好時 (HSY) 2007 Q2 法說會逐字稿

Good morning.

Good morning.

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

At this time, I would like to welcome everyone to the Hershey Company second quarter 2007 results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS).

Thank you.

Mr.

Pogharian, you may begin your conference.

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

Welcome to the Hershey Company second quarter conference call.

Rick Lenny, Chairman, President, and CEO, Dave West, Executive Vice President and COO, Bert Alfonso, Senior Vice President and CFO, and I will represent Hershey on this morning's call.

We welcome those of you listening via the webcast.

Let me remind everyone 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 2006 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 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've 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 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.

We will discuss our second quarter results for 2000 and 2006 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 $124.4 million in the second quarter 2007 and $2.6 million in the second quarter 2006.

Our discussion of year to date results in any future projections will also exclude the impact of net charms relate to these business realignment initiatives.

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

Thanks, Mark.

Results for the second quarter were in line with expectations communicated in May.

Improvement in the U.S.

business has been slower than anticipated, and higher dairy prices adversely impacted results for the quarter.

Importantly, increased investment in our core brands proved beneficial.

Reese's, Hershey's and Kisses achieved a combined 4% increase in retail takeaway during the quarter.

This performance was more than offset by lower velocities of some previously introduced new items and heightened competitive activity within the refreshments segment.

Therefore retail take-away in total was down slightly, off 0.4%, resulting in a share loss for the quarter.

Solid progress was made on Hershey's long term strategic priorities.

The global supply chain transformation is on schedule and the joint ventures in China and India are on track.

These initiatives will enable Hershey to compete more broadly in the explosive growth within emerging markets.

Dave will discuss the second quarter in detail.

I will then provide a summary of our key plans for the second half of the year.

Most important, we're taking the necessary steps to regain momentum and better position Hershey as we enter 2008.

Now here's Dave.

Good morning, everyone.

As Rick highlighted, our Q2 results were in line with expectations previously communicated in May.

Consolidated net sales in the second quarter of $1.1 billion were flat versus the year ago period.

Diluted EPS from operations of $0.35 declined 17%, primarily due to increase in dairy costs and slower improvement in U.S.

retail trends.

For some detail on net sales, which versus prior year were flat for the quarter.

Excluding benefit of the Godrej acquisition and JV, they were down 0.7%.

This reflects essentially flat corporate-wide volumes and negative price realization of around 1 point.

The pricing action announced in the U.S.

in April had little impact in the quarter as we protected previously agreed to promotional price points.

In addition, we increased trade promotion in the quarter behind coupons to generate trial of selected new items, notably Cacao Reserve, as well as couponing behind big merchandising events, such as S'Mores, and our Reese's and Coke promotion in convenience stores.

The flat overall volume reflects some gains in our international businesses, offset by a slight decline in the U.S.

U.S.A.

growth in core brand shipments on Kisses, Reese's, and Hershey's, growth on selected new items such as Reese's Crispy Crunchy and IB Sours gum, and in premium and dark chocolate with Cacao Reserve and Special Dark were unable to overcome continued declines in Limited Editions, a slow down in items launched over the past few years, such as Take5 and Kissables and in discontinued items such as Bites, and particularly in discontinued gum brands such as Coolers and Carefree.

Turning now to marketplace performance, Hershey's retail take-away in the quarter was roughly in line with shipments.

Consumer take away for the 12 weeks ending January 17th in channels that account for over 80% of our retail business was down 0.4%.

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

Our core chocolate franchises, Hershey's, Reese's, and Kisses were up as programs behind the Kisses 100th anniversary, and Hershey's S'Mores, as well as increased advertising spend on the core drove take away on these brands up 4%.

However, we did not keep pace with the category growth in refreshment or in the premium trade-up segment of chocolate, losing share in these areas.

The premium segment was a major driver of share loss in the drug and mass ex classes of trade.

Our new Cacao Reserve product has performed reasonably well, but has not kept pace with the stronger growth of competitive premium entries.

Additionally, lack of news in combination with fewer limited editions and the impact of discontinued items led to reductions in merchandising quality, particularly in the C store channel, where our take away was down 1.9% and we lost 1.3 share points.

Overall we lost 1.5 share points in the latest 12 weeks in [SDMXC.] Notably, we are pleased with our performance in other non measured, non reportable channels such as club stores, and importantly, at Wal-Mart.

We expect our overall takeaway in share performance to sequentially improve as we continue to reinvest in core brand growth and support our new platforms with enhanced customer and consumer activity in the second half of 2007.

Going forward, our retail coverage initiatives should also improve merchandising.

Rick will give you further details on these actions shortly.

Turning now to gross margins, during the second quarter, gross margin was down 340 basis points.

This is due to overall input costs which were higher year-over-year.

In particular, dairy costs are up markedly.

The dairy markets are not as developed as many of the other commodity markets and therefore it is more difficult to take forward positions to cover ourselves over an extended period of time.

In the second quarter, total net commodity costs negatively impacted gross margin by about 350 basis points.

Obsolescence costs were at relatively normal rates and in line with the first quarter.

The softness in single serve did have a negative product impact on margins in the quarter.

Offsetting a portion of these declines were favorable manufacturing variances and productivity.

Our India joint venture closed late in the second quarter and did not have a material impact on gross or EBIT margins.

EBIT margin for the quarter was down 270 basis points as SM&A was about 3% below last year.

The majority of this decline was driven by lower G&A, primarily incentives and benefit costs.

Advertising increased in the quarter up over 25%.

Consumer promotion declined as these dollars were shifted to trade promotion in the form of trial driving coupons.

Total brand spending for the quarter, that's advertising, consumer promotion, and trade promotion, was up 12% versus prior year.

Our ad spending was focused on core brands such as Reese's, Kisses, as well as some new platforms, primarily in dark chocolate and Cacao Reserve.

Going down the P&L, moving to interest expense for the quarter, interest expense increased, coming in at $29.2 million versus $27.5 million in last year's second quarter, reflective of higher short-term borrowings to fund the $250 million share repurchase program initiated earlier in the year and the $500 million share repurchase program completed in 2006.

The tax rate for the second quarter was 36.2%, slightly lower than the prior year, but in line with the 36.0 rate we are projecting for the full year.

Note that on a quarterly and year to date basis, the reported tax rate is significantly lower than the pro forma due to the higher tax rate applicable to the supply chain realignment charges.

Weighted average shares outstanding on a diluted basis for the quarter were 232 million versus 240.1 million shares for the second quarter 2006, leading to EPS of $0.35 per share diluted from operations, down 17% versus year ago.

A quick recap of year to date pro forma results, net sales increased about 0.6% in the first half, or 0.3% excluding Godrej Hershey in India.

EBIT from operations declined 8%, with EBIT margin down 150 basis points to 16.7% from 18.2%.

Higher advertising was offset by tight cost control and lower incentive compensation expense.

Gross margin was 36% year to date versus 38.2% last year, due primarily to increased input costs.

EPS diluted from operations in the first half declined 6.5% to $0.86 per share.

