好時 (HSY) 2007 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Hershey Company third 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.

Mark Pogharian, you may begin your conference.

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

Welcome to the Hershey Company's third quarter conference call.

Rick Lenny, Chairman and CEO, Dave West, President, 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 sheet 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 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 third quarter results of 2007 and 2006 excluding net pretax charges associated with our previously announced business realignment initiative to advance the Company's value-enhancing strategy.

These net pretax charges of $151.9 million in the third quarter 2007 and $1.1 million in the third quarter of 2006.

Our discussion of year-to-date results and any future projections will also exclude the impact of net charges related to these business realignment initiatives.

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

Thanks, Mark.

The third quarter, while below expectations in total, did experience good progress in key aspects of our business, most notably a strong improvement in our chocolate business.

Through a combination of increased investment and improved retail execution, retail take-away on Hershey's core chocolate business increased by 6%, led by our top four brands, which had a combined gain of 8%.

Additional improvements in trend were achieved in convenience stores and loose bars.

This performance drove a 3.5% increase in total retail take-away with improvement across all classes of trade.

However, category innovation within dark chocolate and refreshment, as well as strong competitive activity curtailed this performance.

Market share in reported channels decreased by 1.1 points with half of this decline in refreshment.

Net sales off 1% were impacted by a reduction in inventory levels within certain customers and classes of trade and the fall-off in previously introduced new items.

Lower sales and the impact of higher commodity costs, primarily dairy, resulted in diluted earnings per share from operations of $0.68 cents.

Importantly, good progress was made on Hershey's strategic priorities of disciplined global expansion and the supply chain transformation.

Both of these initiatives will enable Hershey to more broadly participate in global category growth and ensure that margins expand sufficiently to invest in our brands and selling capabilities regardless of the market.

As we move into the fourth quarter, we do anticipate further gains in the marketplace behind selected new items, a significant step-up in consumer and customer support, and a double-digit increase in retail coverage.

However, the competitive activity and inventory tightening levels experienced during the third quarter will persist through year end.

Therefore, full-year net sales are expected to decline by about 1%, with 2007 diluted earnings per share from operations to be within the $2.08 to $2.12 range.

Bert will provide the details of the third quarter and year-to-date performance.

Dave will then discuss major growth plans for the balance of 2007 and early 2008.

Burt?

Thank you, Rick, and good morning, everyone.

Consolidated net sales in the third quarter of $1.4 billion came in 1.2% below the prior year.

Diluted EPS from operations of $0.68 cents declined 13%, primarily due to higher commodity costs, increased consumer investment spending, and unfavorable mix, due to lower shipments to select distributors.

Net sales for the quarter, excluding the benefit of the Godrej acquisition, were down 2.7%.

This reflects a combined net decline in volumes and negative price realization of around 3 points.

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.

Additionally, trade promotion increased in the quarter behind successful coupon offers that generated trial of select new items, notably Cacao Reserve and Ice Breakers.

The decline in volume reflects gains in our international and artisan businesses, which were more than offset by the decline in the U.S.

While retail take-away increased in the quarter, shipments decreased to select distributors, as velocity at retail did not keep pace with historical patterns.

Furthermore, due to deteriorating credit markets, distributors have been focused on improving working capitals.

Turning now to marketplace performance, Hershey's retail take-away in the quarter was ahead of shipments.

Consumer take-away for the 12 weeks ended September 9th in channels that account for over 80% of our retail businesses, was up 3.5%.

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

Note that we continue to execute well in other non-measured channels, non-reportable channels such as dollar stores and importantly, Wal-Mart.

In the FDMxC classes of trade, retail was up 0.5%, while we lost 1.1 share points in the latest 12 weeks.

It was a 40-basis point sequential improvement.

Our core chocolate franchises, Hershey's, Reese's, and Kisses, were up in the quarter, driven by programming behind Reese's Elvis limited edition, the Kisses 100th anniversary promotion and Cacao Reserve trial-driving coupons.

Increased investment spending on the core drove take-away, which was up 11% on these brands in FDMxC W channels.

The Reeses Elvis limited edition and related programming did lead to an increase in quality merchandising in the quarter.

This was primarily responsible for the positive C-store take away, up 0.5%, a 20 basis point sequential improvement in total market share.

Total C-store share was off 1.1 points, about half of the decline accounted for by refreshments.

In the last four-week periods, last two four-week periods, Hershey Chocolate take-away and C-store channel has kept pace with the category, with share about flat.

Turning now to gross margins, during the third quarter, gross margin was down 220 basis points, primarily due to higher commodity costs.

Specifically, dairy costs were up markedly and have remained at a high level.

While dairy costs are higher, they are tracking relatively in line with our mid-year assessment.

We continue to believe that dairy will somewhat subside in the fourth quarter.

In the third quarter, the total commodity cost negative impact on gross margins was about 280 basis points.

And while annual productivity initiatives are on track and will exceed the prior year, these savings are more than offset by higher input costs and unfavorable mix due to lower single-serve shipment softness.

Net obsolescence costs were at normal rates in the quart and they were favorable year-over-year.

Godrej India business and (inaudible) manufacturing joint venture are operating effectively, and they did not have a material impact on gross margin or EBIT in the third quarter.

EBIT margin for the quarter was down 280 basis points, as selling, marketing and administrative costs increased about 3% versus the prior year.

Lower G&A incentives and consumer promotions were more than offset by higher advertising and selling expense, including added retail coverage that began in Q3 and will benefit 2008.

Advertising was up 8% in Q3 and was significantly increased in Q4 by more than 25%, as we increased brand support during the upcoming Halloween and holiday periods.

Consumer promotion decline in the quarter, as these funds were shifted to coupon spend to drive trial.

As a result, they are accounted for as trade promotion versus marketing expense.

Total brand spending in the quarter, advertising, consumer promotion, and the coupon portion of trade promotion, was up 7% versus prior year.

Moving down the P&L, interest expense increased, coming in at $33 million versus $32 million in last year's third quarter, reflecting higher short-term borrowings to fund the JV investments, $150 million of the $250 million repurchase program initiated earlier in the year, barring costs were mitigated by improved working capital, which I will touch on later.

The tax rate for Q3 was 36.5%, slightly higher than the prior year.

For the full year, we estimate that the tax rate will be 36%.

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

The weighted average shares outstanding on a diluted basis for the quarter were 230.4 million versus 237.7 million, versus last year's 2006 third quarter, leading to an EPS of $0.68 cents per share diluted from operations, down 13% versus year-ago.

Now, a quick recap of the year-to-date pro forma results.

Net sales were flat or down, about 1%, excluding the Godrej Hershey JV acquisition in India.

EBIT from operations declined 10%, with EBIT margin down 200 basis points to 18 from 20%.

As M& A, while lower by $5.6 million, was roughly in line with year-ago as a percent of net sales.

Higher advertising and selling expenses were offset by tight cost control and lower incentive compensation expense.

Gross margin at 36.1% year-to-date versus 38.3% last year was primarily due to increased input costs.

Normal productivity, those exclusive of the global supply chain transportation, are on track and running ahead of last year.

This has helped offset higher commodity and volume mix challenges.

Earnings per share diluted from operations declined 9.4% to $1.54 per share.

Turning now to the balance sheet, at the end of the third quarter, net trading capital decreased versus the end of last year's third quarter, resulting in an improvement of $142 million.

Accounts receivable decreased $42 million and remains extremely current and of high quality.

Inventories were lower by $11 million compared to the third quarter last year and accounts payable increased by $88 million.

The improvement in working capital reflects 2007 plans programs to improve our sales and operations planning process and to manage our base payables.

In terms of other specific cash flow items, during the quarter, capital additions including software were $45 million.

Year-to-date capital spending is $128 million.

For 2007, capital additions are targeted to be within the $200 million to $210 million range.

This is below the initial estimate of $250 million to $300 million due to the timing of projects related to the global supply chain transformation.

Depreciation and amortization were $84 million in the quarter.

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

Operating depreciation and amortization were about $50 million in the quarter and should be in the $200 million to $210 million range for the full year.

We pay dividends during the second quarter of $66 million and we spent $50 million for 1.1 million shares in our share repurchase program during the third quarter.

