomplished by delivering superior refreshment and unique packaging using the very strong Icebreakers equity.

Refreshment is on trend from a consumer standpoint, profitable for the trade and highly incremental for Hershey.

For 2007, our plans include expansion of the sours business behind Icebreakers Sours gum and new Wellness mints and gum in unique varieties and on-the-go packages.

These gum and mint products combine great flavors with added ingredients recognized for their wellness benefits; ingredients such as ginseng, antioxidants from green tea, and vitamins.

To support this expanded lineup, brand investment will increase beyond new advertising and a comprehensive convenience store program.

Winning in C stores is very important in refreshment as this channel accounts for about 40% of retail take away.

Within the C store channel, our new P3 program provides the C store retailer with much greater flexibility in terms of which brands to support when, and which merchandising vehicles to use.

In addition, P3 will cover a broader C store universe.

To deliver against the two priorities of restoring growth to our core brands and expanding our new product platforms, we're taking the necessary steps to ensure superior retail execution.

We're adding in-store coverage where the pay back is the highest and implementing new retail technology to enhance in-store effectiveness.

By focusing on fewer, yet bigger initiatives, we'll avoid the stress on the business system, and the associated cost that typically accompanies too many product entries regardless of their close-in impact.

The goal is sustainable growth.

Now, a few comments on our third priority, which is pursuing opportunities in high potential global markets.

While Hershey is fortunate to have the leadership position in the very attractive U.S. confectionery market, there are emerging markets where long-term growth rates offer significant potential.

In addition, global markets offer us access to lower cost of production.

We're taking a disciplined approach to global expansion, specifically, we're focused on key markets such as Mexico, greater China, India, and selected markets in South America.

Second, we're developing regionally relevant products that appeal to local taste preferences.

We're currently doing this on a limited basis in Asia and the results are promising.

Third, we must establish a cost-effective route to market that achieves broad retail availability at an attractive cost for consumers, customers and Hershey.

We believe that alliances with well-established partners within a specific region is one path to enable us to achieve our goals.

This approach increases the odds of success and lowers the investment and risk profile.

As such, Hershey has entered into an agreement with the leading Asian food and confectionery group to manufacture confectionery products in China for the greater China market with subsequent distribution to other Asian markets.

The specifics of this alliance and plans for further product development and distribution activities will be announced in a joint press conference in Seoul, South Korea, on January 29th.

We're excited by the prospects and look forward to sharing more with you next month.

Now, to wrap up.

Admittedly, 2006 was a difficult year.

Although we made solid progress against several initiatives, our performance wasn't what we've come to expect or what we're capable of delivering.

We've learned from this, and are moving aggressively to get the business back on track.

I believe that we have the right plans and resources in place to achieve our goals.

Equally as important, the leadership team's committed to delivering these results.

Our financial expectations of a 3 to 4% increase in net sales and a 9 to 11% increase in diluted earnings per share from operations remain appropriate for the long term.

For 2007 we anticipate net sales to be in this 3 to 4% range, given the increased investment behind our strategic priorities, we anticipate the increase in diluted earnings per share from operations to be in the 7 to 9% range.

We'll now open it up for questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from John McMillin, Prudential Equity Group.

Good morning, everybody.

Good morning, John.

I assume Chris Baldwin, he's the current COO, isn't he, or the one yesterday?

No, Chris Baldwin continues in his current position, which is president of the North American commercial group.

Okay.

And just, this appears -- I mean, you said on December 6 mid single-digit full-year earnings growth, you can argue 4.4 is a little below that and the revenue's a little below.

In terms of what happened in December, am I just kind of right that the obsolescence number was bigger than you thought?

Is that really what happened in the month that maybe brought these final numbers down?

I think, John, for the quarter, obsolescence was higher and I think it was a little bit higher than we would have liked it to have been and we anticipated it to be coming down the stretch.

Also we had the issue in Canada where we were, I think, out of business a little longer than we would have liked to have been and that hurt us on the top line a little bit as well as on the bottom line.

And just the change in revenue recognition, Dave, and I admit I did not graduate Cum Laude like you, does it reflect revenue recognition in the past that might be viewed as aggressive or kind of what is this change in accounting?

I'm just trying to understand it.

John, it's actually we've had a long-standing revenue recognition policy, it's been actually in place long before I joined Hershey.

And essentially what we were doing was recognizing revenue at the time of shipment, and then essentially though our terms were FOB destination.

So there was about a day and a half or so, or two days of transit time to customers.

For administrative ease we were recognizing it when we shipped it rather than trying to track it through and get proof of delivery before we recognized it as revenue.

Comparability-wise it's essentially, there were always 365 days in each year, there were the same number of days in each quarter as you went through it, so year over year, the comparisons were the same regardless of what we did with that last day and a half of revenue.

What 108 makes us look at, it also makes us look at the impact on the ending balance sheet, and in particular, in accounts receivable.

Essentially based on the fact that our terms were FOB destination, those receivables really shouldn't have been on the books.

SAB 108 makes us take a look at that.

What we did is we went back and changed the revenue recognition policy so we will now recognize it when the customer receives the goods.

So it's essentially a day and a half of inventory, it's immaterial, didn't affect results for 2006, but for comparability we went back and restated other quarters to make sure it worked.

Just my last question to you, Rick, I agree with you in terms of your advantaged position in Reese's and Kisses and Hershey, I'm just trying to understand your advantages in dark chocolate.

And I know you're going to talk more about this, but as you try to take the Hershey name into dark chocolate, does it really work?

I know you have other brands besides Hershey, but kind of where are your advantages in dark chocolate?

I think, John, there's a couple of things.

First off, we currently have six of the top fastest growing brands in terms of dollar gains within dark chocolate.