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

At the end of the second quarter, net trading capital decreased from the end of last year's second quarter, resulting in improvement of $104 million.

Accounts receivable increased $51 million and remains extremely current and of high quality.

Inventories were lower by $64 million compared to second quarter last year, and accounts payable increased by $92 million in the quarter.

The improvement in working capital reflects 2007 planned programs to improve our sales and operations planning process and to stretch our days payable.

This has resulted in improvement in net cash from operating activities that is running about $150 million ahead of last year.

Some other cash flow items.

During the quarter, capital additions, including cap software, were $41.4 million.

For 2007, we continue to target total capital additions to be in the range of 250 to $300 million, driven by our global supply chain transformation initiative.

Depreciation and amortization was $83.9 million in the quarter.

This includes accelerated depreciation related to the global supply chain transformation plan of $33 million.

So operating depreciation and amortization totaled $50.7 million in the quarter, and should be in the $200 to 210 million range for the full year.

Dividends paid during the second quarter were $60.1 million.

We did not acquire any stock in the second quarter related to the current repurchase program.

There is $150 million outstanding on the current authorization that the board approved in December 2006.

During the quarter we did repurchase $47 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.

Lastly, we made $77 million in investments in Godrej Hershey in India, and with the [Lo Te] joint venture in China.

Let me quickly give you an update on the impact of the global supply chain transformation initiative which we announced back in February.

20 closures have been announced, 6 in total.

During the quarter, total business realignment charges of $124.4 million pretax were recorded.

This reduced reported EPS by $0.34 for the quarter.

We recorded $41.3 million in cost of sales, consisting of accelerated depreciation and inventory reductions.

The $3.3 million recorded in SM&A related to the program reflects program management costs.

The $79.7 million on the restructuring line in the P&L includes $53 million related to employee costs and $27 million related to asset write-offs and contract terminations.

Overall projections for the project remain in line with what was announced in February.

And on a year-to-date basis, the pretax expenses related to this program total $164.8 million or $0.44 per share diluted on a reported basis.

To date, our plans are on track for the global supply chain project and we expect to recognize $15 million in savings from the realignment by the end of the year.

Construction of the new facility in Monterrey is on track and we'll begin production there in 2008.

Let me close by talking about 2007.

And the remainder of the year.

Increased investment spending and trade promotion, advertising, and retail resources will continue for the remainder of the year, and should lead to improving marketplace performance as we work our way through the rest of 2007.

Specifically, we should see an improvement in trend in U.S.

business versus the first half behind improving core brands, seasonal offerings, and artist and confections programming.

Our Canadian business will cycle last year's recall in Q4, and we'll also relaunch our business in China in the back half.

Therefore, for the year, we anticipate organic net sales growth to be in the low single digits.

Benefits from the India joint venture will be additive to this number.

With respect to gross margin, we would expect the moderation in the gross margin decline in the second half.

Dairy cost escalation has slowed a bit in radio weeks.

However, the market remains volatile.

As we mentioned earlier in the year, our productivity program is stronger in the second half, and we will incur more normalized levels of obsolescence expense versus prior year.

These benefits won't be sufficient to offset the entire overall increase of input costs.

So the top line and margin outlook and our commitment to continue to spend behind our brands leads us to expect 2007 diluted earnings per share from operations to be down mid single digits its for the year, as we continue to do what is needed to reestablish marketplace momentum.

Now, Rick will provide some specifics.

It's obvious Hershey didn't perform up to expectations during the first half.

Although progress was made in many areas, we've yet to experience the broad based gains that are reflective of a very attractive category and Hershey's competitive advantages.

As we enter the second half our number one priority is to restore Hershey's marketplace momentum within the U.S.

Where we have combined solid execution that leverages our scale with strong innovation and investment, our business has responded.

We fully intend to do what's necessary to create this combination through the balance of 2007 and beyond.

Therefore, despite the ongoing commodity cost pressure with significantly increasing the investment in advertising, key consumer and customer promotion events, innovation and retail coverage.

Our core brands posted a 4% gain in retail take away in the second quarter behind increased brand investment.

This investment spending will continue in the back half, and I'll provide specifics in a moment.

The other big opportunity for us is new product innovation.

Over the past several years, we have had good success in new products, particularly Limited Editions and dark chocolate.

However some of our new products have experienced shorter life cycles than expected.

This lower velocity has impacted retail distribution and takeaway.

In addition, the majority of the falloff has been within the single serve pack type thus impacting margins and performance within convenience stores.

Our new product innovation must become more sustainable.

This will require sharper consumer and customer insights and a more rigorous process from idea development to end market execution.

We're taking the appropriate steps in terms of resource allocation and key changes to our new product development process.

We're pursuing parallel paths for new product innovation.

One is close-in news that leverages our core brands, while the other is more sustainable platforms, such as dark and premium chocolate.

I'll start with broader platforms.

The platform that is the most promising is dark and premium chocolate.

This segment is expected to show continued strong growth.

Over the next five years we expect the segment to measure $2.5 billion at retail, representing a mid teens compounded growth rate.

Hershey's growth in this segment has not kept pace with the competition and this will change.

Through the years, Hershey has benefited from portfolio, scale, and mainstream chocolate.

This approach will continue in premium chocolate in two key ways.

First, earlier this morning we announced strategic alliance with Starbucks, one of the most iconic brands in the world.

Hershey will manufacture, distribute and market a broad range of Starbucks branded chocolate and cocoa products beginning in early 2008.

The premium segment is poised for rapid growth as consumers search for superior high end offerings and as retailers are adding sections dedicated to premium chocolate.

Hershey as category captain will provide customers with the appropriate category management insights to fully capitalize on this opportunity.

The addition of Starbucks when combined with Hershey's Cacao Reserve, Scharffen Berger, Joseph Schmidt and Dagoba brands, will enable consumers and customers to select from a wide portfolio of on trend superior premium chocolate products that deliver unique benefits and satisfy numerous usage occasions.

Hershey's retail scale and merchandising expertise will be a key enabler of the strategy.

It will certainly speed the development of Cacao Reserve by Hershey's, which represented our initial entry within the mass premium segment.

Consumer research, both prior to its launch and following the initial trial, confirms that the Hershey brand can participate in this emerging segment.

To ensure that we deliver the right consumer proposition during the remainder of 2007, we're evolving the Cacao Reserve portfolio.

Late in the second quarter, we launched indulgent individually wrapped truffles and chocolates in stand-up bags.

This past weekend, an FSI delivered coupon support, that in conjunction with in-store merchandising should further boost consumer trial.

In-market learning will help determine the power SKUs, while phasing out slower moving items.

Some of the items in the line were developed in concert with Barry Callebaut, the world's largest producer of cocoa and chocolate products.

This week, we announced that we would further our relationship with Callebaut.

We finalized an agreement enabling the two companies to partner on research and development activities, with a focus on driving innovation and new chocolate taste experiences, premium chocolate, health and wellness, and ingredient research.

This alliance provides Hershey with immediate access to these capabilities.

To build additional scale within the premium trade-up segment, we're developing a major new entry that will be announced later this year.