This leaves $100 million outstanding on the current authorization that the board approved in December 2006.

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

In addition, during the quarter, we purchased 1.5 million of -- $1.5 million of our common stock shares in the open market to replace shares in connection with employees exercising stock options.

Our goal is to repurchase all such shares.

And finally, we made a $20 million equity payment related to the purchase and installation of manufacturing equipment into the Lotte joint venture in China.

This brings our total investment in this venture to approximately $38 million.

Our manufacturing joint venture in China is on track and producing product, specifically we're manufacturing Kisses, Nuggets, and chocolate bars in anticipated of demand related to the holiday season.

We have also began discussions with Lotte about distribution and selling of Hershey products in South Korea and Japan.

We'll have more to share with you on these prospects in the future.

The Godrej-Hershey joint venture in India is progressing as planned.

We are leveraging our confection area R&D expertise and go-to-market capabilities as we focus on growth and profitability.

Our investment in manufacturing is on schedule and more than adequate to support the upcoming launch of the Hershey branded products in India.

Now, for an update of the global supply chain transformation announced back earlier this year in February.

During the quarter, total business realignment charges of $152 million pretax were recorded.

This reduced earnings per share by $0.41 cents for the quarter.

We recorded $38 million in cost of sales consisting of accelerated depreciation and inventory reductions.

The $2.4 million recorded SM&A reflects program management costs.

The $112 million on the restructuring line in the P&L includes $104 million related to employee costs, and $8 million in asset write-offs and contract terminations.

On year-to-date basis, pretax expenses related to this program totaled $317 million, or $0.85 cents per share diluted on a reported basis.

For 2007, our initial estimates are to record GAAP charges of about $270 million to $300 million, or $0.75 to $0.84 cents per share diluted.

However, we are running ahead of schedule and now expect that we will recognize $380 million to $400 million in 2007 project costs or $1.03 to $1.08 per share diluted.

Specifically, the increases result from a greater than anticipated number of impacted employees volunteering for the early retirement package.

While these employees will be working through the first half of 2008, generally accepted accounting principles requires that we recognize the expense when the employee commits to a retirement date.

This is an accounting change only and does not impact cash flow or the total cost of the global supply chain transformation.

Our estimate of total pretax charges and nonrecurring project implementation costs remain in the $525 million to $575 million range, including project management and start-up costs of approximately $50 million.

For the remainder of the year, our plans are on track for the global supply chain project to deliver $15 million in savings.

The construction of the new facility in Monterrey is on track and production is scheduled to begin during the first quarter of 2008.

Let me comment now on the rest of '07 and 2008.

During the fourth quarter, our investment in consumer and customer programming will be up markedly.

Furthermore, selling expense will increase as the additional sales associates required to enhance retail coverage are now on board.

Total retail coverage hours in Q4 will be more than double in grocery and up double digits in convenience stores.

These efforts will result in sequential improvement in marketplace performance.

However, the competitive activity has increased and will impact retail velocity and shipments in select distributors.

Therefore, we expect organic net sales for '07 to be decreasing about 1%.

Profitability will be impacted by unfavorable mix related to lower single serve shipments, higher dairy and commodity costs and increased business investment.

As a result, we know anticipate full-year diluted earnings will be from operations in the range of $2.08 to $2.12.

2008 we remain committed to increasing consumer and customer programming.

We are currently reviewing plans that will include higher investment spend on the core, as well as in our dark and premium platforms.

This spending will have a positive impact on market share and we expect sequential improvement throughout the year.

At the same time, our major input costs remain volatile and will be higher next year.

Therefore, we'll provide further details on the Company's full-year 2008 financial objectives in January.

Let me turn it over to Dave now, who will talk about some specifics about our business.

As Burt highlighted, Q3 results were not up to our expectations.

While we are not pleased with the Company's overall financial and market share performance, progress has been made, albeit more slowly than we had anticipated.

Importantly, Hershey's take-away improved significantly in the third quarter.

In the food, drug and mass, including Wal-Mart and convenience universe, our take-away in the 12 weeks ending September 9 was up 3.5%, a 4-point improvement over the 12 weeks ending June 17.

Importantly, this reflects an improvement in each of the classes of trade.

This was driven by several key factors, the first being support behind our four core chocolate brands, Reeses, Hershey's, Kisses and Kit Kats, which posted an aggregate 8% gain in retail take-away in Q3.

Improved advertising support continues to benefit these brands and close in-line extensions, such as Reese's Crispy Crunchy are working.

For the first time this year, quality merchandising was up in the quarter driven by Reese's Elvis, S'mores and Kisses 100th anniversary activity.

This reflects increased retail resources which were added and focused on the food class of trade during the quarter and have the gun to make an impact.

We also invested more in trade promotion and trial-driving coupons to ensure we were competitive in the market on our key brands.

We will continue this type of support into Q4.

All this drove total chocolate take-away acceleration in Q3, posting its best performance to date as chocolate market share sequentially improved by 80 basis points.

While progress was made in the marketplace and in core chocolate in particular, the advances were not reflected in shipments, with net sales down 2.5% excluding the Godrej India JV.

Several factors impacted revenue during the quarter.

First, the credit crunch combined with year-to-date sluggish C-store and then take-away led to inventory destocking at many of our distributors, who chose not to finance current inventory levels at higher borrowing costs.

We also experienced a slight shift in seasonal business during the quarter as back-to-school and holiday reduced year-over-year sales growth by 1%.

We also continue to be impacted by discontinued items and the unperformance of certain prior launches, such as Take 5 and Kissables, which are still being sold through at retail, but not being replenished with follow-in shipments at the same levels.

We expect these factors to continue into the fourth quarter and then begin to moderate in Q1 2008.

With respect to total market share, while our core chocolate franchises did grow nicely, we nonetheless lost share.

We were unable to keep pace with the category growth in premium chocolate and refreshment.

To put it in perspective, in SDMCW, we estimate that dark and premium chocolate is a $1.5 billion category.

There are two aspects to premium.

The first is the $1.1 billion trade-up segment that includes products such as Hershey's Extra Dark and Mars Dove and a $400 million premium segment, with Cacao Reserve and Scharffen Berger, as well as Lindt and Ghirardelli and other brands.

On the year-to-date basis, premium and trade-up sales represented approximately 60% of total category growth and about 20 % of total chocolate category sales.

Solid growth will continue at a double-digit compounded growth rate.

We have participated in this segment primarily with Hershey's Extra Dark and Hershey's Cacao Reserve.

These products have performed well.

However, they have not been sufficient to deliver share leadership in this fast-growing segment.

Our strategy to win in the marketplace is to bring portfolio scale to the category to allow us to utilize our category management and retail capabilities.

Last quarter, we announced the strategic alliance with Starbucks, one of the world's most recognized brands which portrays an image of quality at a premium price.

Our Starbucks chocolates will compete in the premium segment of the market, with entries planned for late Q1.

Today, we are pleased to announce the addition of Hershey's Bliss to our premium and dark chocolate platform.

This product has been developed using extensive research and delivers a smooth, creamy and rich tasting chocolate experience, meeting the consumers desire for indulgence.

We'll be offering bags of individually wrapped pieces of solid milk, dark chocolate, as well as the milk chocolate with a melt-away center.

Bliss will compete in the trade-up segment and will launched along the Starbucks chocolate line at the end of Q1 2008.

To further on the trade-up segment, we will also be introducing a signatures line that will leverage Hershey's mainstream existing brands.

For example, Reeses Select Clusters is scheduled to launch mid 2008 and will be incremental to the total Reese's franchise.

This product has tested very well, with new and existing Reese's consumers and includes pecans, peanuts, peanut butter and caramel wrapped in milk chocolate.

This portfolio approach will leverage our scale and category management techniques.

Combined with Cacao Reserve, Sharffen Berger, Joseph Schmidt and Dagoba, Hershey will have a broad portfolio, enabling consumers and customers to select from a wide variety of on trend superior premium chocolate products that deliver unique benefits and then also satisfy multiple usage occasions.

We'll place numerous dedicated merchandising fixtures, which will carry our entire line of products in early 2008.

Turning now to refreshments, a segment that continues to be on trend and has grown throughout the year.

Competitive activity continues to increase.