We have a very strong market share position and we've been able to see very good growth with Special Dark a couple years ago, the launch of Extra Dark a year ago and now moving into the mass premium segment with Cacao Reserve by Hershey.

So we think we have a broad portfolio that's enabling us to leverage our scale of retail and using existing branding, I think that's one of the important considerations that we're not introducing multiple brand names within the dark chocolate segment.

Thanks for that.

Your next question comes from Eric Serotta of Merrill Lynch.

Good morning.

Hi, Eric.

Hi, Dave, just wondering whether you could give us an update as to where we stand in terms of seasonal shipments.

I know that was -- there have been a lot of changes over the past year.

What seasons shipped during the fourth quarter?

And what kind of seasonal pattern should we -- what kind of pattern should we look at in terms of seasonal shipments going forward on a year-over-year basis compared to the pattern that we saw last year?

Fine, Eric.

The-- we did have a very good holiday season in terms of share and shipments, and a very good Halloween season.

As you would expect, we shipped all of our Valentine's in December of this year, the same way we shipped Valentine's all in December of last year.

So all of Valentine's falls in December in both years.

Valentine's shipments this year were a little stronger than last year, Easter shipments are essentially flat year-over-year in December.

As you look at it, we're pretty comparable, the seasonal business continues to perform well although the markdowns and sell through in holiday was a little lower than we would have liked.

But overall, we still are gaining share and growing the seasons and feel pretty good about that part of the business.

Okay.

And then Rick, could you give us a little bit of more granularity as to the degree of weakness in some of the core brands?

Considering the importance of growing the core brands to reigniting growth for the Company?

I think a couple of things, Eric.

We had seen some base business slow down throughout 2006, we had talked about it.

We certainly had expected new products, some of the new products that we had shipped in '05 and platforms to more than offset and this didn't happen as much to the same extent in terms of getting base business to flatten out and growing.

And a couple reasons for that.

One, we had less news to merchandise the base business at retail.

And we also saw some increased competitive activity.

I think what's important is that when we were being very successful with limited additions, there was also the collateral benefit to the base brands in terms of getting merchandising on base business or the core brands at the same time of limited editions, but as we see now, the opportunity is to get velocity restored in our core brands and think about how very efficient that is.

The arithmetic is simple.

For a 1% increase in core Reese's velocity, that's equally to a limited edition.

Therefore, we believe it's getting core velocity is a better way to go in this regard, it's more sustainable and more profitable.

That's really the emphasis on our core brands.

They're strategically advantaged, there's a lot of news and innovation we can bring to them, and then as I said earlier on, they're very responsive to advertising and consumer promotion and we also believe they'll benefit mix as we talked about.

Okay, thank you.

Thanks, Eric.

Your next question comes from Terry Bivens of Bear Stearns.

Good morning, everyone.

Hi, Terry.

Two things I wanted to cover.

Number 1, just on the obsolescence, Dave, I know you gave some dimensions around what Canada did for the quarter.

Did you do the same with obsolescence?

If you didn't, I'd like to get some idea of how that affected us.

I didn't give any specific numbers, Terry.

It was a pretty significant drag on the gross margin.

If you look at the gross margin decline, it -- clearly a large part of that is related to obsolescence, both markdowns related to seasons, our seasonal sell through wasn't quite as good as we would have liked it to have been.

As we work through the obsolescence with related to the shift in portfolios from limited editions to platforms and an SKU rationalization, when we started looking at that back in the second quarter, I would have expected us to have been through that more quickly than we've gotten through it.

Part of that is our original assumptions were built at a period where the category and our takeaway was in the mid single digits.

As that's slowed, it's taken us longer to get through that.

So it was a lot bigger in the fourth quarter than we would have liked it to have been and it was a big drag on gross margins, it was really the single biggest drag on gross margins in the quarter.

Well, that's kind of what I thought.

Why didn't you just take the pain earlier, really mark the stuff down and blow it out before now?

Well, it's not as simple as just marking down.

A lot of it, a lot of things, there's planned obsolescence in the portfolio.

So for example, we would have an item that's on the shelf, a mint or gum item that was on the shelf, as we were coming with a new item, that new item was planned to launch, let's say in December, we would have planned to sell-down the old item, and then replace that facing with a new item.

And so what happened was you don't want to mark it down, we were holding the spot and we were working through the inventory.

But as the category slowed a little bit, at the end of that process, when you go to take the item out, there's just more inventory left over.

Okay.

Thanks for that.

Rick, one quick one.

When you mentioned some of the new products, I think someone said didn't do quite as well as expected, I didn't hear much this morning about some of the new initiatives, cookies, brownies, for example.

Does what appears to be a pretty solid focus on the core indicate that maybe you guys become less aggressive with some of those products that are, slightly out of the core area?

Yeah, a couple ways to think about that, as we have talked in the past, we're going to be narrowing our efforts in the areas of substantial snacks.

We believe it's a platform that can provide good incremental sales and profitability for Hershey and we've talked about three of those.

And it's primarily sandwich cookies, brownies and snack nuts but in single-serve and in specific retail outlets which can provide a more sustainable business, so think of it as we tested a lot, we learned a lot from our snacks initiatives.

And it's also important to reinforce that they required less investment because they really leveraged a lot of Hershey's core equities and business systems strengths.

It is worth noting that in the past quarter we did see a share gain within our snacks business and we saw a slight share increase in both cookies and snack nuts.

The focus for us is closer in, a couple of platforms within substantial snacks, but again, the major emphasis for 2007, as we've said, is restoring core brand growth and really investing behind those platforms that have shown good success to date, which are dark chocolate and refreshment.

Okay.

Thanks very much.