Turning now to the refreshment platform, this segment is on trend from a consumer standpoint, delivers profitable growth for retailers and is highly incremental for Hershey.

As such, it it's attracting a significant amount of competitive activity, particularly in new products and varieties.

We experience strong growth in 2006 but have lagged the segment this year.

Although Ice Breakers is a brand that can effectively compete in refreshment, our innovation to date has not been as consistent as we need it to be.

Where we have been able to gain distribution, the velocities have been solid.

This is the case with Ice Breakers Sours, mints and gum, and York mint tins.

However, the competitive activity mentioned previously and the lack of portfolio scale in refreshment have limited our retail space.

New refreshment items must deliver a meaningful consumer benefit that can compete effectively at retail and maintain a reasonable level of ongoing sales.

We believe that wellness mints and gums do this.

In May, we launched two flavors of Ice Breakers wellness gums.

These offer consumers unique benefit as they include ingredients such as ginseng, vitamins and antioxidants.

In September, we'll introduce Ice Breakers wellness mints.

Both the gum and mints are packaged in convenient, on-the-go tins.

In December, we will introduce Ice Breakers ice packs.

This unique product delivers a superior boost of cooling sensation by combining breath strips in a pouch filled with xylitol.

A third platform involves well-being.

Consumers are responding to the benefit of portion control, especially 100-calorie packs.

Across the food industry, this segment is growing at rates better than 60%.

Hershey is participating broadly in this growth with Snacksters 100 calorie packs.

In addition, Hershey's 60 calorie sticks and 100 calorie bars are performing well.

We're adding capacity to keep pace with full-year sales growth that's expected to be up double-digits.

So our approach going forward is to be more targeted in our positioning while delivering consumer benefits that can leverage Hershey's retail and technology scale.

This approach will also be applied to close in new products, which brings news to our core brands and leverage strong equities.

This has worked particularly well with Reese's.

Reese's Crispy Crunchy has added a new dimension to the brand, and is the major driver of franchise growth on a year-to-date basis.

Reese's whips, which will deliver a meaningful consumer benefit of 40% less fat, will now available in September.

The Reese's brand will also benefit from the Elvis peanut butter and banana cream limited edition.

Retail selling was successful, and we anticipate very strong in store support.

For example, at a major drugstore customer, Elvis is a top five turning standard bar.

Given that we had request for twice the typical number of merchandising units, we expect to have more success stories such as this.

In addition to bringing news to the category, these close in new products will benefit from the step up in second half spending behind the core brands.

Whether the advertising message is specific to the new item, or it reinforces the existing brand equity, there's a halo effect across the franchise.

Importantly, this type of innovation will be tailored to our scale and business system.

We will plan our closer in innovation to anticipate a shorter life cycle, minimize capital and product returns, and ensure that distribution is only in appropriate outlets, customers, and trade classes.

For example, the Kisses franchise performed well in the second quarter.

Retail take away improved sequentially versus the first quarter.

This gain is attributed to the custom Kisses flavors offered only to select customers to celebrate Kisses' 100th anniversary.

In the second half, customer programming accelerates with the end stands that include the iconic milk chocolate Kiss in addition to the custom items.

Promotional materials will be prevalent in certain geographies, giving consumers an opportunity to win a trip to the sweetest place on earth, Hershey, Pennsylvania.

Our retail sales force remains a competitive advantage.

One of the major enablers of our brand-building strategy is superior retail execution, whether we're winning the seasons, driving core brand growth, or delivering innovation, we must ensure the right level of resources are placed against the right customers and channels.

For example, we have utilized our in-store presence to create what we refer to as the fifth season.

That's the very unique summer S'Mores program.

This year we developed a fully integrated promotion with the key component being preassembled pallets of Hershey's milk chocolate bars, Honey Maid Graham Crackers, and Kraft Marshmallows.

Prior to Memorial Day and continuing through the summer grilling season and Labor Day, these pallets are shipped directly to key customers.

This event supported by media and couponing has achieved strong merchandising support.

Hershey's milk chocolate bars in convenient six-packs have experienced double-digit growth.

We expect similar results for the balance of this promotion.

We continue to assess and refine retail coverage across all channels.

To support our consumer and customer initiatives, we will be increasing retail coverage by 30%.

We expect to achieve these staffing levels by September, so the latter part of the second half will experience the major benefit.

Convenience stores will be the recipient of the largest increase.

C stores continue to be a long term source of growth for Hershey.

The recent share loss is due to lost merchandising from the previously mentioned competitive activity in refreshment, and the shorter life cycles of some new products.

Increased coverage in support of stronger programming will deliver improved performance.

Within convenience stores, we will be driving our core brands.

The Reese's and Coca-Cola promotion has been widely accepted and momentum is building.

Participation in the second half will increase by 20% versus the first half.

Hershey's segment leadership in king size expanded during the second quarter, with take away up 11%.

This momentum will accelerate behind the current Elvis promotion and a fourth quarter king size two for $2 merchandising event.

Kit Kat will capitalize on the growth of hot beverages in convenience store with counter units placed at the high-traffic coffee stations.

A recently executed Kit Kat and coffee focused radio promotion has helped drive Kit Kat takeaway in C stores by 6%.

This retail investment will support strong seasonal programming.

The second half of the year is the most important from a seasonal standpoint, accounting for 60% of the full year seasonal take away.

Hershey is the clear marketplace leader during the high consumption Halloween and holiday time frames.

Seasonal orders and committed merchandising plans are on track to deliver solid performance.

The major emphasis is on our core brands such as Reese's, which will benefit from seasonally relevant TV and print support.

Our key brands respond well to in season advertising, with an ROI of over 200 during the key Halloween time frame.

As we get closer to October, we'll run FSI's promoting snack size bag candy including Reese's, Hershey's and Kit Kat.

These three brands alone account for well over half of our Halloween retail sales.

During the holiday season, we'll support a broad range of our brands with national promotions featuring strong couponing activity.

In addition, Kisses will benefit from seasonal advertising, which has proven to be very impactful with an ROI of almost two times the average.

To capitalize on the gifting opportunity, Hershey will leverage several of its brands.

Cacao Reserve will offer a variety of unique packaging formats, ideal for gifting.

These items, featured on specially created holiday gift center displays will be provided to key customers.

In addition, Scharffen Berger and Joseph Schmidt will deliver high end gifts in selected retailers.

Combined, these seasonal programs will drive sell-through and retail takeaway.

Now to wrap up.

The company's performance during the first half is not what we've come to expect, or what we're capable of delivering.

We've completed a detailed assessment of what's working and what's not, and are making the appropriate shifts in plans and execution.

We are increasing the investment in our brands and selling capabilities, while pursuing a disciplined approach to global expansion.

Based on the plans in place in the second half, we expect sequential improvement in organic net sales that will result in full year 2007 growth in the low single digit range.

Against this backdrop of improving sales, are higher dairy costs and stronger investment levels.

Both will pressure margins.

As such, we expected earnings per share diluted from operations for 2007 to decline mid single digits.