This backdrop has been a challenge for our business, which has suffered this year, as we have discontinued stick gum brands, such as Carefree and Stick Free and mini rolls mint items and slowly rebuilt distribution on more relevant items, such as Icebreaker Ice Cubes gum, Ice Breaker Wellness mint and gums, as well as York mint tins.

These have performed well at retail in distribution.

During the first half of the year, our gum and mint take-away in market share declined.

However, in Q3 gum take-away increased 2.8% and share improved sequentially by 80 basis points.

We expect to continue to improve our performance in C-stores, where refreshment is disproportionately represented in Q4 and in 2008, primarily behind the new sales associates, who were added during the year to increase retail coverage.

We'll expect to increase our C-store coverage hours markedly.

In 4Q, we'll have new product news around our refreshment platform, including prepriced merchandise shippers and the launch of Ice Breakers Ice Packs.

This is a unique product that delivers a superior burst of cooling sensation, by coupling breath strips in a pouch filled with xylitol.

We have even more news to follow on refreshment in early 2008.

So as you can see, we are ready in consumer and customer activity to compete in these two category segments, refreshment and premium, where we are currently losing significant share.

Let me quickly post you on two other key areas of our business, which are critical to our future growth and are largely on track.

The first is our international business, which produced another good quarter.

Our JV in India with Godrej is on track and we are pleased with our end market results.

Local production in China is on stream and our manufacturing JV with Lotte and our broad-based entry is occurring in most of the major cities in China.

These initiatives are expected to be significant contributors to our top line growth in the next few years.

The other key area which will contribute to our future financial success is our global supply chain project.

As Bert highlighted, we are hitting all key mile stones and believe both the savings and flexibility we have envisioned will be delivered in 2008 and beyond.

Let me now look ahead.

We do expect the trends the business is experiencing in Q3 to continue into Q4.

We'll begin to gain some traction in premium and refreshment, but the big news there is in Q1 2008 behind Starbucks and Hershey's Bliss.

We will continue to aggressively invest in Q4, with a nearly 20% increase in U.S.

advertising spend and continued strong merchandising support at key customers.

We therefore expect the core chocolate business to hold the marketplace momentum we gained in Q3, although we do expect continued competition on price points.

Shipments will be muted further, but by further pressure on distributor inventory levels and seasonal shipment timing.

As such, we now have a goal to deliver 2007 full-year EPS diluted from operations in the $2.08 to $2.12 range.

As we look to 2008, we continue to see growth in our international business, and we'll capture the supply chain savings and continue to reinvest in key U.S.

strategic growth areas.

These include further increases in consumer and customer support, with increased advertising investment and improved merchandising programs behind our core brands.

New product efforts focused on the fast growing premium chocolate and refreshment segments of the category and the strengthening of our competitive advantage at retail, with markedly more resources, particularly in the food and convenience classes of trade.

We are making progress in some areas and I'm excited about the 2008 plans to build on our recent gains in take-away.

These plans have been developed in the face of increasing competitive activity and changing category dynamics.

This environment has driven us to evaluate our entire consumer and customer value proposition, with work already under way to analyze our portfolio, pricing, packaging, usage occasions and retail formats, to ensure we augment the programs already outlined for 2008 and further reaccelerate top line growth.

This work is being done with the backdrop of a volatile cost basket, with inflation affecting most inputs and dairy and fuel being particularly volatile.

As we look to 2008, we are assessing the cost and competitive landscape, as well as how quickly our initiatives will gain traction in the marketplace, as well as the impact of other strategic initiatives.

I remain confident that our strong brands, advantage retail sales force and supply chain capabilities can be leveraged for success.

Many initiatives, such as Hershey's Bliss, Starbucks and retail coverage will have impact early in 2008.

Others will take some additional time.

I believe that the continued focus on the programs that are currently gaining traction, combined with new strategic initiatives upon which we are currently working, will restore a strong growth profile in the future.

I look forward to reporting on our progress and providing you with details of the company's 2008 expectations in January.

Let me now turn it back to Rick.

Thanks, Dave.

As this will be my last conference call as CEO of the Hershey Company, I would like to share a few thoughts.

In 2001 we developed our value-added strategy and began its implementation later that year.

The overarching objective was to deliver superior shareholder value over the long term.

This was to be accomplished through a balance of organic growth and margin expansion.

Fundamental to this strategy was the understanding that the marketplace was evolving and what had characterized success for Hershey in the past would need to change.

Consumer and customer behavior was shifting and while Hershey benefited from enormous sources of competitive advantage, meaningful changes in terms of building our brands and winning at retail were required.

Over the ensuing 5 1/2 years, we did just this.

Through the first half of 2006, Hershey delivered top tier performance in terms of sales, market share growth and profitability, as measured by earnings per share from operations.

And unlike virtually our entire peer group, international growth did not play a role in our success.

Just as in 2001, we're identifying the key opportunities for profitable growth while addressing the barriers that have hampered our performance in 2007.

Specifically, we've identified structural changes within the category and among our competitive set.

We're beginning to address these shifts and will do so from a position of strength.

Regardless of current trends, Hershey remains the clear leader in the attractive U.S.

confectionery market.

This leadership is broad-based in terms of product segments and across classes of trade.

We're building new capabilities from insights to product development to supply chain to retail effectiveness, all focused on delivering a superior value proposition to both consumers and customers.

Where we put everything together, it's worked.

These efforts will expand in 2008 and beyond.

In addition, we fully recognize and are responding appropriately to the long-term growth potential in key emerging markets.

Our initial efforts, via joint ventures, are focused on developing a relevant product portfolio and advantage route to market.

Strengthening Hershey's leadership position in the U.S., building new capabilities that recognize new marketplace realities and expanding globally, will work synergistically to deliver superior shareholder value over the long term.

This company has a long history of success.

I'm confident that Hershey will continue to be successful.

A key enabler of Hershey's success is leadership.

On December 1st, Dave West will become CEO of the Hershey Company.

Dave's appointment is the result of a very thoughtful and effective succession planning process.

Over the past six years, Dave has developed a keen understanding of what it takes to win, while building a strong following among all employees.

His strategic insight, yet pragmatic approach to getting things done, will serve this Company, employees and shareholders well.

Dave has the full support of our board and of me.

Dave's energized by Hershey's future prospects and I look forward to his leadership of our company.

Now we'll open it up for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Robert Moskow from Credit Suisse.

Good morning.

Good morning.

I'm sure you're going to get a lot of pointed questions today, but I guess I'll start with fourth quarter.

It seemed inconsistent to me that you will be dialing up advertising by 25% and then also you're citing some sequential improvement here during the third quarter, especially in chocolate.

But then fourth quarter, the implication is for a 3.5 % decline in sales coming off a fourth quarter a year ago where you had a 1% decline.

And I'm just wondering, how can I justify that in my forecast.

And then secondly, you're talking about credit problems on behalf of your distributors.

That seems new to me.

Is that a reflection across the confectionery industry, or do you think it's augmented by the fact that your products aren't working as well as you thought?

Rob, let me start with the first part, which was what's happening with the increased investment and sequential improvement and then the reduction in sales.

And what we highlighted is that what we're seeing the major change in fourth quarter today versus what we had anticipated was the significant reduction, as we said, in inventory levels at key distributors and certain classes of trade.

And let me highlight one overall way to think about it, then Dave's going to provide a couple of specifics.

Let's take the C-store situation.

For the past few years, we've been very successful focusing on C-store distributors.

And this was appropriate when, think about us introducing a lot of new items, building out retail distribution and experiencing strong take-away.

As we've shifted out this approach to one of driving more core brand growth and you've seen it with some success with the Elvis program and other initiatives, our efforts are now being more pull oriented, meaning being more focused on the C-store operator, the C-store retail, which is why we're increasing retail coverage.

Distributors have been reducing their inventory levels in light of this change, as well as we've also cited a slower performance at retail as well as the tighter credit conditions.

However, given the improvement in trend that we've experienced in C-stores over the past several weeks, we do believe as we go into 2008 that we expect to have a more normalized shipment to take-away pattern in 2008, but the major delta in Q4 is what we're seeing is a reduction in inventory, primarily on loose bars and primarily through distributors.