Thanks, Terry.

Your next question comes from Chris Growe of A.G.

Edwards & Sons.

Good morning.

Good morning, Chris.

Hi, I just had a couple of questions for you, the first one is that you reported your retail take away of roughly 3% and obviously your shipments, your sales were down around 1%.

I'm just curious, has there been truly a reduction in retail inventory here as a result in the quarter, given the gap in -- no?

Not really.

I think, one, you're equivalizing a U.S. take away number versus a shipment number.

Remember, the takeaway number includes holiday merchandise, or Halloween merchandise that might have shipped earlier in the year.

And then also we were hit by the issue in Canada, which is not in that takeaway number.

Okay.

And then I'm just curious if you can give us an idea of the size of the obsolescence cost in 2006 even in rough terms?

I don't want to get into specifics.

As I said, when you look at our gross margin performance for the year, it certainly was a very big detractor to gross margin performance.

And bigger than we thought it would be as we got into it because as I said velocities weren't what we were planning on to move some of these items through.

But as such, as we looked at 2007, year-over-year we should be looking at a favorable comparison.

Should we have seen inventory levels on the balance sheet actually have come down more, though, as a result of these obsolescence costs or are those two independent of each other to some extent?

I think they're really independent because the inventory level that's on the balance sheet is really looking forward to future sales as we expect to grow sales in the 3 to 4% range, that base is pretty constant.

Okay.

And my last question, then, I guess really to Rick, is that if you look at 2007, do you have -- is it a market share goal that's really driving Hershey here, or is it more about just reviving growth?

I'm curious how we should measure the recovery in 2007, if you will?

It's a good question.

There's a couple ways to think about it.

For us, when we say restore core brand growth, is to get retail takeaway up to levels that we believe are required to drive good levels of shipments and profitability.

But again, the best yardstick for us in terms of how we're doing in terms of winning with consumers and customers is market share.

So for us, it's I think the most important factors will be how was our retail performance doing, and that will be measured by takeaway and market share.

But also in terms of a specifics behind are the core brands that we're emphasizing, Reese's, Kisses and Hershey's, are they growing.

How are we doing within our platform.

So it's going to be very much focused on the specific initiatives where we're targeting our investments as well as our retail execution.

Okay.

Thank you.

Your next question comes from Eric Larson of Piper Jaffray.

Good morning everyone.

Good morning.

Just some follow-up on the marketing spend, Rick, over the next two to three years I suspect that your marketing spend as a percent of sales will go up and you highlighted a couple items where spending will double this year, Kisses and several others.

Can you give us an idea of, you know, kind of your longer term vision on how that marketing spend ratio is going to look in the next one to three years?

I think what's important, and you did highlight correctly where we're headed, significant increases on the three core brands that we discussed as well as the platforms, we expect total advertising and consumer promotion support to increase double digits in '07 but we don't give any specific numbers.

I think the important thing is, A, where we're increasing our spending, and also how we're increasing our spending is going to be a lot more targeted on brand equity building our core brands and on generating trial and -- trial and awareness on our platforms.

We'll cover quite a bit of this next month at Cagney.

Okay.

Then just one other follow-up question.

The competitive environment out there, you obviously mentioned that your retail takeaway numbers are up, but not up with the category.

Who are -- I do not get IRI or Nielson data or anything.

Could you give us a shapeup of what some of the competitors are doing out there and who seems to have the most traction?

Well, I'm certainly not going to address any one specific competitor, I think what's important is we're seeing quite a bit of competitive new products out there as folks are attempting to bring some innovation to the marketplace and for us, our goal is -- that's how we're going to compete.

We've never said we were going to compete on price or act irrationally, we said we have a leadership position and an attractive category that responds to news.

For us it's investment in our brands and investment in our platforms.

That's where we're focused.

Okay, thank you.

Your next question comes from David Adelman of Morgan Stanley.

Hi, good morning everyone.

Hi, David.

Morning, David.

A couple of quick things.

I realize you don't give quarterly guidance, but I'm curious, I mean, internally, is it realistic to expect, given the situation you're in today, for the Company to deliver, you know, material earnings growth in the first half of the current fiscal year?

Yes, you're right, we don't give specific quarterly guidance or halves.

What we do expect is obviously that momentum will build throughout the year, that we expect our marketplace momentum to get better and I think our productivity and cost reduction initiative plans in the year also build throughout the year.

So we do expect momentum to build as we go through the quarters.

Okay.

And then given the emphasis on dark chocolate and the nuts, its importance in your growth plans, could you give us some grounding on how large a component of your portfolio that is, approximately, today?

No, we don't break out any one specific component of our portfolio.

Okay.

And then lastly, can you talk to your envisioned scale of share repurchases in the current fiscal year?

Because obviously you could deliver, given the balance sheet and the cash flow of the Company, a high component of your overall expected earnings growth simply through share repurchases.

We did complete the $500 million authorization from December of 2005 last year, so there is a reduction in the number of shares outstanding.

And you can do the math on that.

We have a $250 million authorization that was just put in place in December of 2006, and we'll buy in the marketplace from time to time.

We don't have a time bound end on that.

We'll look at that as one of our uses of cash along with acquisitions, capital spending and other items.

Okay.

Thank you.

You're welcome.

Your next question comes from Kenneth Zaslow of BMO Capital Markets.

Good morning, everyone.

Good morning, Ken.

Can you go through the new product platforms or at least give a sampling of them that did not work from back in December '05, and what did you learn and what are you going to do differently on execution going forward?

I think what we've talked about is the platforms are more sustainable, primarily because they offer a higher level of incrementality.

If you think about refreshments, certainly dark chocolate where we obviously had been there with Special Dark and really converted from an item to a platform.