We're committed to taking the appropriate steps to ensure that Hershey's enters 2008 with a strong foundation for delivering profitable growth both in the U.S.

and within key global markets that represent attractive long-term potential.

Investments made in 2007 are the essential building blocks necessary to deliver consistent net sales and earnings growth over the long term.

We'll drive these fundamentals throughout the remainder of 2007 and emerge from this period a stronger company.

We will now open it up for questions.

Thank you.

(OPERATOR INSTRUCTIONS).

We will pause for just a moment to compile the Q-and-A roster.

Your first question comes from Eric Serotta of Merrill Lynch.

Good morning.

Hi, Eric.

Sorry about the echo there.

There was obviously a very big swing in your second half guidance.

Could you give us some quantification as how much of this is attributable to accelerating some of your investment spending to position the company for '08 versus the weaker than expected performance in the core business in new products?

Particularly, could you comment on change in your marketing spending plans versus the guidance that you gave in early May?

Hey, Eric.

Let me take a shot at that, and Rick can add some color commentary if he would like.

Since May 10th, I think, is when we communicated to you last, the commodity cost picture is a little worse than it was, so that's a part of what we're seeing here in our second half estimates now.

We will increase our investments, particularly in the back part of the year behind consumer promotion and trade spending and some couponing to get take away reestablished so you will see higher spending from us.

Probably a little bit more advertising than we would have been thinking about back in May, but even more in the way of trade promotion and FSI, some consumer activity to get things moving again, and then also as we lack through the back half of the year, frankly the share projection that we had for ourselves in the second quarter we didn't quite get to where we wanted to be, and so as we projected the rest of the year, we've taken that into account, that we have not seen it it turn around as quickly as we would like.

That does have both a volume and a mix impact because the seasonal part of the second half is already sold in what.

We would expect to see a little less robust take away in would be [foreign instant] consumables in the back half, which would have a negative mix.

Just sort of following up on that point I guess we have been hearing for about five quarters now about the mix drag as customers kind of burn through the inventories on the limited editions which aren't moving as quickly as they used to.

When does this end?

When do you -- could you give us some assessment as to the Limited Edition inventory in the pipeline in the retail channel out there, and when you see that finally at least turning neutral from being a drag?

Eric, this is Rick.

We are working through the reduction in the Limited Editions in the year-over-year impact.

I think the other one that's important, is we talked in terms of our innovation, we're seeing a shorter lifecycle on some of the new items that were higher margin single serve that we thought would have more sustainability, which is why we're being very aggressive in our two-step approach to innovation.

The close in innovation, right size to the brand, and then more broad platform innovation that can be a part of a very high growth segment such as premium and dark chocolate.

So those really are the two combining factors to your point in terms of when is it going to turn.

Okay.

Thanks a lot.

I'll pass it on.

Thanks, Eric.

your next question comes from the line of Jonathan Feeney of Wachovia.

Thank you, and good morning.

Dave, you mentioned your total consumer spending rising 12% this quarter.

Is it possible you could maybe parse that out between advertising and trade and maybe talk about what your targets are for the year for those two categories of spending?

Advertising spending I had mentioned in my remarks in the second quarter was up over 25% versus the prior year.

We would expect to see continued double-digit increases in advertising through the second half of the year.

The reason that I'm talking about consumer promotion and trade promotion together is because we made a conscious decision this year to shift some of our consumer money which the consumer promotion is down below the sales line.

We have shifted some of that up to FSIs and some couponing activity to get trial on some of the new items, and so it shows up as trade promotion expense between gross and net.

So it's a little hard for you to see it, but overall, when you put all those buckets together, it was up double-digit in the second quarter.

We'd expect similar increases going forward and a profile that's fairly similar to what we saw in the second quarter.

Do you have a number in your head as a percentage of sales?

What's the right number for ad spending on a consolidated basis?

You're clearly growing it way ahead of sales right now.

I think the important thing, as we've talked before, given our category leadership and scale within the segment, we see very high ROIs between trade promotion support and support of a value-added event as well as advertising, so we look at the total bucket of funds that we want to invest in our brands.

I think what's important about while we're increasing advertising, another factor is what are we advertising against.

If you think about it, within that increased advertising, we are very much focused on core brands, which we know respond extremely well, and they have been, and also new products, some of which are also a part of the core brand equity.

So I think not diffusing that spending across multiple parts of the business, I think we have a much greater impact, but the important thing is we see the opportunity to leverage our total investment, given the scale of our portfolio with both consumers and customers, and that's the strategy we have been following, and the short answer is we don't after specific target for the percentage of sales devoted to advertising.

We really look on it on a brand by brand, initiative by initiative basis.

Thanks.

If I could ask one more follow-up, Rick.

Sort of a big picture question.

When you have a lot going on here with international JV, Starbucks cobranding, is it possible that some of this difficulty you're seeing in the marketplace, and not -- obviously the core businesses are pretty good, but is it somewhere between those sort of new products in the market, the premium chocolate, are suffering from maybe a little bit of overload at the management level, like trying to do too much?

Would it make sense to maybe focus more on the kind of core U.S.

business, or would you say that's not a fair characterization?

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

I think within the core U.S.

business we see the long-term profitable growth opportunities within chocolate.

We have a 40-plus share of the chocolate market, the largest, most profitable chocolate margin in the world.

Everything we're doing is focused on how do we continue to strengthen that part of the business.

We have scaled back some of our efforts on snacks and you could say maybe that was a distraction in the U.S., but our work on the globalsupply chain transformation, and our work on our disciplined approach to global expansion are not distractions or getting in the way.

Quite simply they're an enabler for us to collectively have a much stronger broader based company going forward.

okay.

Thanks very much.

Thank you.

your next question comes from the line of Terry Bivens of Bear Stearns.

Good morning, everyone.

Hi, Terry.

I guess there are a number of topics on this one, but one thing I wanted to talk about, Rick, was the premium chocolate.

You mentioned there that you had lost some share there and that some of the I guess Cacao Reserve products aren't selling that well, and you're trimming some of the SKUs that we have out there?

Is that correct?

Did I hear that correctly?

I thnk what's important is -- let's take a step back.

The premium segment has shown explosive growth.

Customers are dedicating new sections to premium chocolate.

That's terrific.

We haven't been participating broadly enough, so I'll take Cacao Resereve.

Doing well.

It's largely inline with our expectations but it's a small component of our scale play in the broader premium segment.

That's why we're moving quick toll build scale with Starbucks announcement or work with Barry, Cacao Reserve and other brands.

Think of it, Cacao Reserve was our initial foray into the segment.

Some items don't do well, some do well so we're going to continue to refresh that part but most important this is a scale play and we think we can do within premium and dark chocolate exactly the way Hershey has been competitive in mainstream.

If the consumer is going towards pram why from mainstream, we'll continue to support mainstream, but we need to participate more broadly which is the steps that are being taken.

I guess my feeling on it would be, though, that I just wonder how you would feel about the initial strategy, it seems to have not played out as well as you thought more quickly than I would have thought, and, you know, you look at the venture with Starbucks, you know, that should bear some fruit, but it raises the issue of, you know, why the Starbucks brand and not the Hershey brand.