And Rob, let me add to that, that on top of the distributor issue is that we are expecting seasonal shipments in the fourth quarter of 2007 to be lower than 2006.

Number of factors working there.

One of them is in Valentines and we don't have the premium gifting line-up that we would like and we are starting to develop that and have that coming in 2008 and it is a much shorter Easter season next year, by a number of weeks.

So we have lower holiday shipments in the fourth quarter -- lower seasonal shipments in the fourth quarter than we did this year and as I said, there's still a lot of items out in the marketplace, discontinued items.

And as we've dialed the portfolio a little differently, those items are still scanning in take-away at the 3.5% numbers we are quoting, but we are not really replenishing them at nearly the same rate, so as some of that prior year innovation, as we're working through that in the portfolio, is creating a drag on shipments versus the take-away.

And one final question, when you say that you're looking at alternatives to improve your consumer and customer value proposition, does that mean that you're looking at taking price down on any of your product lines?

Don't want to really comment specifically about price points or pricing.

Let me just talk to you in a couple of ways.

The category has really continued to grow.

It is a good category.

Retailers make money and manufacturers make money.

You know, realistically, as we look at it, there have been some shifts.

We've seen premium really grow.

We've also seen that the -- that a value component of the portfolio, that there is still a very strong value component of the portfolio, as well as refreshment has grown.

So there is a shift in consumer demographic and price-value expectations out there in the marketplace that's created some new usage occasions.

Convenience continues to grow as a need and then retailers have become much more focused on their own formats, looking at gourmet and store within a store concept.

So there are parts of our portfolio, which frankly right now don't really have a very well defined price-value positioning, or certainly there's some things that we need to do from a benefit or usage occasion where we're not meeting them right now, which is refreshment or premium.

So we are evaluating our whole set of consumer and customer insights and it's going to be necessary to transform some of the segments of the business and get them back on a better growth trajectory.

The solutions on those things are going to take some time.

I don't want to talk specifically about pricing up or pricing down or any of those things.

It's really about price value and we're looking at that, at some of those parts of the portfolio to make them a little bit more meaningful to the consumer and that work is underway and we'll be talking about that sometime in early 2008.

Okay, thank you.

Thanks, Rob.

Your next question comes from the line of Jonathan Feeney with Wachovia.

Good morning.

Good morning, Jonathan.

Just first off, Rick, you talked about the well thought out and kind of long succession plan.

I guess what sort of made this the right time for you to sort of move on and hand off to Dave given, I think us being in the middle, we could say of a lot of initiatives you outlined?

Well, if you think about for me, after 6 1/2 years, I just thought it was the right time from both a personal and professional standpoint to announce my retirement from Hershey and obviously exceedingly confident in Dave and the leadership team's ability to take this Company to the next level.

It certainly is -- it's a professional and personal decision.

It certainly wasn't a 90-day decision.

Okay.

Do you have some fun things planned?

I'm sorry?

Do you have some fun things planned?

No, no.

So on to the quarter, if you wouldn't mind, looking at -- you talked about increasing, you're shifting some spending from promotional to coupon dropping, and I guess, at a time when commodity costs are up, it surprises me a little bit to so that increasing your coupon activity and it maybe speaks to trying to lower some price points, increase value proposition to consumers, would that be a fair characterization and specifically, is this couponing going on all across the portfolio, or is it specifically related to maybe some of the items you're trying to -- some of the discontinued items you're trying to move out of the channel?

Actually, the two biggest components of that are, was really trial and generating trial and some, then getting some repeat activity on some of the new items, particularly Cacao Reserve and Ice Breakers Ice Cubes gum, where we feel really good about the product and the repeat rates have been very good, we did not get to the trial rates we wanted to as quickly as we would like.

We did stimulate good trial on those two products during the quarter there.

There are some other couponing activities going on, and frankly, some of that is really not about price reduction as much as it is getting merchandising against the coupon.

And so that, that's, that's a little bit of a -- has increased a little bit more in the category in the last six months than it had in the previous six months, but for the most part where we coupon was much more around trial generation on the new items.

Okay.

And just finally, maybe this is a question directed for Bert.

You know, it seems like while distributors are taking down inventories, looks like day sales outstanding was up a little bit year-over-year for you guys.

That had been coming down pretty steadily for, certainly the past, most of the past three or four years.

Could you talk about maybe some of the trends there and what you're doing to improve working capital?

Yes.

We, we had some very specific plans around working capital improvements this year.

A lot of them revolved around our payables management.

In terms of the DSO, I wouldn't call that a trend.

The receivables remain in the mid-90s in terms of being current.

They -- there has not been any incremental or unusual dating or pricing that we've entered into into the quarter.

So we have very clean receivables.

The DSO, really more related to mix around seasons.

The focus on reduction of working capital will continue and we're very pleased with the progress we've made to date.

We think there's more progress we can make there.

It is related to other elements of our business in terms of how we improve our sales and operations planning.

So we expect that to continue to be a bright spot in the business.

And I guess does this commentary, I guess, about distributor credit concerns, that wouldn't -- you don't have any issues with collections at all, do you?

No, not at all.

As I mentioned--

Most of your distributors are pretty highly rated, right, pretty solvent?

I can't comment on the ratings of our distributors.

I would tell you that what we're signaling is not necessarily that distributors are in trouble from a credit perspective, but we're saying as their financing costs increase, they are more conscious of the level of inventory that they keep and so they are making efforts to reduce those and improve their own working capital.

Okay.

We don't have concerns that there's any eminent issue in terms of their ability to do business continuing.

Okay.

Thanks very much.

Your next question comes from the line of David Palmer with UBS.

Hi, Rick, a question for you.

The trust board has been rather public lately with some of its comments, saying that they have -- more or less they have expressed disappointment with the value destruction in the stock.

They have said that there are two major principles or rules need not be constrained to growth.

Do you share these sentiments that they have expressed publicly or perhaps do you think that there might be certain critical limitations that have been placed upon you, that perhaps have limited your ability to create value for shareholders?

David, I think the better way to think the better way to think about it is -- I think you're referring to the trust statement that was issued last week and we have ongoing discussions with the trust and that's because we're both keenly focused on how do we deliver superior shareholder value over the long-term, so that's -- as a major shareholder, that's what they are interested in and that's what we're interested in, so I think I'll leave it at that if I might.

The separate question, with regard to the past platform innovations that were meant to really replace limited editions as a growth driver for you, particularly in the C-store channel and also with regard to premium growth, could we maybe go over some of these platforms lately, what have been the highlights and the low lights, including Cacao Reserve, Kissables, Take 5, snack bars, cookies, nuts.

The sense is that some of these perhaps have not been sustaining as a growth driver and perhaps have been accelerating some of this inventory reduction at the trade.

Let me start and maybe Dave can fill in some more.

I'm not certain about the specifics.

We have talked before that particularly within snacks, and that was a few years ago.

We saw some opportunities, as the distinction between certain snack segments were blurring and we thought there would be an opportunity to leverage some of our sources of competitive advantage into some snack adjacencies.

I think what we have said in the past, we might have gone too far at one point in terms of having too many potential platforms.

we've learned a lot, but at the same time as we were doing snacks, don't forget there was very little growth in what has become premium and dark chocolate and refreshment and we believe premium and dark chocolate, which is obviously much closer aligned with our core capabilities and our 40-plus share of chocolate, we view that as a long-term trend that's highly sustainable.

So when we have items such as Take 5 and Kissables that provided good merchandising support and good -- brought some news to the category, what we've said in the past is in the future we do those, they will be viewed more close in as opposed to broad-based platforms, and as they are viewed more close in related to our core brands and we'll size them and invest in them accordingly.

The think the more important aspect is going forward.

As we've said, this year has been one shifting from what had characterized success in the past, recognizing shifts in consumer behavior and looking to do two things and do them both well.

One, restore growth to our core brands, which we are seeing some success, and two, create scale in some high-growth platforms.

I guess, I mean, I guess what I was maybe hoping to focus on more would be the Kissables and Take 5, which would be more of a move against Mars and some of the portable single-serve, and those were bolder efforts to perhaps gain share, drive a sustaining megahit, and certainly net pricing.

Those -- if you cannot succeed in those sorts of innovation going forward, it seems to limit the growth opportunity for Hershey.

