好時 (HSY) 2007 Q4 法說會逐字稿

Please stand by for real-time transcript.

Good morning.

My name is Brandy and I will be your conference operator this morning.

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

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

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

there will be a question-and-answer session.

(Operator instructions)

I would now like to turn the call over to Mark Pogharian, Vice President of Investor Relations.

Please go ahead, sir.

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

Welcome to the Hershey Company's fourth quarter and full year 2007 conference call.

Dave West, President and CEO, Burt Alfonso, Senior Vice president and CFO and I will represent Hershey on this morning's call.

We welcome those of you who are listening by the web cast.

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 the consolidated balance sheets and the 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 provide additional information to investors to facilitate the comparison of past and present operations.

We will discuss our fourth quarter and full year results excluding net pretax charges associated with the Global Supply Transformation program and business realignment and impairment charges with Brazil recorded in 2007 and the 2005 business initiative recorded in 2005 and 2006.

These net pretax charges were $95.9 million in the fourth quarter of 2007 and $5.6 million in the fourth 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 and initiatives.

With that, let me turn the call over to Burt Alfonso.

Thank you, Mark, and good morning, everyone.

Net sales and earnings per share results for the full year 2007 were in line with the outlook we provided during the last conference call.

Specifically, consolidated net sales in the fourth quarter of $1.34 billion increased 0.4% versus the prior year.

Diluted EPS from operations of $0.54 declined at 19% primarily due to higher commodity costs, increased consumer investment spending, unfavorable mix and higher SG&A costs related to our international expansion.

This brings full year performance to a 0.1% increase in net sales and a 12% decline in EPS diluted from operations.

Net sales for the quarter, excluding the benefit of the Godrej Hershey business in India were down 1.1%.

This primarily reflects a net decline in U.S.

volumes, which more than offset gains in artisan and international businesses.

Outside the U.S., our businesses grew at 39% in the quarter, including Godrej.

As anticipated during the third quarter conference call, shipments to key distributors were soft in the fourth quarter, which impacted our results.

Importantly, as we exited the year, inventory levels at key distributors had declined.

This should lead to shipments in retail take away patterns that are more closely aligned in 2008.

For the full year, net sales were even with 2006 and excluding Godrej Hershey business, sales decreased about 1%.

Turning now to marketplace performance.

Hershey's U.S.

retail take away in the quarter was ahead of shipments.

Consumer take away for the 12 weeks ending December 30th, in channels that account for over 80% of our retail business was up 0.9%.

As a reminder.

These channels include food, drug, mass including Wal-Mart and convenience stores.

In the FDMxC classes of trade, retail take away declined 2.1% resulting in a share loss of 1.4 points in the latest 12 weeks.

Take away within our core chocolate franchises, Reese's, Hershey's, Kisses and Kit Kat was negatively impacted by a lower than expected performance on Kisses.

Excluding Kisses, retail take away in FDMxCW increased 2.1% during the quarter due to the launch of Reese's Whips, Kit Kat Reserve, Holiday Gift Box offerings and the Kit Kat coffee promotion at selected C stores.

Kiss's take away declined 7.1% in the quarter due to the competitive activity in chocolate packaged candy.

For the full year, retail take away in FDMxCW was up 1.3%.

Strong gains by Hershey's and Reese's both up mid-single digits was offset by challenges in refreshment and lower velocities of previously introduced items.

Importantly, the category remains healthy and grew by 3.5% in 2007 in the FDMxC classes of trade.

In these channels, Hershey's take away declined by 1% and resulted in a share loss of 1.3 points.

In the fourth quarter and full year, our C store take away declined 3.4% and 1.2% driven by softness within refreshment.

Competitive new product activity has impacted our refreshment business in 2007 and accounted for about half of our total company share loss of 1.2 share points in the C store channel.

Hershey chocolate take away in C store for the full year was up 1.3%.

We expect our share performance to improve in 2008 as we continue to increase core brand investment and launch new products, Hershey's Bliss, Starbuck's and the Signatures line to compete more effectively in the on trend premium and trade-up segments.

In 2008, we will also have the full-year benefit of increased levels of retail coverage that were mostly added in the fourth quarter of 2007.

With respect to gross margins during the fourth quarter, gross margin was down 240 basis points compared with year-ago levels primarily due to higher commodity costs, higher trade promotion spending and unfavorable mix.