, so you know, maybe if you could just take one step back and, you know what did go wrong?

Granted, it's early stages with dark chocolate, and as you mentioned you do hope to scale up with it but I guess I'm at a bit of a loss to understand why the whole thing got off to what appears to be a pretty shaky

Terry, it it hasn't gone wrong.

I think the important thing is, we continue to be the leader in solid dark chocolate, if you think about special dark and extra dark.

What we're seeing is we're seeing explosive growth in a segment, some very strong competitive items, and we see the opportunity and -- to participate more broadly.

So cacao reserve was an initial entry to learn about the mass premium segment.

We're talking about segment that's expected to be over $2 billion.

We need to participate.

Starbucks is one of the most iconic brands in the world.

We have an opportunity to develop and market that item with our retailers and for consumers and be able to use that as another part of the foundation to bring in additional premium items.

We also said later in the year we will be announcing a major new entry.

These are very early days.

This thing is headed in the right direction.

It's going to take some time but the most important thing, this is a segment that's growing, it's on trend from consumers and customers and we're going to participate broadly.

Okay.

Just one quick follow-up.

On the C-store share loss there, can we -- what portion would be attributable to refreshment, if you could give us some color on where the competition is coming from, versus what you may have lost on business we'd look at is more being base chocolate.

The refreshment share loss was disproportionate because convenience stores have a larger proportion of total refreshment take away.

We talked about significant competitive activity and we had some trial take-away a year ago that we are lapping this year, and we talked about our innovation refreshment is going to be more back end loaded towards the lat party of the year but our convenience store initiative is more broad based than just competitive.

We didn't have the news in convenience stores in the first half of the year, whether it was limited editions from a year ago or some new items that were in their first year, the previous year, that's not the point.

The point is in the second half, we saw continued growth in king size, let me remind you that king size is a major contributor in convenience stores, so whether it's the Elvis promotion, the Coca-Cola and Hershey promotion, or some of the new refreshment items, and again the added retail coverage we see continued growth in convenience stores and we haven't done as well as we have in the past and we are going to get back on track.

Thanks for that.

I'll pass it along.

Thanks, Terry.

your next question comes from Robert Moskow of Credit Suisse.

Good morning.

Hi.

I wanted to know, I think you said that you're making changes in your R&D and your new product development process.

And I think, Rick, the way you described it, you're also going to have close-in efforts and you're also going to have sustainable platform type of efforts.

I'm having trouble figuring out how that's different from how you approached new product development before, then I'm looking at some of the items that you're talking about, like Reese's Crispy Crunchy and whips and then the Elvis promotion and the Ice Breakers items.

Should we think that these are much more sustainable items, these items are going to be much more sustainable because you've fixed this process?

Maybe you could help me understand how the process is different.

What we're doing, there's a parallel path to innovation.

There's the close in new product news such as Reese's Whips or Crispy Crunchy, and we are going to size that appropriately, in essence, closer to what a limited edition might be or a new variety as opposed to expecting it to be sustainable.

Let me give you example of one that we learned a lot from, and I think that's what's driving us towards this approach.

Let's take Take5.

In Take5 what we thought could be more sustainable innovation consumers viewed it as more of another variety, thus its performance has been more short-term than we would have liked.

So while we treated that as a brand and we invested accordingly, that's not a long-term viable proposition.

So the learning for us is that true innovation must be more platform based versus new items unless it's close in and leverages an existing brand equity such as Reese's whips.

So when we do a Reese's whips or a Crispy Crunchy, that's not a huge capital investment, we know exactly how to merchandise it, we know which customers to take it to, but when we do something like dark chocolate, premium and dark chocolate, which is a huge segment from a consumer standpoint, we need to participate more broadly, and that's where platform based innovation is going to play.

Okay.

Thank you very much.

Thanks, Rob.

Your next question comes from Eric Katzman of Deutsche Bank.

Good morning.

I'm on a cell phone, so hopefully you can hear me.

Got you just fine.

I wanted to ask maybe a little bit of a longer term oriented question.

When you first came on, you justifiably raised the targets, you had a lot of it costs to take out of the business, you did well with the new product and the limited edition effort, and since that -- this year, and I guess last year, you're going to underperform on the targets, and, we've had a lot more cost volatility than anybody expected across the industry, we've kind of learned that any commodity is kind of at risk to standard deviations of volatility beyond expectations.

So I'm kind of wondering how do you feel about the lock-term target and, you know, to the extent that that may try to push the organization beyond what -- what's reasonable at this time, given the cost environment and the competitive dynamics, then I will have a follow-up.

Eric, one way to think about it is our primary and sole focus right now is to restore momentum in the second half of this year, and begin to get the foundation in place on our joint ventures and high growth emerging markets such as China and India.

We're in the early stages but making a lot of progress on our global supply chain transformation and those are the type efforts of that we believe over the long term are going to provide sustainable profitable growth for the company.

We still view the U.S.

market as a very attractive one.

We have a leadership position, we have great scale at retail and selling capabilities, so we're not going to get into a discussion of what long-term expectations might or might not be.

Your points are well taken around commodities and competition.

We faced those in the past, and we've done well in the past.

What we're talking about is getting our foundation back on track, and ensuring that we have a broad view of where to capture strategic growth opportunities going forward.

Thank you.

And then as a follow-up, I don't know if you -- when you woke up this morning and read the Journal, but when I read the Journal and saw that Pepsico was in conversation with Nestle, I was just shocked.

From an M&A perspective, I know you can't talk specifically about Hershey and its kind of place in the world, but to the extent that these huge companies are talking about combining, how does that make you feel about the company's position and how long, I guess, of an effort does the international expansion -- how much time do you give that before the need to look elsewhere to grow is necessary?

Well, Eric, you're right, I can't talk about any potential M&A activity.

Your observation is obviously a sound one, and we think about the scale we have within a category as opposed to a company that's large because it maybe competes in multiple categories and may not have scale in all of those.

We certainly like our position in the core U.S.

market but we also know that in order for us to deliver on our long-term expectations we need to get profitable growth outside of the U.S., and we like the steps that we're taking.

We want to see how those play out.

So I would leave it at that for now, if I might.

Thank you.

Good luck.

Thanks, Eric.

Your next question comes from Christine Mccracken of Cleveland Research.

Good morning.

Hi, Christine.

Hello, Christine.

Just wanted to touch a little bit, and I know you don't provide specific commentary on your commodity cost exposure but I did want to talk about maybe your relative exposure.

Generally lacking at kind of what's happening in dairy markets and expecting maybe a sustainable increase in costs, you look at maybe formulations as a consideration, or is there any way that you can manage that exposure over time by maybe shifting away from some of those costs?

Christine, we continuously look at formulation.

There are a number of things within the products that we can do, and are certainly already looking at.

Some of them we're already doing to shift from lactose to other things.

So there are a number of things that we continue to look at and obviously we take a look at the global dairy market as well as the other mark which have become very global.

We will continue to do what is appropriate for us not only to get the product formulation to the most cost effective and consumer preferred but also we're going to have to look at our margin structure going forward and our pricing structure.