And some of what we had said did not have the level of incrementality.

We're speaking primarily of some of the items.

Kissables has been a very good item for us, in fact there's a Dark Chocolate Kissables that's being successful.

But I think of Kissables and Take Five as more of items than necessarily a platform.

What we want to ensure is that the platforms provide a greater level of sustainability as opposed to having a new item in a specific quarter that we have to then cycle in subsequent years.

I think that's created the stress and strain on the system.

Okay.

But there were no specific changes to how you're going to execute or anything more specific that you could give us on the philosophical differences at all besides the generality?

I think not that there's a philosophical difference in terms of where we're headed, I think the important thing is we're being more strategic in terms of where we're converting consumer insights into those type of new product platforms that we believe have sustainability over time.

I think the fact that we're going to be executing fewer and what we intend to be bigger is probably the biggest difference than having maybe a lot of new items at a time.

It's a category where there are variety-seeking consumers and we want to guard against providing too much variety.

And the second question I have is, has there been any pushback at any of the retailers that has given the competition a more level balanced field or anything like that or it's really been the execution on your side or has it been the pushback from the retailers at all?

It's hasn't been pushback from retailers, Ken, it's really been our execution as we cycled through some limited additions and some other things in the back half of the year.

We frankly didn't have the kind of news that would get us the type of merchandising level that we were used to.

And that opened up windows for other people to merchandise in.

It's not any kind of pushback, it's really more of an absence of our news and merchandising.

The level of confidence you have in your guidance going forward, after a couple times of reducing it, reducing it, is there some sort of confidence that you feel better or is it, this is the best we have right now?

I think what's important, if you think about where our growth is focused in 2007, it's close in, in terms of our core brands, and it's on platforms, where we have experienced good growth to date and we have momentum.

We're not looking for our snacks business to be a major contributor to our growth for 2007, so in that regard, we think we have a very good profile because it's close in, it capitalizes on some of Hershey's existing strengths and it also focuses on those areas where we've had some success to date.

Thank you.

Your next question comes from Eric Katzman of Deutsche Bank.

Good morning, everyone.

Hi, Eric.

A few questions.

I guess going back to the meeting a year ago at Hershey, you talk a lot about price realization, the opportunities you have, and that would be a major factor in driving margins.

But obviously that didn't come through if volume was most of the growth in the full-year sales.

So what -- I guess what kind of gives you confidence in '07 that price realization and/or, I guess, mix, is going to work for you?

Eric, in the early part of 2006, the first quarter, and a little bit into the second, we did have some carryover pricing and weight changes that we had to accomplish in the portfolio.

As we went through the year, we didn't have any list pricing that we were cycling, and as a matter of fact, we actually increased our trade promotion rate in the fourth quarter, behind the new platforms and merchandising in convenience stores.

So we didn't get price realization, either list or trade promotion for 2006.

We also didn't get any kind of favorable mix gains that we would have liked, because as we got out of limited editions, our loose bar take away was not very good as we were cycling that out.

So 2006, we didn't get the mix in pricing we would have liked.

As we look at 2007, all of our 2007 initiatives for the most part are in very high price per pound, good price realization segments.

They're behind core brands, they're behind dark chocolate and premium chocolate and refreshment items as well as having a loose bar history, if you will, for 2006, which was pretty depressed.

So as we look to 2007, we would expect to generate favorable mix.

Okay.

And then on kind of related to that, I assume not being a chocolate expert but I assume that dark chocolate has a higher cocoa content and somewhat lower sugar.

So does that mean from an input cost, even though we know that you have, you know, sophisticated hedging in place, does that mean that over time, you become more leveraged to cocoa volatility?

Eric, we won't comment on anything specify to ingredients or cost for a specific item.

I think what's important about dark chocolate is we're able to deliver a superior value proposition and at a higher price per pound, and, therefore, a better margin for us.

Okay.

And then as a follow-up, Rick and Dave, you've both been around the industry for a long time.

You've seen just as many of us have, that when you kind of reach the excellent -- and it's fair to say you've done a great job -- the excellent operating margins that you have, that that is just a very difficult level to overcome.

Maybe you're going to address that at Cagney, but I'm kind of wondering, because when I go around, it's just most of the investors kind of see that wall at 21, 22% also.

So what can you say to us that gives us such comfort that margins can continue to expand from such a high level?

Eric, I think we're going to cover this in greater detail at Cagney specifically around plans to expand gross margin and get some leverage in the business system as well, we will give you more flavor for that next month.

But as you note for 2007, I did say from an EBIT margin expansion standpoint we would expect that we would be pretty much flat.

So we do have some required investment we need to make in marketing and selling this year that we will make to get the business growing the way we'd like it again, and then when we get to Cagney, I think we'll probably give you a little more flavor for where we're headed in the future.

My last question, Rick, is that why you've asked Dave to move from CFO to COO in terms of focusing more on operations?

Is there something in particular that you, don't like or didn't do well that needs to be accomplished and that that is a -- kind of an H.R. response to getting the consolidated margins up?

I think there's a couple of things.

If you think about a parallel path with one path being we want to get the core U.S. business growing again.

Obviously we feel we're in an advantaged position and the fact that we didn't have the type of year in 2006 in no way mitigates or undermines the competencies and competitive advantage that we think Hershey has.

So think of that as one path.

The other path is we see significant growth opportunities outside of the U.S. and selected markets as we've highlighted as well as wanting to advance the overall strategic agenda.

So it's more about taking advantage of Dave's experience and working hard to get our U.S. business back on track, but also freeing up some time for myself to focus on some broader strategic initiatives and leadership development.

Okay.

Thank you.

See you at Cagney.

Thanks, Eric.