David, yeah, I don't think that that's true.

I think the, if you think about Take 5, Kissables, even the S'mores products we have, variety clearly has a role in this category.

This is a variety-seeking category.

Consumers have more than one brand on their menu.

They do tend to shift around.

Frankly, the variety -- we went too far on the variety and frankly, we were meeting -- we were just meeting the same usage occasion, or same need state for consumers with different items.

So we didn't get the kind of incrementality that we originally thought and that was a mistake on our part.

We just came with too much and really over time started to cannibalize ourselves and that is part of our issue right now with inventory levels out in the marketplace.

We're consuming a lot of those things in the take-away numbers, but we're not really replenishing them with shipments at the same levels.

So that did create an issue.

I think as you think forward in the category, we have great brands in the category.

The brands should be able to meet new usage occasions, think about what's happened in premium.

We have our Hershey's Bliss items, Starbucks coming, Cacao Reserve has done fine, but we actually need to do much more to compete more effectively there.

Refreshment category has been reinvented.

It's gone from rolls of mints and stick packs of gum to tins to liquid ice.

We drove a lot of that early innovation change and frankly Cadbury and Wrigley have really stepped up their innovation in the last 12 to 18 months.

So there are new usage occasions and new places for us to grow in the category.

I think we were a little too anchored in the core bar business, which wasn't as incremental.

And as we looked at 2008 and beyond, we are much more focused on the things that are more incremental, but the important thing for us is our brands and our category management skills and our retail capabilities are just as leveragable in those as they are in the core.

All right.

Thanks very much.

Your next question comes from the line of [Vincent Andrews] with Morgan Stanley.

Good morning, everyone.

Good morning.

David, if I could just ask you, every CEO does things differently, and as you look out to your pending tenure, what do you think you will do differently at Hershey?

Well, Rick and I have worked together for a long time and have the utmost respect for Rick, but we're different people and we would both tell you that.

I think I have somewhat of a different style than Rick and I'll leave it at.

I think that his style's effective, as is mine, and people go at the people side of things a little differently.

So I think there will be somewhat of a difference there.

You know, in terms of the architect of the strategy that we have been executing here, I am the architect of that strategy.

Clearly as I said there are some things within the portfolio where we are not meeting the emerging consumer and customer needs, particularly price-value and new formats.

We have a lot of work underway already.

It has not been completed as quickly as any of us would like and therefore we've kind of found ourselves in a transitional period, where we're working to the right things and just haven't gotten them into the market fast enough.

So we will be completing a lot of that work and I think you'll see some bold steps from us in terms of how to approach growth in the portfolio.

So if we look out two years from now, how would you define your success?

I mean if you achieve -- what -- are there specific things you're looking to achieve?

I think clearly the global supply chain transformation that's already under way is a huge enabler for us.

It's going to create a lot of cost savings to reinvest in our businesses.

It's also more importantly going to create flexibility to compete in new segments of the market.

The international growth, particularly very pleased with our progress in Mexico, and then also in India and China.

We will have a much more robust and strong global footprint that we're currently building.

It's going to take some time for that to start to become as profitable as we like, but it certainly will add to growth.

And then within the core U.S.

business, we have some leveragable strength and we will continue to leverage those strengths, but, again, it's really much more around providing a much better set of a bundle of consumer value to the customers.

Okay, and what about from a share repurchase perspective, I know you bought back $50 million worth of stock in the quarter, but you still have a balance remaining on the existing repurchase program and you also have what would be considered a fairly underlevered balance sheet.

Given your stock seems like it's going to be down today, how should we think about those dynamics going forward.

You're quite right.

We did repurchase 50 million and that's 150 million this year.

There still is 150 million remaining from the 250 that was authorized last December.

We look at our capital structure on a consistent basis.

It's a question that we get often and a topic that we do review with our board of directors.

It is a board decision in terms of how we look at our capital structure and the elements that we seek to finance.

So I think it's a valid question and one that we -- one that we look at from time to time.

Okay, and then lastly, if I think about you brought guidance down three times during the year, which kind of leads to the conclusion that you've been more reactionary in this environment.

What do you think is going to allow you to kind of be more answer anticipatory of the changing dynamics in the marketplace, whether they be competitive or input-cost related.

What do you think's going to change to improve your performance on those metrics?

I think what we will be participating much more broadly in the market next year, aggressively in premium and trade-up with Starbucks and Hershey's Bliss.

We have not held our share certainly in that segment.

This year we've been playing defense.

Next year we'll be playing offense with some very good launches.

As well as in refreshment.

We've got much better C-store coverage and some better items and we will certainly be much more aggressive there.

I think that the challenge for us this year, the biggest single challenge was dairy costs, and dairy costs came at us in the April-May timeframe and that certainly changes the profile and the way you think about the year.

We have chosen to continue to reinvest in our brands and in our people, and in the face of those costs and just frankly can't price to those kind of costs in the short-term.

And so I think as we go forward next year, we have a much better view of what the commodity markets may bring for us and I think a much better plan to deal with that.

Okay.

Thank you very much.

Thank you.

Thank you.

Your next question comes from the line of Christine McCracken with Cleveland Research.

Good morning.

Hi, Christine.

Rick, just want to say it's been a pleasure working with you.

Oh, thank you very much.

Likewise.

Thank you.

Just wanted to delve a little bit into thus premium and super premium launch.

Sounds like now you're adding another brand to the mix and obviously it seems like it fits an area that you're not hitting squarely with the products that you have now.

I'm wondering, looking back at where you've had trouble launching -- or with maybe too many brands and splitting your resources and focus, do you anticipate having any similar issues as you launch yet another brand and what seems to be an area where you already have quite a bit of coverage?

Christine, the launch of Hershey's Bliss, it is clearly a Hershey's brand and therefore will get the consumer recognition of the fact that it is Hershey's and the consumer clearly believes that Hershey can and should play in the trade-up and premium segments of the marketplace.

The Cacao Reserve, as I said, we've gotten to the point where we're pleased with the trial and repeat levels.

Cacao Reserve was a necessary entry into the premium area, but certainly not sufficient to gain share in that segment.

And as we said, I wish we would have been more, more quick to come up with some other alternatives and entries.

We were not.

As we get to first quarter of next year, the important thing is as we get into the premium and trade-up spaces that we compete with scale in the category, which is our advantage, and that's all about retail coverage.

It's about merchandising and fixtures and bringing category management.

So it's important that we have a breadth of portfolio which plays to our strength.

So when you think about having a Starbucks item, Cacao Reserve, Joseph Schmidt and Scharffen Berger, now we're adding Hershey's Bliss to the line, Reese's select product, we now have the scale to -- with good brands and scale, to compete in the segment.

So we believe that the Bliss item is a Hershey's Bliss item and therefore it is not a new brand.

It's just the logical extension of Hershey's up into trade-up and premium.

Okay, and then just a quick question on dairy costs, is there a lag on how quickly you could see the benefit from the declines in dairy costs, given the length of time from manufacturing to the shelf?

Christine, there's -- we obviously produce an inventory.

So costs do -- costs wind up on the balance sheet at some point in time.

But dairy is one of those commodities, which we frankly -- particularly fluid milk, really can't cover forward on.

There's not a ready market to do that.

So it is one that -- it is one that affects us more immediately than most of the other commodities where we don't necessarily -- we can take a longer position on some of the others.

All right.

Thanks.

Thank you.

Your next question comes from the line of Eric Katzman with Deutsche Bank.

Hi, good morning, everybody.

Hi, Eric.

Good morning.

Rick, best of luck.

Dave, same to you in your new position.

Thank you, Eric.

Thank you, Eric.

I guess my first question has to do with, maybe it goes back to Rob Moscow's question on the pricing.

I mean normally the chocolate category's kind of been viewed as a pretty rational category.

When you talk about the value proposition, is that kind of a function, Dave or Rick, of your opinion as to how the consumer has changed, or how the position has changed?

Like which are you reacting to?

Actually, it's probably a combination of both, Eric.

The price realization in the category has really come from the, a lot of trading up into premium and the trade-up phenomenon.

We have not participated as broadly in that as we would like to and we see the opportunity to gain price realization that way.