So those are all things that are under study and I can't really comment any further than that but it is something that's underway.

With your relationship now with Barry Callebaut, does that change your exposure to commodities at all?

Does that shift some of that to their responsibility with more outsourcing?

One of the things, I would say, Christine, is we've already been moving -- we moved production of cocoa powder outside.

Last year we moved production of cocoa liquor outside.

So some of the the things where we don't think that we add value in the process, we have already moved outside.

You have seen a reduction in our raw material inventory levels over time, you'll probably continue to see some of that as we use third-party suppliers where we don't really feel we add a competitive advantage ourselves.

So you will continue to see that.

It will change our inventory levels a little bit but it doesn't change the way we view the market, and our market expertise in terms of procurement will still be there.

But again obviously I think on some level it also opens us up to share knowledge with someone else who does this for a living as well.

Just one other question on seasonal.

It seems like you you've put more a focus on seasonal, increasing some of your advertising around that.

I'm curious, because you have backed off that I know recent years.

I'm curious if there's a big shift in strategy there.

Christine, I think that what we looking at in the back half of the year importantly for us is to make sure in that the marketplace we are competitive that we get our market share growing in the right way.

It is a very large seasonal component.

We have continually run our marketing mix models over the last few years and what we found is the ROI of the advertising in the season has come back as very, very highand we've adjusted our spending models accordingly to run there.

In both holiday and Halloween, you will see a little bit of advertising for us.

It goes a long way, one of the lightest users in the category, so we can kind of capture that purchase occasion.

Frankly, the way the seasonal business works, it's very important to get sell-through because it's how you base your next year's order on it and we want to make sure as we leave tend of this year that we've got very good sell through.

And the early read on Halloween and Back to School is good?

Solid.

We have a solid Halloween program in place.

Holiday and Valentine's Day have been a little tougher for us the last few years because of significant portion -- not a significant portion -- a good portion of the categories have moved toward premium gifting.

We did not have solutions in the past there.

We do have some very good Cacao Reserve and Scharffen Berger items in gifting this holiday into next Valentine's season, so we think we'll be okay.

Great, thanks.

Your next question comes from David Edelman of Morgan Stanley.

Good morning, everyone.

Good morning, David.

I wanted to ask a question about share buybacks and the balance sheet.

Clearly, even this quarter, your EBITDA interest coverage is north of seven times.

This is a seasonally weak part of the business.

Presumably you're optimistic on the long-term prospects for the company.

Between '04 and '06 you bought back almost $2 billion in stock.

Essentially at an average share price close to where the stock price is today.

So what's the argument, given those dynamics, against doing a large leveraged recap at this point?

Right now, Dave where, we are, we currently have a board authorization and clearly, the capital structure of the company is a Board-level decision I can't really give you any more specific commentary in terms of what the future plans are.

Let me tell you how we are thinking about it today.

Within the quarter we made some investments in joint ventures in both India and China.

We have significant capital expenditures this year and into early next year behind our global supply chain transformation project, and also the costs associated with that project are in terms of cash flow.

So as we look at kind of the levers in terms of using cash, we have a pretty balanced use of cash in this quarter.

We will continue to look to buy back shares.

It is accretive.

We do believe the stock is a good value, and so you should expect to see a continuing to exercise our ability to buy back shares and beyond that, I don't want to go any further than that because the capital structure strategy needs to happen at the Board level.

Okay.

Thank you.

Thank you.

Your next question comes from Eric Larson of Piper Jaffray.

Yes, good morning, everyone.

Good morning.

Quick question, Rick, on China and India.

Obviously, right now you don't have an equity line that sort of discloses what your investment -- what the drag to earnings is on that.

We all know how long joint ventures do take to start producing real earnings, et cetera.

What is the size of your investment, what is the drag on earnings, and what is a payback period in terms of when you would see maybe those ventures contributing to the bottom line?

Let me give a bit of an overview, then Dave will give some specifics.

Let's take India, for example.

India we have the joint venture with Godrej, and we started with a going concern when Godrej acquired the new train confectionery business about a year or so ago, so we have a going concern that's profitable.

You are talking about a chocolate market in India measuring maybe $400 million in sales versus one in the U.S.

that's maybe close to $8 billion.

So we see the opportunity to get in there and help influence consumer taste preferences.

It's certainly not a share gain within India.

China, we have a manufacturing joint venture and we expect to deliver profitable sales as we get that up and running.

Both of those certainly require brand and customer investment but done so in a way to build a profitable business over the long term.

Dave, I don't know if you want to give specifics.

We invested $77 million in the quarter in Godrej Hershey in India and with Lo Te in China.

As Rick said, the important thing to know about the Lo Te JV in China, it's a manufacturing JV.

So essentially, if you think about it, if we didn't have a manufacturing JV partner, we would have had to go in on our own and make the investment to manufacture.

What we are doing is sharing costs in terms of overhead with someone else who also needed to manufacture in China and what that JV is doing is transferring product to us at cost plus a markup.

So essentially the sales and marking aspect of it is our own to control so the valid question would be more so -- less about the JV, more about what's the market look like in China and how long is it going to take to us get to scale and to profitability.

That's a fair question.

We have some good plans in place in the back half.

The India JV, since we have a 51% stake in that, that will be consolidated into our results, and there will be a minority interest line that will be newly added to our balance sheet so will you be able to see the progress in India, and then the China JV is recorded as an equity investment.

We did discuss how big it was.

Okay.

Thank you.

You're welcome.

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

Good morning.

I wanted to see if you could follow up a little bit on the share repurchase.

Obviously, you've been repurchasing shares, and I know you can't comment on specific plans with respect to a leveraging event, but if you could kind of tell us what your free cash flow priorities are currently, and kind of in the context of your strong investment grade rating with a lot of your peers basically saying, we don't need to be a strong A-rated company today, how are you thinking about your credit rating in light of your capital structure?

Probably not going to give you any much more satisfaction than I did before.

Again, as I said right now, as we lack at cash flow usage, we have a large capital project, the largest in the company's history in terms of the global supply chain project and a new facility in Monterrey, Mexico.

That, obviously, is ongoing.

We have a lot of one-time cash costs associated with employee costs and start-up associated with that.

We do have a buyback in place.

We are making investments in the joint ventures I just talked about, and we obviously have -- continue to pay a dividend.

So we have a balanced approach to this.

All of those things are at relatively high levels for us versus historical, so I think the balanced use of cash is clearly one we're looking at.

As we go forward, in terms of uses, I'd rather not speculate on what we may or may not do.

To kind of recap, it sounds to me like what you're saying is your free cash flow priorities are first to invest in the business.

If you have excess cash flow beyond that you may consider repurchasing shares, but that would be a secondary use?

As I said, we have intentions in all of those areas.

We have an existing buyback in place.

We have been active buying back shares in the past.

Our dividend -- we continue to pay a dividend, our dividend policy, we have had increases in the dividend 30 plus years in a row.

We are investing in the business in terms of manufacturing infrastructure and also globally.