Your next question comes from David Palmer of UBS.

Hi, it's actually Dalia Toll on behalf of David, good morning.

Good morning, Dalia how are you?

Good, how are you?

Good, thanks.

I have a couple of questions, how much of the weakness in 2006 was the result of promotional strategy that you're rethinking for 2007 and how much was the result of worse than expected trial and repeat from new products, both the limited editions and innovations?

I think there's a couple things.

First off we talked about the declining incrementality of limited editions in 2006 versus 2005.

And they were, limited editions, have always been instrumental in getting merchandising activity on the base brand.

That's where we saw a collateral impact on our base brands.

And then on trial and repeat, as we have talked about, we saw very good progress on our new platforms, dark chocolate was our fastest growing business, Icebreakers had a very good year in terms of mints and we're following that up with Icebreakers Sours gum, Icebreakers Ice Cubes gum for 2007.

So it was more about not having some of the news to drive in-store merchandising, as well as we weren't doing some of the retail coverage initiatives as well as we had in the past.

So when you think about getting the news and spending behind our core brands, getting news and spending behind our platforms and having the right level of retail execution, that's why we expect to see an improvement in 2007.

And could you just elaborate on the promotional strategy differences between 2006 and 2007?

We won't get into the specifics of that, no.

Okay.

I have a follow-up question.

You mentioned about advertising increasing.

Is it increasing as a percentage of sales and do you have a target?

It is increasing as a percentage of sales and we've never provided any specific targets on spending.

Would it be closer to 2002 or 2004?

I'm sorry?

Would it be closer to 2002 or 2004?

It will be up.

Okay.

Thank you very much.

Thank you.

Your next question comes from Jonathan Feeney of Wachovia.

Good morning.

Quick question, Rick on advertising.

For quite a while now, you've been spending a little bit less on than some others.

While it's not perfect, I mean, traditional media advertising, we tend to hear around the industry, it's still probably the best way of promoting broad appeal core brands.

But I heard your comments under your first goal of reinvigorating core brands about things like Wal-Mart TV, it makes me think you're still somewhat skeptical of that value.

Could you show us a little bit more data about what your mix of advertising spend might look like and to the extent you're spending that away from the traditional advertising that we're all used to hearing about and seeing, some data about why and how that's more effective?

Sure, a couple of things.

Over the past few years we brought a lot of news to the marketplace via in-store and product, whether it be limited editions or some of our new items.

We didn't advertise the core brands to the same extent that we are going to be doing in 2007.

Part of that is that core brands benefited from the news around limited editions, and the core brands also benefited from some of the advertising behind new items, whether it be Kissables or Hershey's Take 5.

What we're saying for 2007 is we want to restore advertising support broadly behind our core brands and also behind the news of our platforms.

As we continue to do our marketing mixed modeling, a couple of things come out.

Trade promotion, not meaning price discounting, but trade promotion, meaning in-store merchandising and display still has the highest ROI.

Advertising does very well and that's why I said Kisses is our most responsive brand to advertising.

So it's no surprise that Kisses, Reese's and Hershey will have significant increases in advertising.

The comment about or the data around the Wal-Mart TV just shows here's a great opportunity that when Wal-Mart runs in-store TV on your brand, I can assure you you're going to get in-store merchandising support.

We like the combination of strong consumer media to drive awareness to deliver some of the benefits around the product but we certainly want to have in-store support.

So it's not an either/or proposition.

Okay.

And just on the international side, Rick, it seems that scale could be a barrier in a lot of the fastest growing markets.

Have you looked at partnerships, that perhaps you could take that disadvantage out of the equation?

How are you looking at that?

As we talked about, we do see working with well-established partners within a specific region.

We talked about that as an opportunity to increase the odds of success as well as lower our investment and risk profile.

I did mention that we have entered into an agreement with the leading Asian food and confectionery group to manufacture confectionery products in China for the greater China market.

There will be a press conference, a joint press conference with this company in Seoul, South Korea on January 29th and we'll provide more specifics when we're together at Cagney.

Thanks very much.

Your next question comes from David Driscoll of Citigroup Investments.

Good morning everyone.

I know you've talked a lot about trade promotions, I've just got a few more questions on this.

Can you tell us what the change for the full year was in your trade promotions?

The rate was up slightly for the full year, it was up more in the fourth quarter.

As I said we spent behind our platforms and we spent behind the new initiatives, core brand initiatives in convenience stores but I don't want to get into anything more specific than that.

Rick, can you then comment -- I think you made some comments already on this by saying that the trade promotion strategy just simply wasn't as effective as you want.

You didn't have the right initiatives.

Yet, you actually spent more in the fourth quarter.

I'm not understanding exactly where the problem was.

What was wrong, if you were spending more in the fourth quarter, I would assume that you were, in fact, spending behind initiatives, but nonetheless it doesn't seem like it worked out as you had originally hoped.

Can you help me understand what happened there?

Yeah, let me address it specifically.

We selectively increased our trade promotion investment in the fourth quarter, particularly within convenience stores where we did see takeaway in the most recent four weeks higher than the 12 weeks and higher than year-to-date.

We did see a very good improvement in the most recent four weeks within our chocolate business up about 6% in convenience stores.

This is retail takeaway for the four weeks.

So where we selectively invested in convenience stores, we did see some improvement.

Another portion of the increased trade expense for the fourth quarter is behind new products and our platforms and that obviously will benefit the business subsequently in 2007.

I want to make sure that what we said was not that we had a problem with our trade promotion strategy, we said the absence of news from a consumer standpoint and not being able to have some of the level of retail execution, A, behind not having the news and B, in terms of needing to do some improvements with retail coverage, which we're now executing.

That's really what brought it together.