There's still a large portion of the category that is -- that meets the needs of seasonal occasions and that is a much more price sensitive consumer, and as -- frankly, the biggest issue around the price points is to get the merchandising and our merchandising calendar this year was in a bit of transition.

In the past, we would have certainly merchandised much more around news and new items.

And this year, we've made a shift to merchandising much more around events, such as a S'mores event or a Reese's Elvis event.

When we got that merchandising around the event this year it was the best share periods and the best performance we've had.

We just didn't have enough of them.

So as we look to 2008, we'll have a much, much more fully loaded merchandising event calendar.

We have tied into the Batman movie.

We're an Olympic sponsor.

We have a very good program with Dale Earnhardt commemorative bars.

We've got a lot more merchandising events headed for next year and that's the cause to get merchandising, the event much more so than needing to get to a price point.

So we are a little bit in transition this year for merchandising innovation to merchandising events, and we weren't as robust as we needed to be, so I think that's part of the issue we've had this year with price points.

Okay, and then second question, I don't know how well known it is, but I think it's fairly well known that Starbucks is looking at Godiva.

And I'm just kind of wondering, given the approach to the premium or super premium category, if they were to acquire Godiva, does that really have any impact on the potential, or on the agreement that you have with them?

Eric, we're not going to comment on any of the potential M&A speculation.

Okay.

And then I guess this is a last question.

You know, Rick, you came in as the first outsider in the Company's history.

I think in many respects you've done a great job and there's been a culture clash, whether it's with some of the folks in Hershey or the trust.

And I'm kind of wondering, Dave, as you kind of go forward, culture is so important to a company, how do you balance, I guess needing to bring in talent from the outside, given that Chris is now at Kraft, versus clearly what are the desires of the workers, the union, the trust to maybe have more of a -- I don't know, internal job flow.

So I mean maybe you could kind of just touch on kind of how you see your imprint on culture and human resource talent.

Hi, Eric, and I guess if you're considering Rick to be the first outsider, I guess that would have made me the second.

But --

Good point.

The reality, the reality of it is over the last -- my tenure here and my tenure going forward obviously, the culture here at Hershey is extremely supportive of the Hershey brands and wants nothing more than Hershey to succeed.

It is a very, very strong culture that way and wanting to do the right thing and frankly has been -- I have found it to be very welcoming of me from day one and continues to this day.

We have done some things in the last several years to change one, the way we went to market with our customers, with the sales force realignment.

We have done some manufacturing realignment.

The employees have by and large embraced those changes, as necessary components to compete in the marketplace.

And that's really, that's really one of the things that I would say about this Company and its employees, is that they recognize they want this Company to win more than anything.

They are very, very loyal and dedicated employees when it comes to that.

So I feel very good about the ability of the culture to adapt to new changes and new initiatives.

And obviously we have been able to attract talent from the outside as well and blended that very nicely with our internal experience, which in confectionery category in many cases we've got people with 25 or 30 years of experience.

And that blend has happened nicely.

You know, frankly as we go, become a more global company, we will need to attract more international talent.

We don't have a lot of home grown international talent and that's an area where we continue to look and as we're growing, I feel very good about that.

But overall from a culture standpoint, Eric, I'm pleased with where we are.

Okay.

All right.

Thank you.

Thank you.

Thanks.

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

Good morning, everyone.

Good morning, Terry.

Hi, Terry.

Rick, best of luck to you, and I guess one thing you can't say is there were a lot of dull moments out there.

You're right, Terry.

Thank you.

The one thing I did want to get is a little more clarity on the marketing and there I'm getting to the split between your trade promotion and stuff we would consider more consumer oriented.

Trade promotion up in the third quarter, now in the fourth quarter, you have said pretty clearly that the entire marketing spend is going to be up markedly.

Is there a split there you can give us between what would be deemed trade money and consumer money in Q4?

Well, the way the accounting works is we do segregate advertising from consumer promotion and both of those are contained within our marketing budgets.

Already mentioned that when we do trial coupons, while they, while they might seem like marketing, we so account for them because of the accounting requirements up in the trade, up in the trade budget.

And we see both of those, as has been discussed in the past, as really the mix with which we compete in the marketplace.

This year, we have had both increases in marketing, primarily advertising, and more couponing than we've had in the past to drive trial of new products.

But overall, as -- if you looked at those two elements collectively, both trade promotion and the marketing elements, we are putting more behind the business.

Okay.

I guess my concern is kind of similar to Eric Katzman's on this.

As I hear Dave talk about '08, it sounded like the first things out of his mouth were like more merchandising events, which I understand it's a category that does respond to merchandising, but my concern is, I'm just hoping there isn't more of a tilt towards trade spending that is somehow emerging here that might erode ration nationality in the category.

And I wanted just a little bit more clarity on how you see the balance between what we would typically look at as trade spending versus couponing or whatever, that would be more aimed at the consumer.

If you could just give us a little more clarity on that, I would appreciate it.

Okay, Terry.

Specifically, as I said in my, in my remarks, advertising and consumer promotion investment behind the core brands, we expect to be up again, in 2008 and we will continue to invest behind those brands.

We particularly are pleased with the new item portfolio that we have in trade-up and premium and we are going to support that from a consumer standpoint, both the Hershey's Bliss, as well as the Starbucks line.

In terms of trade promotion, we absolutely, as we -- the reason the merchandising events frankly are more helpful is because the strength of the merchandising events, Terry, the better the merchandising event is, as it appeals to consumers, the less likely we actually are to have to do to a deeper price point.

And so if we have, if we have very good merchandising events that have consumer -- create consumer suction, if you will, we don't have to get to a price point to move the items through.

So that's why I feel very good about the merchandising calendar, coupled with the huge increase that we have in retail sales force hours next year, which will make our merchandising that much more effective.

Again, it's effective in terms of getting it set up and getting the the quality of merchandising to be higher and therefore less of a need for price points in the category and to hit those sharper price points in the category.

That was kind of the clarification I would make with Eric.

Okay.

And then just in terms of inventories, can you kind of give us a read on where trade inventories are right now, either at the customer or the distributor.

And I guess the important thing is how much longer, I think you mentioned the destocking is likely to play out more in the fourth quarter.

How are you looking at '08 in that regard?

Do you think inventories are regular -- reasonably clean as we go into next year?

Yeah, Terry, I think they will be.

You know, we've been actually all year long loose bar instant consumable take-away has actually been exceeding shipments all year long, so we've had a correction in the inventory levels from the new items and limited editions coming in and out of the system all year long.

It just was really exacerbated in the third quarter by the credit crunch.

A lot of our distributors work on fairly thin margins and a couple of points increase in interest rates really eats into their margin that they have got to make a choice about what inventory to carry and what not.

So we saw some correction of that in the third quarter, we'll see that into the fourth.

But then as we look into next year, we look to be at normalized levels.

Okay, and just one last and rather basic question, what exactly is Hershey Bliss going to be?

Is that, you know, solid bars, bag candy?

Maybe I missed that.

That's okay.

It's individually wrapped pieces, Terry, and it will be in bags, but it will be individually wrapped pieces.

There will be a dark chocolate variety, a milk chocolate variety, and then a milk chocolate variety with a melt-away center.

Very rich, indulgent and we will be selling it at a higher price point than our normal package candy line-up of either Kisses Miniatures or et cetera.

Okay.

Good luck then and thanks very much.

Thanks, Terry.

Thanks, Terry.

Your next question comes from the line of Eric Serotta with Merrill Lynch.

Good morning.

Good morning, Eric.

Good morning, Eric.

I just wanted to touch back on this distributor credit crunch issue.

You guys seem to be the only ones who have -- among the manufacturers that kind of play into the C-store arena that have cited this.

I'm just kind of wondering how much of the inventory destocking at distributors is really attributable to this credit crunch, which I recognize is real for small distributors, but is less of an issue for your largest customer, McClaine, which is owned by Berkshire, and how much of this is really related to more customer -- more company-specific issues or your product line specific issues?

Well, I mean I we would likely be the one who would talk about it.

The rest of our confectionery competitors don't have conference calls and/or if they do, confectionery is a smaller part of their business.

-- cigarettes or carbonated soft drinks though are the ones that I'm referring to.

Correct, and if you -- if those folks are selling those things DSD, they aren't going through the same distributor network.