So I think it's across the board, and I'd rather not go back and state a policy for you.

Okay.

That's helpful.

Thank you.

Thanks.

Your next question comes from Alexia Howard of Sanford Bernstein.

Hello, Alexia.

Couple quick ones.

I think you mentioned that pricing was -- net pricing was somewhat down this quarter but that you're actually pushing through more of the price increase that you announced earlier in the year.

Are we expecting to see a benefit from that as we go into the third and fourth quarters?

Alexia, in the second quarter, given the timing of the price incrase we really protected promoted price points for the most part in the second quarter.

You should see an increase in some of the list price pass through in the third and fourth quarters but as I just mentioned also, you will also continue to see increased promotional activity both in the way that we're looking at some couponing on some of the new items in the back part of the year and we'll also be looking at some programming and convenience stores and against the seasonal part of the business.

So I don't believe that price realization or -- will be as big a drag as was in the first half but I would really look more towards 2008 to start the see some real big benefit of it.

I think we're going to spend back in the second half.

Okay.

Great.

And then one other quick one.

We talked a lot about sort of share changes over the last few quarters.

Can you seek to -- what you see happening across the -- your measured channel in terms of total chocolate category growth?

We seem to be seeing consumers shifting into healthier snacking options and certainly I guess the growth in dark chocolates is part of that as well, but for the chocolate category as a whole are you seeing a little bit of a slow down relative to where we were a couple years ago?

No, we're seeing very good overall chocolate category growth.

Okay.

Great.

Thank you.

Your next question comes from David Driscoll of Citigroup Investment.

Good morning, everyone.

Good morning, David.

Wanted to go through some numbers here.

This is a follow-up to a question previously asked.

When I look at the change in the guidance from May 10th, something like $0.20, $0.25.

When I do it on a pretax basis that's something like $80 million in terms of the delta.

If you -- you've lowered your sales expectation, always hard to say with the way you guys write this but something like two percentage points.

Again, the profit impact there, the pretax impact would be like a $20 million impact.

That would leave $60 million remaining.

I still don't understand really what the split is here on -- between investment spending, dairy and commodity, and then the negative mix impact from the weakness in the C-stores.

Can you rank these items for me?

I would actually prefer not to get into too much specificity.

Volume is a large component of that obviously, as you said as we looked at the trend that we saw in the second quarter and projected where we were going to be, volume is a part of that, and underneath the volume the mix component of the kind of volume where we're seeing some of the softness is part of that.

Dairy costs particularly are a little higher than we would have thought back on May 10th.

That would be one component of it.

The last component is the continued increase in spending behind the brands in the business.

It's probably a little bit of all of the four, David.

So you want to say basically equally weighted across those four different categories?

No, I actually don't want to say anything about the weighting of them, but those are the four big buckets, and I would just kind of let it go at that.

Let me just be real clear.

What I think is going on here, if it's a dairy impact, if it's a commodity cost impact, people can look through and understand that '08 can get back on track as dairy comes back.

If it's really a fundamental issue with the C-store business and it's a mix impact and volume impact and that's driving the large reduction in your forecast for second half, then that's really a very fundamental problem with the business strategy that you have out there.

Rick, can you make some comments?

This is going to be a question all day long and really people are going to be quite upset about how to think about their investment in Hershey.

Right.

David, no question.

No one likes to miss their numbers.

What we like less is not addressing the issues and getting the business on track by the approach we're taking in terms of continuing to maintain the investment.

We have drawn that investment, we have seen some good results in the first half.

We have talked about what's been in the base or the prior year comparisons that have created a huge drag in the first half, Limited Editions much more so in the first half than in the second half.

We talked about the innovation that wasn't as sustainable, and that's in the base as well.

As Dave said, we're not going to split out what the components are.

What we're doing, is we're saying what does it take to become competitive and restore momentum in the marketplace in the second half and then what are the right levels of expectations for sales and earnings that we have with the backdrop of higher commodity costs.

You keep saying C-stores.

We weren't addressing it it particularly as convenience stores.

We said we had lost share, I think 1.5 share points for the quarter, and we know exactly where that is and the steps we are taking.

So we still fundamentally like the characteristics of the category and our leadership position.

We have been very successful in the past.

We understand the missteps over the past few quarters and we are aggressively addressing those.

One more question on follow-up.

Eric asked the question about your long-term guidance and you really didn't answer it.

You have had this long-term guidance out there.

Again, another topic of major concern for investors.

Are you really just saying right now that you're just not going to talk about it, you're going to withdraw this for the moment, pending getting the business back on track?

Is that the right way we should really read your comments?

No, absolutely not, David.

What e are saying is that the 3 to 4% top line, 9 to 11% on the EPS line has always been a long-term rang.

We have been above it over the past several years, more often than not last year, and this year obviously we're below 3 to 4, 9 to 11.

We are very excited about what we have going on in the business long-term, the global supply chain transformation project is going to generate significant savings for us to invest in our business in the future.

The globalization that we have going on, particularly in attractive markets such as India and China, the scale in our core markets where we are just now starting to enter the faster growing segments, in premium and dark, and we're going to do with it scale with very good partners such as Barry Callebeut and Starbucks.

What Rick said is, is we are focused in 2007 and in early 2000 in a getting the business back on track but we still believe in the fundamental strength of our scale and our position in the U.S.

and also what we're doing in the supply chain and what we're doing globally to grow the business in the long term.

So we are absolutely not saying that we're walking away from 3 to 4, 9 to 11.

It's obviously something that we'll continue to evaluate but at this point in time we really do feel good about where we are headed for the long term, but most importantly, we're focused on getting it it fixed in the short term.

Super.

Thanks for the comments, everyone.

Thank you.

Your next question comes from Steven Kron of Goldman Sachs.

Great, thanks, good morning.

Good morning.

Couple questions.

First, just touching on the brand support, if I look at the SG&A line, I know it's been like this for the last couple quarters, that line as a percentage of sales has come down.

I know you've commented in the past it's more on the G&A side of everything and not so much the selling side.

As we get into the next couple of quarters and we start seeing some of these, I think, productivity, like the global supply chain and other things start to flow through, and we, I guess, continue to see a mix of some of these selling and marketing expenses, perhaps moving more toward the net sales line, should we continue to expect that line to come down, or are we going to see a step up across the board at which case, these -- this line could start to creep up as a percentage of revenues?

I think the component that you are seeing this year in this quarter particularly as obviously as we've internally look at our expectations for the year, we have adjusted our incentive compensation expenses accordingly.

So that's really what you're seeing in the SM&A line this quarter which is driving it down on a rate basis is really that reduction in incentive spending.

I would look at that as a one-time, and clearly if you look to 2008 on a more normalized basis, we would expect to have incentive expenses back in so that would be a driver of SM&A going up.

Advertising spending is clearly going up.

From a consumer promotion standpoint we have moved some of our consumer promotion dollars up between trade promotion -- up into trade promotion between gross and net.

One of the other things you are going to back half of the year here is an increase in investment selling headcount which will increase the SM&A line as well so I don't think you'll see continued SM&A rate reduction on a rate basis going forward, actually, it will probably swing the other way a little bit.