And then just one fast question, everything else has pretty much been answered.

Can you tell us what your C store market share did for the quarter?

C store market share for the quarter was down.

Okay.

Thanks a lot everybody.

Thank you.

Your next question comes from Pablo Zuanic of JP Morgan.

Good morning, everyone.

Rick, with all due respect, I have to ask you this question: If Milton Hershey was alive, he would have seen the share price go from $68 to $49, he would see clearly this is a company crisis.

Last two quarters are poor performance, here the Chairman and CEO of the Company is stepping back to focus on leadership development and potential business in Korea and China when the problem is in the U.S.

When I see other companies promote someone to Chief Operating Officer, normally it's because they're paving the way for succession.

In a crisis mode, I would have assumed, you, Rick, which I have a little respect for, and clearly, you've been a star in the sector to be in charge in a crisis mode, trying to turn the Company around.

Can you help me reconcile this?

I didn't quite hear your question at the end.

I just want you to help me reconcile the issue here.

I'm a bit confused about the timing of promoting Dave, great resource, of course, to COO. [indiscernible] more in charge instead of focusing on things in China or leadership development, honestly.

I appreciate the question, and observation, certainly not a question of either/or that I'm going to run off to China, Korea, and Dave's going to be left back here doing things.

That's not it.

I'll put in a couple of things.

First off, we had five very, very strong years.

We've talked about that.

And last year, '06 was not the type of year that we are used to having, but I wouldn't in any way, shape, or form say we're in a crisis mode.

I think what's important is we've done a lot of things we've learned from, we've certainly had some missteps and we also believe we're headed in the right direction.

I'm going to be working with Dave to ensure that we get the U.S. business back on track.

And there's no master plan here.

This isn't step 1 or step 2 or anything of that nature.

It's not as though I'm walking away from what we need to do.

As Eric had asked a question previously, we see a parallel path.

We see opportunities to get our business back on track in the U.S. and quite frankly we have to be every bit as aggressive at other opportunities to build our business broadly.

And that's not just within global expansion.

One last one, in terms of EBIT margins and guidance clearly is for flat EBIT margins in '07, the way I understood it, the gross margin increases we're finding increasing SG&A.

I'm trying to understand the gross margin increase.

I see that there's less pricing power, I see the Company spending, more [trip] spending especially in the fourth quarter, I assume that some of that would percolate into the first half; you talked in your press release this morning about more cost inflation, then you know obsolescence has been going on for a while, I see that return merchandise to some extent of sales that didn't really happen before, that may continue into '07.

Why should I expect gross margin expansion in '07?

I think there's a couple of things, Dave touched on it when I think Eric had asked the question.

For us to get gross margin expansion and primarily to be able to get price realization is to ensure that we start to improve the mix.

And our ability to drive single-serve growth is a great contributor to gross margin expansion.

So the majority of our new platforms are single-serve.

And our core brand support that we've highlighted this morning will do much more so next month, our core brand support benefits single-serve and it's primarily on Reese's.

So you think about investing into those parts of our businesses that have good margins as well as building those platforms that have inherently higher margins, and cycling a higher level of obsolescence expense in '06 and '07, that's where we believe there can be gross margin expansion.

And Dave's also talked about productivity improvements.

Again, just to be clear, trade spending applies only to packaged candy, not to single-serves, not to C stores, drug stores or it can apply to everything trade spending in this case?

I'm not sure I understand the question.

We invested in --

Well, normally, I don't see - I mean, let me explain so you understand it, Dave.

Normally I've never seen trade promotions of discounts at the checkout counter or the supermarket, I've never seen a discount necessarily at a C store, I'm just trying to understand the strategy of the single-serves.

When I think about trade spending, should I be thinking about packaged candy or about single-serves?

When you think about trade spending on instant consumables, it's not necessarily about price reduction, it is about getting a merchandising vehicle in the right spot.

So it's about getting shippers, displays, counter units, et cetera, in the right spot, it's not about necessarily a price point.

Okay.

Thank you very much.

Your next question comes from Edgar Roesch of Banc of America Securities

Hi and congratulations, David.

Thank you.

So just trying to understand how SG&A dollars were down $25 million from last year.

You mentioned a few drivers.

Could you just prioritize them a little bit?

You mentioned --

Sure, it's a combination, Ed, I think between -- we've had very, very good G&A control all year long as it relates to the realignment initiatives.

We had an early retirement in 2005 that kicked in, and has given us very good spending control and reductions in G&A all year.

And then also as you would expect in the back part of the year here as we have come up short of our targeted numbers, we've reduced our incentive compensation expense outlook and that's been favorable in the G&A as well.

It's kind of the order of importance there.

Was advertising pretty much not a factor in the change there?

In the fourth quarter we did focus our ANCP spending on certain brands and initiatives, but not that big a factor in the quarter.

Okay.

Then just also understanding for next year, sales are going to be up 3 to 4, EPS up 7 to 9 and your EBIT margin will be flat, are those all correct statements?

Yeah, that's correct.

Okay.

I'll work with you a little bit on that later.

Let's see, just two more.

You mentioned at the Holiday at Hershey last year that you'd beaten the market on sourcing your inputs for about four years in a row, can you add '06 to that list?

I'd rather not get into anything specific, we continue to feel very good about our purchasing practices.

One last thing, it seemed like, maybe Rick, you want to address this, but it seemed like some of your new products have a wellness angle to them, whether it be the wellness mints, or the chocolate bars with reduced sugar and high fiber content.

Can you kind of talk about the genesis of that and how long those have been in development, things like that?

Health and wellness is obviously a growing segment and part of that's represented by organic, part of it's represented by some of the work we had done on sugar-free a few years ago.