The largest two categories in the distributor network are cigarettes and then also -- are also candy.

Cigarettes are basically, the terms are cigarettes are buy them today and pay for them net two days, so there's not a whole lot of inventory and float in that system.

Candy is the one area in that, in that system -- the candy and tobacco distributor system, which has inventory float in it.

And so we are effected by it and -- as are others, but for us, it's more notable and frankly, exacerbated by the fact that our take-away used to be in the 8 to 10% range.

It's now down more notably.

We're getting out of a lot of items, limited editions and some items that aren't turning as well, so it would be natural for those inventories to come down first.

Okay.

And then to follow up on the question on price competition that has come up a bit, could you point to areas within the portfolio, whether it's loose bars, seasonal, refreshment, where you've seen price competition from other players in the industry already, and I guess I'm also wondering, is some of this competitive dynamic being exacerbated by your need to still clear some of the sale inventory out there?

Or returning inventory?

Eric, it has nothing to do with any inventory issue and it is really not specific to a part of our portfolio.

It has really become much more specific to certain customers, and that -- it's not widespread across all customers.

It is in selected classes of trade and selected customers and I would prefer to leave it at that.

Okay, and lastly, I think it was on the last conference call and the last few Rick has expressed confidence in the 3 to 4% top line target long-term and then 9 to 11% long-term EPS target.

It seemed like your comment of -- at the end of we'll be able to restore a strong growth profile in the future was certainly a bit more tepid than Rick's endorsement of the long-term targets.

Just wondering how you're looking at them, given the very changed marketplace environment and recent performance of the Company.

Yeah, Eric, I'll take that.

The reality of it is we have the long-term targets of 3 to 4, 9 to 11.

For a good solid five-plus years, those targets were basically exceeded.

We have hit a patch here over the last 18 months that has been more difficult.

Some of that is commodity costs and the commodity markets have become more difficult.

Also, the category has shifted into other segments, refreshment and premium have been growing more rapidly.

It's -- as we look at our business right now, we are assessing which of those factors are long-term going to be with us.

Is it commodity costs at a higher level.

Is the category going to be played in a different area and frankly, our international growth prospects have ramped up over the last 12 to 18 months.

So we're making that assessment.

As I said, we're looking at some of the price-value equations in the portfolio and trying to get a read on some of the commodity cost baskets, et cetera, so right now, what I would tell you as we get back to you in early 2008, we'll take a look at those growth targets and see whether they are realistic for the long-term and give you some sort of a statement at that point.

Okay.

Well, best of luck in your new role and best of luck to you, Rick.

Thanks a lot.

Thank you, Eric.

Your next question comes from the line of Steven Kron with Goldman Sachs.

Thanks, good morning.

Good morning.

Good morning.

Couple of questions.

I guess just to follow up on this drive to improve the consumer and customer value proposition.

It just seems taking a step back, that you're throwing a lot at the business.

You know, you're evaluating pricing.

You're doing some couponing.

You're increasing your ad spend by a significant amount.

This is obviously a category that not only has responded to -- has been rational in the past, but has also responded to just one of these things in the past, not the need for all these factors.

So taking a step back, are you talking about a change in the sensitivity by the consumer to certain price points out there, or is this more reflective of the portfolio having not kept up on the innovation front and you feel as though you have the pipeline of product going forward to really spend behind?

I think, Steve, the category has been rational, will continue to be rational.

I think what we're talking about really moreso is the -- is the consumer looking for price points?

No.

The consumer's looking for a value proposition.

I mean, premium brings a higher price point.

It's where a significant portion of the chocolate category growth is, so that's not going to hurt price realization over time.

It's going to help it.

We haven't participated in it as effectively as we would like.

So I think from a rationality and profitability standpoint, refreshment, where refreshment is going, refreshment is moving up in price points.

We're moving up to $1.99 tins, but what we have to do is bring the appropriate level of innovation into that.

We have not gotten that done in 2007 as readily as we would like.

I feel much better about the launches we talked about today for 2008 to start to do that.

So I don't want you to read anything into the fact that somehow this is going to become a price-oriented category, because it isn't.

Private label is still very small in the category.

There are some parts of the business that this year we have chosen based on market share and some other initiatives that we've invested behind, but the biggest investment we have made is in advertising and consumer, behind the core brands and as you see that starting to work and grow.

So I would -- I wouldn't want you to leave this call very focused on the fact that it's all about trade promotion in the category because it's not.

It's about where the consumer's going, which is into higher price points and better value propositions and we're going to be there with them and advertising and consumer spending has been up this year and it's going to be up again next year.

Okay, and then on the gross margin line, I just want to make sure I have the numbers right.

I think you mentioned that commodities impacted the gross margins by I think you said 280 basis points.

Gross margins were down 220.

You had unfavorable mix in your sales.

You also had negative sales, so I'm just curious, what's the offset that I'm missing there, if I have those numbers right, that benefited that line by 60?

Yeah, we did have some price realization that was offset to some extent with mix.

The other elements that you noted, those were correct.

Okay.

So going forward, if I think about pricing and I know for the most part you have been honoring your commitments on the 4 to 5% price increase, when might we start to see a bit more realization, or is that going to really be funding a lot of the above the sales line trade spend?

No.

You'll certainly see much more this year's pricing action benefit next year.

We had already commented that when we took the pricing this year, at that point we had a lot of our promoted pricing already in the marketplace with our consumers, a lot of our seasonal price points already out there, because we booked those well in advance and so the flow-through is very much '08.

We also had -- back to the gross margin, we also had very good supply chain productivity during the quarter.

Okay.

Thanks very much.

Thank you.

Your next question comes from the line of David Driscoll with Citi Investments Research.

Good morning, everyone.

Good morning, David.

Hi, Dave.

I want to wish you the best of luck, Rick.

Thank you, Dave.

And Dave, it's welcome, but you've already been here.

So let's just get to a couple of questions.

Most everything's already been asked.

The one thing I really wanted to try to understand a little bit, Dave, if I could direct it to you, why is it that you didn't see this inventory reduction coming last quarter, given the trends that have been going on?

I feel like the proverbial rug's been jerked out kind of again here and that this inventory situation is something that people have been worried about for a long time.

They have been -- we've been hearing quite often about the thoughts that there was a trade loading going on by Hershey, i.e., those distributors building up inventories, now we're going the other direction.

And I'm just curious as to exactly what changed.

Is it simply your answer, it's really the credit crunch that developed during the quarter?

I think, David, the reality of the -- of what exacerbated the change was the credit crunch which occurred in July.

And the way our programming has historically worked, there are growth targets for quarters.

There are growth targets on an annual purchase basis.

And so distributors have really until September to decide what they are finally going to buy for the entire quarter.

So while the credit crunch really occurred in July, it's not until the end of September that we really have a great read on what the total for the channel's going to be.

I think you got to step back in context.

If you think back 18 to 24 months ago or 36 months ago, we had 8% to 9% to 10% take-away in the convenience channel and a very significant pipeline of items in limited edition.

And in that environment, it was in the distributor's best interest to take on our inventory, because it was getting pulled out of their system very rapidly at retail.

You know, the shift that occurred towards -- in the middle of last year, and over the last several quarters, as we've dialed back on items and innovation and some of the innovation has not worked as well, such as Take 5 or Kissables, that velocity kind of fell off, that the inventory levels, just based on the sheer mass of it, as consumption goes down and some of the items don't turn, weeks of supply go up and we've been working through that this year.

As I said, take-away has certainly exceeded our shipments into the convenience channel all year long, and that -- so as we were working through a lot of discontinued items, the inventories were naturally coming down all year, but as we got to the third quarter and in terms of what happened, many of the distributors did not buy as much because they were managing their inventory levels and that's, that's really what happened for us.

Just one final question, and I will let it go.

I know the call has been going on for a while.

In the dairy side can you quantify for us what the dollar impact for dairy will be for the full year?

No, we don't comment on individual commodities.

Needless to say, dairy has been by far the most significant this year.

I already mentioned we see it moderating some.

We don't see it returning to historical levels next year, and I will just leave it at that.

Great.

Thanks a lot.

Thank you, David.

Thanks, David.

Your next question comes from the line of Alexia Howard with Sanford Bernstien.