Okay, and just on the commodity costs, we have talked quite a bit about dairy here.

Can you maybe comment on the hedging programs and how locked in you are on some of your other product, particularly cocoa?

I won't go too much into specifics, obviously, we are starting to get visibility into 2008 across the entire basket, we don't want to talk about any one in particular.

The markets have been fairly volatile across the board, and we are starting to lock in many of our 2008 positions but I think it the's a little too early to make an overall comment.

As it it relates to 2007 do you have that visibility?

I know dairy is a more difficult one.

We have visibility into pretty much everything but dairy.

We have, as I said, since May 10th, probably a little bit more dairy exposure than we thought, and that's reflected tip numbers you are getting today.

We have our best estimate for dairy at the current time in our numbers for the full year.

There is some volatility there but we've done our best thinking at this point.

Okay, thanks.

Thank you.

Your next question comes from Pablo Zuanic of JPMorgan.

Good morning, everyone.

Hi, Pablo.

Rick, I guess what I'm struggling with on the one hand, I'm hearing all the things that personally I was looking for, a ramp-up in innovation, 30% increase in [legal coverage] more ad spend, more brand support, more consumer.

It's what I wanted.

I have to say, as well as other investors that I talked to.

But I'm having problems believing it, to be honest.

And I say that because clearly on my math, the guidance is more related to dairy, mix, and volume than really to the brand -- to increasing marketing.

At the same time, and related to this, my question is what you are telling us today in many ways is not very different than what you said back in December when you had guidance.

You got guidance in December, and announced the restructuring program, and the idea was that you would ramp up innovation, spend more on branding.

Some of that was echoed again I believe in the first quarter conference call, so the bottom line question Rick, is what is different?

Can I assume philosophical change in the way you're thinking of innovation and brand support or is it just that what you tried to do back in December didn't work?

What's different?

Let me go back to some of the messages, Pablo, that we communicated at Cagney, because that ties together some of your questions and the themes.

So what's changed since then when we outlined these plans.

Not our spending.

In fact, we have ramped up our spending since that time and we feel our spending is appropriately focused on the core brands and we are seeing those respond.

Again, not core-brand focused, whether it be some of the close in news and the spending and the retail execution.

I think the couple of outages that we have talked about and we're addressing specifically, one, we weren't as well prepared as we needed to be to participate broadly in the explosive growth in premium.

That's one that we're taking a lot of steps and the appropriate steps so that we can leverage scale or build scale in that very attractive segment.

Refreshment has gotten worse than we had expected, more competition and therefore we had a slower ACV build on some of our new items, but we're focused on that in the back half.

I think the other aspect that has really impacted our business, and we're going to work through that that's a tough one for everybody, we are going to work through, that's the drag that we have experienced from shorter lifecycles of previously introduced new items and also the impact of Limited Editions in the year-ago period.

All that means is that the things we had done before were very successful, they had a shorter lifecycle so we are very much committed to the strategic direction.

The fact that it's taking longer than we would have anticipated for it to be successful does not necessarily mean that it's not the right approach.

What it means it's taking us longer.

Having said that, we have identified those areas that we have had some missed steps and we are aggressively addressing those.

That's helpful.

To follow up, when I think of creating new brands or platforms, and I thought it was interesting distinction that you made with Take5, with just another chocolate, and Cacao Reserve being a whole new platform, dark being a whole new platform, I have to say that when I think of Cacao Reserve, I really thought it was a great brand, I love the single serve tin boxes that you put out, I think it was so small that people would really think Cacao Reserve but most people I talked about didn't hear of the product, and that's probably because (inaudible - heavy accent).

I just find when I look at Riesle, they're launching five whole new brands, Mars, they launched Dove, a huge new brand that's done very well, it reflects Hershey's lack of willingness to spend big on new brands and still relying on Reese's and your core brands.

Can you comment on that?

I think that just the fact that you're doing this deal with Starbucks, why not put more money behind Cacao Reserve, which I think is a great product, it's just not everyone reads those two magazines.

Well, a couple of things.

Let's take the first part.

With Cacao Reserve I think we may have thought of it initially as a more narrow product than we should have, which is why the recent advertising and consumer support and the FSIs are more broad-based.

So point is well taken on that one.

Think of a very large segment where there would be only one segment within that or only one benefit or usage occasion.

That's not the way a $2.5 billion segment is going to evolve, which is premium and dark chocolate.

Therefore, Cacao Reserve gives us the match premium approach, where the Hershey users will trade up to that.

Starbucks gives us a higher end superior chocolate experience for consumers who truly appreciate and enjoy the Starbucks experience.

That will also provide strong anchors for us to bring into a dedicated merchandising unit at retail our other items such as Scharffen Berger and perhaps Dagoba.

So if we're going to participate broadly in a $2.5 billion segment, we can't do it with one item or one line.

Cacao Reserve is a very good entry point but that's one aspect of it.

Your comments about the core brands, when we have brands such as we do, Reese's, Hershey's and Kisses, and they high response functions, are very profitable, and are great merchandising vehicles for the trade and really do well in seasons which accounts for a large portion of annual sales, it would be foolish for us not to support those as aggressively as we can.

The strength of those core brands enable us to have the close-in innovation which brings news and excitement albeit relatively inexpensively to consumers and customers, which is why will you see more things like Reese's Whips, but you'll see them across the other core brands, as well.

Thank you, Rick, and just one last one on the Hershey Trust.

You are a board member there.

Obviously you can comment on the trust but share buy back to some extent were driven by the trust divesture for the last two or three years to a great extent if I'm not wrong.

Maybe they're reaching thresholds that they don't feel comfortable selling more, or they don't want to sell at these levels.

Maybe that's the reason why there's not a lot of share buybacks planned in the future, but more important than that, the world-class share structure limits your ability to do deals, limits ability for a merger or a share swap.

I mean, how can we think about the trust in the future?

Can the trust think of letting Hershey evolve to a single class share structure?

Dilute themselves beyond the 51% control?

What comments or any color if at all can you give us, Rick, on that?

The first part, over the past years, the trust has not driven the share buyback strategy.

That's the Hershey Board capital structure decision, and last year the Trust did not participate.

They did participate three years ago, now, in a buyback but not last year.

The relationship with the Trust has been on going and everybody understands that.

They are very much supportive of the direction the company has taken, and the investments, the necessary investments we're making to build our brands both organically and do the things through global expansion.

So I'd rather leave it at that and certainly not talk about any speculation, Pablo, if I might.

Thank you.

Thank you.

We have a follow-up question from the line of Robert Moskow of Credit Suisse.

Hi.

I can withdraw my question.

Thank you.

Okay, Rob.

Thanks.

At this time there are no further questions.

Gentlemen, are there any closing remarks?

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

[Monifor] Brian Clemens and myself will now be available to answer any additional questions you may have.

As a reminder, our 2007 third quarter sales and earnings release and conference call is scheduled for October the 18th.

We will release earnings at 7:00 a.m.

that day and our conference call is set for 8:30.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.