It's just a portion of our portfolio where we're able to deliver some consumer benefits.

The products that I mentioned, the three that we're coming out with, and you mentioned them, the whole bean, the antioxidant, the organic, those have not been in development that long of a time.

They'll get into the market in the middle of 2007.

Did the Dagoba acquisition help out a little bit with the development of some of those items?

I think we're learning.

I mean, Dagoba is admittedly a small business but very well positioned in high end organic chocolate segment.

We're going to learn from them and we hope they can learn from us.

All right, I'll leave it at that.

Thank you.

Thank you.

Your next question comes from Steven Kron of Goldman Sachs.

Thanks, good morning.

Good morning.

A few questions, they all turn out to be follow-ups here, but I guess first on the C store information that you provided, market share seemed like it was down for the quarter but you seemed to suggest that the last four weeks the sales really picked up.

I was wondering do you have market share data for the past four weeks?

We don't give out intraquarter share data.

The important thing is that we did see improvement in takeaway particularly in chocolate for the most recent four weeks, better than the 12 and even better than the year-to-date period, I'd like to leave it at that.

Can you give us the full-year market share change?

The full-year market share change for convenience stores was down one half of a share point, full year 2006.

Okay.

On the dark chocolate you made some comments, Rick, that sales I guess have doubled for you in the last two years.

I guess you're not going to give us what percentage of your sales are currently dark chocolate related.

What do you see as category growth there, what has the dark chocolate category growth been like?

It's been very high, it's very much on trend, we don't have the specifics but in terms of what dark chocolate's contribution was to the total category growth would be extremely high.

Okay.

And just an initial read on Cacao Reserve, given the more expansive rollout in the fourth quarter, is there any specific trade that you can point to that things are maybe doing better than other places or what's the early learnings on this?

Too early to tell.

We're pleased with some of the response we're seeing at retail but certainly don't want to overstep reacting yet, it's very early days.

Lastly, certainly we'll hear more about this I guess later this month with the international efforts and the international agreements but should we be thinking about anything from a sourcing and ingredient cost things given the predominant focus thus far is in the U.S.?

Anything from a commodity standpoint, or gross margin standpoint?

I'd rather not comment any more at this point.

Thank you.

Okay.

Thanks.

Your next question comes from Robert Moskow of Credit Suisse.

I just wanted to know if there's any way to quantify the level of display activity that you got this year and how much of a decrease it was from prior years?

And also, maybe you could give us some context, are there years in the past, Rick, where you've seen, the merchandising activity go to your competitors instead of to you, the incremental merchandising activity, and then very quickly, in a year, so get it back because the programs have improved and the support has improved?

I think what's important is as we have had very good merchandising over the past few years, that merchandising has been the result of bringing the type of profitable growth programs to our customers that encourages them to let us have the merchandising support.

So I think what we've said previously is not having had some of those types of value-added programs to get the merchandising support in '06 has been the biggest factor and again, limited editions, not to keep banging on that, but it's important.

In the previous years that had done well and we had gotten support for the base brands.

Now we're focused on getting the right level of support on our base brands and our new platforms.

We think we have the right combination of consumer and customer initiatives to get that done.

Other than limited edition, though, I'm referring to a trade article that I read a couple weeks ago that indicated the trade was unhappy with some of the restrictions you would put on -- the performance that the trade would have to do to get the display.

Has there been any changes in that regard in your tactics or is it just really you're not doing a limited edition and that's really the biggest change here?

I think there's a couple of things.

Let me take one part, I did mention, I talked about the new P3 initiative within convenience stores, it's called the Premier Partner Program, that has a greater level of flexibility and local activation, you'll hear more about that at Cagney.

That's really the only part that I'd say is a major change from what we've done in the past from a trade merchandising standpoint.

Great.

Thank you.

Your next question comes from Todd Duvick of Banc of America Securities.

Good morning.

Dave, this question is probably for you, given your recent role as a CFO, but I'm just wanting to know in terms of financing the business, you've increased your short-term debt quite a bit over the last two years, it seems like the mix of short term to long term is much heavier.

Most of that according to your filings is in commercial paper.

Can you just tell me if this is a policy change that you've had over the last two years, or if you plan to turn out some of the that short-term debt and finally, what you plan to do with the note that matures on March 1st, the $150 million note, if you plan to refinance that or just pay it off?

We have made a conscious decision over the last several years to increase our debt levels, our absolute levels of debt, whether it be short term or long term.

Given historically low interest rates from a cost of capital and cost structure for the Company, it made sense to do that and we've used those funds to buy back shares.

So that's been a conscious decision on our part.

With respect to the split between what's termed out, what's not, I'd rather not get into the specifics of the capital structure plans.

It's something that we continually look at based on marketplace conditions.

Okay.

And in terms of paying down debt like the note that matures, is it safe to assume that you'll refinance that in some form?

I mean, with a debt level, yes, when that comes due, we'll have to settle that note.

And obviously we'll have to finance it in some way in the short term.

Okay.

Thank you very much.

Your next question comes from Andrew Lazar of Lehman Brothers.

Good morning.

Hi, Andrew.

Two quick things, one, just so I'm clear, what is the key things that are actually causing the overall category to have slowed some from where you were in the first half?

I don't think we commented specifically on the category, we were talking about our takeaway, Andrew.

I guess my impression was the overall category takeaway had slowed some.

So have you seen the category, I guess, maintain sort of a rate of growth that it has somewhat more historically, and it's just a matter of what you need to do around getting back your fair share?

It's more a story around what we were able to do in the first quarter with very strong takeaway and then -- first half, excuse me, with very strong takeaway and then not having some of the news and merchandising in the second half.

So it's been more a story of getting our sales back on track.