Hi.

Good morning, Alexia.

Quick question about where you are on attitude towards acquisitions.

Historically the international growth strategy has been very much along the lines of organic growth and joint ventures and sort of smaller, I guess more from an organic model.

Given what the statement from the Hershey Trust last week about pursuing aggressive growth both domestically and internationally, can you clarify what your attitude is towards acquisitions today and how that might have changed over the last year to eighteen months?

I certainly wouldn't clarify any perception or perspective on acquisitions in the context of the trust statement.

I think what we've always said in the past is we will look at acquisitions as an accelerator to top line growth and as long as they're consistent with our overall strategic direction.

Your question regarding organic growth internationally, I think it is really a hybrid organic growth because when we went into the joint venture with Godrej in india, they acquired new trains.

So the combined Hershey Godrej joint venture really has an acquisition embedded into it.

We've also seen very good growth in Mexico, a market we don't talk about, and we acquired Pelo and Pelorico a few years ago, so we're going to look at ways that we can build our business in the emerging markets, whichever is the right combination, whether it be an acquisition of a local business, whether it be a joint venture and certainly through organic means as well.

Thank you very much.

Rick, good luck with whatever comes next, and, Dave, I look forward to working with you.

Thank you, alexia.

Thank you, alexia.

Your next question comes from the line of James Amoroso with Helvea.

Hi, guys.

Thanks for letting me come on the call even though I don't actually cover you.

I have a statement and then a question.

The statement is really the recent quarters obviously haven't looked too good, but from where I have been sitting, I think, Rick, you've done a pretty good job in regenerating the company.

Thank you.

You're welcome.

The question is a little bit relating to the last one.

You've -- I asked you a question about five or six years ago about internationalization, and the focus was very, very clearly at that time on North America and the existing markets that you were in.

Obviously with the two joint ventures the focus has switched, much more aggressively pursuing international opportunities.

Do you regret not having been more aggressive earlier or was that just simply not possible given management capacity?

I think the important thing, you have a very good memory, but if you go back to 2001, 2002 as we had been saying, the goal was to get our core business growing and to take advantage of clearly the largest most profitable confectionary market in the world which is obviously the U.S., and we had strong leadership and made some very good progress on that.

As we started to see opportunities to expand in global markets and in emerging markets, I think the important thing is if one were to go back in 2001 and 2002, we might have been looking at markets that didn't represent as sustainable a long-term growth trajectory as the ones we're clearly focused on now in terms of going into India where the chocolate market is obviously just developing, and we think we have an opportunity to influence consumer taste preferences along the way and build our category as the trade becomes more modern.

So I think the markets that we're focused on now represent long-term growth and whether we had been in China or India three or four years ago I think is going to be less the story.

And the greater story is going to be how successful the company is five or ten years in in those markets.

Thanks very much.

Thank you.

Your next question comes from the line of Andrew Lazar with Lehman Brothers.

Good morning, everyone.

Hello, Andrew.

Hello.

How are you?

Good.

Just a quick one.

One of the things that Hershey's has always talked about and always talked about with a lot of pride is the scale you bring to the trade at retail and the in-store presence and how you make that work for you, and in thinking about this uptick in retail core coverage and such, I just want to make sure I understand what really underlies that or necessitates that, given that your strength all along I think -- I always thought of as being the ability to get it done at the point-of-sale.

Is it something that competitively you have competitors raise their game at retail?

Is it purely just this sort of push to a pull model that you referenced earlier, Rick?

I am trying to get a better sense of that.

Andrew, it is Dave.

Within the convenience stores, the change from the -- to more of a pull model does require more merchandisers at the retail level, and we have added a significant number of part-time merchandisers who are going to provide that coverage in convenience stores.

And frankly with the competitive intensity that has come in the refreshment items and how big that is in the class of trade, we feel the need to improve our coverage at the convenience store level.

Within the food class trade over the last several years we have experienced very good retail productivity, and as we had gone through that, what we had done was kind of rerouted, and what we looked at in the middle part of this year was going back at coverage, and we took an analytical view and then decided we thought we could do better from a merchandising standpoint if we added more resources back into food.

Okay.

Thanks very much.

Good luck to you both.

Thank you very much.

Thanks, Andrew.

Your next question comes from the line of Pablo Zuanic with JPMorgan.

All the best to you, Rick and Dave.

Thanks, Pablo.

I guess my first question, Rick, have you already signed a book deal?

[ laughter ] No, I am first going to exhale.

Okay.

I guess I will just follow up on that.

If I may, you gave us an overview what you accomplished over the last few years and obviously several accomplishments there.

Could you just give us two or three examples of issue that is maybe you regret or that you would call mistakes?

I think we've talked about a couple of them.

At the time we do these things we're focused on our strategy and execution and if we thought it would be a mistake, we probably wouldn't do it.

I think the strategy to get into the snacks segments strategically made a lot of sense.

Executionally I think we can say we missed a couple of the critical success factors.

We tried to do too much in too many segments.

I think we learned a lot.

I don't think it necessarily hurt us that much, as much as it might have taken some resources away from some things that we think have more staying power.

I think the focus on core brands has been consistent from the very beginning.

How we have chosen to support core brands is maybe open to debate, and I think the focus where we're headed now more closer in makes a lot of sense.

If you think about the limited editions in '02 and '03, that was one of the key drivers to bring news and innovation to core brands, and it certainly worked because we got merchandise and we got take-away and it enabled us to expand our share.

Clearly over the past -- let's call it twelve months -- we've seen explosive growth in a non-trend segment called premium and dark chocolate, and we haven't participated as broadly, and that's been a drag on our business.

That doesn't mean -- the best part about that is we're not talking about trying to create a new segment.

We're talking about doing what Hershey does well, which is build and leverage a scale in a non-trend high growth segment that is very attractive to both consumers and customers.

So unlike snacks or unlike another business we might be trying to grow from scratch, here we are leaning into a high growth profitable segment.

I think those are maybe the couple of areas, Pablo, that I would highlight.

That's very useful.

I appreciate it.

One last question maybe for you, Dave.

How much more marketing is needed?

Because when I asked that question, you're saying 25% increase in the fourth quarter.

Your Advertising to Sales is 2%, (inaudible) is 11.

If I annualize the 25% for '08, that's only like $25 million, and that would mean going from 2% to 2.5% of sales, and we have really 11.

And I know that chocolate and gum are different, but the way I think about it, if you're moving more into bars, more into single-serves, as you said, your advertising needs to go up maybe another 400, 500 basis points.

Just give us a sense of how much more is really needed.

Sounds to me like 50 basis points and a base of 2% is not big enough.

Pablo, obviously I don't want to get into our future plans on spending levels in any of the lines of the P&L.

We have this year been much more focused on our core brands, and while some of our investments in the past and in let's say advertising behind snacks or Take 5 or Kissables were not nearly as effective as we would have liked, we have redeployed that money this year.

So in addition to the increase you already mentioned, when it comes to the core brands spending is up significantly, almost 2x on some of the franchises like Kisses and Reese's and in the Hershey's platform.

So we have redistributed the existing level of advertising to make it much more focused on the core and then are adding to it, will continue to grow the advertising and consumer investment into the future.

But I don't want to get into giving away he pieces of how much we're going to invest and where we're going to invest it.

We're focused on it, have done a better job this year about where we're spending, have spent more and will continue into 2008.

If I make one last one, Dave and maybe for the lawyer, but referring to Pennsylvania house deal number 2036 or what they call the Hershey's trust deal, I am wondering when you look at the Wall Street Journal saying that Hershey's Trust has been in discussions with Cadbury, didn't they break that law in the sense that they were required to disclose that those discussions were taking place on a public basis?

Pablo, I am not going to commented on speculative reports in the press about meetings that may or may not have happened.

That's not what we're going to do.

With respect to the trust, the trust understands its fiduciary responsibility, and I will leave it at that.

All right.

All the best.

Thank you.

Thank you, pablo.

At this time there are no further questions.

Hearing no more questions, we'll conclude today's session and Mona, Vern and I will be available to answer any follow-ups you may have.

Thank you very much for participating.

This concludes today's Hershey's Company third quarter 2007 results conference call.

You may now disconnect.