The one thing that I've mentioned earlier, we have seen explosive growth within the premium and dark chocolate segment and that's had a positive impact for the category overall and there's been quite a bit of news in the total refreshment segment where we have both benefited and participated.

Okay.

And then I realize there's been some shifts around the merchandising and how you're affecting that at C store level and such, have there been any changes, without getting specific, but any changes in the way folks internally, particularly in sales are getting let's say compensated, because sometimes that helps gets a sense of acceleration in the way things get done, in terms of where you want their focus to be.

In 2006 we really didn't change the incentive compensation program all that much.

For 2007 we'll be making some slight changes to the compensation program for the sales folks.

But not that much.

We are making changes in the way we're looking at some of the routing and deployment of our retail resources.

We think we can make improvements in that area, Andrew and I think we'll have a little bit more about that at Cagney.

Thanks very much.

Thank you, Andrew.

Your next question comes from David Palmer of UBS.

Mr.Palmer, your line is open.

There is no response from that line.

We will proceed with the next question in the queue.

Your next question comes from Nancy [Skira] of Lord Abbett.

My name is actually [indiscernible] from Lord Abbett.

I have a question on the dark chocolate business again.

Could you please tell us what the past growth has been in this business for this quarter?

We have not provided any specific and we don't provide any specific growth for a segment of our business.

So I also wanted to ask you about the margins for this business.

Because you said that this business has better margins?

Yes.

Could you please give us a sense of how better these margins are compared to the other parts of the business?

We haven't done that.

What we have said is that by virtue of the benefits that we're able to offer to consumers, at retail, it's a higher price per pound.

So the retailer gets a higher margin and we in turn also have a higher margin on the dark and premium chocolate businesses.

Thank you.

Thank you.

And the last question is about your market share in this business.

What is your market share in the dark chocolate?

It's -- it's higher than our total share.

It's roughly around 60% of solid dark chocolate.

60, six-zero?

Yes.

Okay.

Thank you very much.

Thank you.

Your next question comes from Alexia Howard of Sanford Bernstein.

Hello.

Good morning, a quick question on the sales mix in the quarter.

There was a comment earlier that sales mix was less profitable and I know we've talked about going forward, what the benefits are going to be and why positive mix should kick in in 2007.

Could you give some color on what caused the negative mix shift in the fourth quarter?

Was it more within the chocolate category into multi-- you know, more sales of multipacks and snacking items or was it more between different product categories within your portfolio?

Alexia, really it wasn't really a negative as much as we were expecting it to be positive, and it's really a sense that we still were cycling through some of the limited editions in the category.

So our singles business was not up and we had a very good seasonal period, holiday was very good as was our Valentine's sell-in.

So it's a mix of better seasons and then some cycling through some of the limited editions which depressed the instant consumables.

Okay, thank you very much.

You're welcome.

Thank you.

We have a follow-up question from the line of John McMillin of Prudential Equity Group.

Thank you.

Hi, John.

Sales were reported down about 1% in the quarter, but I think there was some impact from acquisitions.

I don't know when you made some of the dark chocolate moves.

Can you give us the impact of acquisitions in the quarter?

It wasn't very much, John, Dagoba year-over-year was a small amount.

A tiny amount.

A percent or two -- okay.

No, not even that.

A very small amount.

And then China, I've been there, I've seen a lot of gum, I must admit, I haven't seen much chocolate.

Can you just, I know you don't want to preempt what you're doing next week, but how big is the category over there?

Is chocolate already a big part of Chinese consumer habits?

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

There's certainly the chocolate market, there's the sugar confectionery market, we've seen very good growth in chocolate in China as you see it in other markets as terms of - as the modern trade gets better developed and as obviously the purchasing power increases.

For us, our issue has not been consumer acceptance of our products, our issue has always been the absence of in-country manufacturing and an advantaged route to market.

So from where we sit, we see an opportunity to get in now.

It's not as though we believe we're late, and we see opportunity, as we said in selected markets, John, and to do so with well-established partners is one route because that gives us an inherent cost advantage as opposed to trying -- as to going it alone and starting from scratch.

I'm trying to understand the milk issue, other issues, how much chocolate is part of the habits already.

A good portion is.

There's a lot in the gifting.

There's certainly a lot of opportunities in the traditional trade, which are the mom and pops, and the kiosk.

So, again, being able to have an alliance with a well-established partner we have access to not only their manufacturing capabilities but certainly their understanding and local knowledge.

We think it's a great way to bring our brand franchises to potentially high-growth markets.

Just my last questions revolve around dark chocolate, you can kind of, as a wise guy comment, will people really kind of eat chocolate to get fiber?

Is that the delivery system?

And just if you can kind of quantify how big that U.S. dark chocolate category is right now and how fast it's growing?

I don't have those specifics.

Dark chocolate category as talked about is growing rapidly, in fact, it contributed to the majority of the total confectionery growth.

We'll have that at Cagney.

What we were talking about was less sugar.

And it did have added fiber, that one particular product, the whole bean had less sugar.

So that's one item of several new items.

But again it's leveraging the Hershey franchise.

The major emphasis for us is dark chocolate.

We've seen growth, we have the leadership share there and we feel good about the prospects.

Okay.

Thank you.

Thank you, John.

All right, with no more questions we'll conclude today's session, [Monifer] and Brian Clemens and I will now be available to answer any additional questions you may have.

As a reminder, our 2007 first quarter sales and earnings release and conference call is scheduled for April 19th, 2007.

We'll release earnings at 7:00 a.m. that day and hold a conference call at 8:30 a.m.

We look forward to seeing you all at Cagney where we will present on Tuesday, February 20th, at 1.15 p.m. local time.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.