Specifically, dairy costs were up markedly year-over-year and tracked slightly higher than the internal forecast we established at mid year.

We believe that dairy stock prices will continue to subside somewhat as we make our way through 2008.

However, we expect that dairy will have a negative impact on our first quarter of 2008, because of the timing of increases in 2007.

Total productivity initiatives in the quarter exceeded our initial plans and helped offset a portion of the previously mentioned higher input costs and unfavorable mix.

Net obsolescence rates were up in the quarter and were favorable year-over-year.

Outside the U.S., the Godrej Hershey business generated lower than company average margin and modestly impacted our gross margin in the quarter.

For the full year 2007, gross margin was 35.5% versus 37.7% in 2006, down 220 basis points, primarily due to increased input costs.

Productivity initiatives exclusive of the Global Supply Chain Transformation exceed our initial estimates and helped offset the total year commodity cost impact.

EBIT margin for the quarter was down 450 basis points as selling, marketing and administrative costs increased about 14.4%, or 210 basis points as a percentage of sales versus the prior year.

While consumer promotion expenses were lower they were more than offset by higher advertising and selling expense.

EBIT margin was also affected by the cost of added retail coverage that began in Q3, will benefit 2008 as well as higher employer related costs from our international expansion.

Advertising was up 21% in the fourth quarter to support Reese's and other core brands.

We also shifted some spending from consumer promotion to trial driver coupons which are accounted for trade promotion between gross and net sales.

Total brand spending for the quarter, advertising, consumer promotion and trade promotion was up 10% versus the prior year.

For the full year, 2007, advertising increased 18% with total brand spending up 9%.

EBIT from operations for the year declined 13% with EBIT margin down 270 basis points to 17.6% from 20.3%, driven by lower gross margin and higher advertising, selling and administrative expenses.

Moving down to P&L.

For the quarter, interest expense decreased, coming in at $28 million versus $31.5 million in the prior period.

This was driven by lower year-over-year rates on our commercial paper.

For the year, interest expense was $119 million, up $2.5 million from last year, reflecting slightly higher levels of debt.

In 2008, we expect interest expense to be up slightly.

The tax rate for the fourth quarter was 36.4%, 90 basis points lower than the previous year.

For the full year, the tax rate was 36%.

Note that on a quarter and year-to-date basis, the reported tax rate is higher than the pro forma rate due to the effective tax rates applicable to business realignment and impairment charges.

For 2008, we expect full-year tax rate to be unchanged at approximately 36%.

In the fourth quarter of 2007, weighted average shares outstanding on a diluted basis were 230 million versus 235 million shares in 2006, leading to an EPS of $0.54 per share diluted from operations, down 19% versus year ago.

For the year, shares outstanding were 231 million versus 239 million last year.

EPS diluted from operations for the full year was $2.08, down 12%.

Turning to the balance sheet and cash flow, in 2007, net trading capital decreased versus last year, resulting in an improvement of $152 million.

Accounts receivable decreased $35 million and remains extremely currently and of high quality.

Inventory was lower, by $49 million, and accounts payable increased by $68 million.

The reduction in working capital affects 2007 programs to improve our sales and operations planning process and to manage our days payable.

We expect working capital to improve in 2008, primarily driven by inventory reduction in the second half of the year, but not at the same improvement rates as we achieved in 2007.

In terms of other specific cash-flow items, during the quarter, capital additions, including software were $76 million and $204 million for the full-year.

As previously mentioned in the third quarter conference call, capital spending came in below our initial estimate of $250 to $300 million due to the timing of projects related to the Global Supply Chain Transformation.

For 2008, we are targeting total capital additions to be in the range of $300 to $325 million driven by the year-on-year shift in our Global Supply Chain Transformation program.

Depreciation and amortization was $83 million in the quarter.

This includes accelerated depreciation related to the Global Supply Chain Transformation program of $33 million, so operating depreciation and amortization was about $50 million in the quarter.

For the full-year 2007, depreciation and amortization was $311 million, of which accelerated depreciation and amortization was $109 million, and operating was $202 million.

In 2008, we are forecasting total depreciation and amortization of about $250 million, including accelerated depreciation and amortization of approximately $60 million.

Dividends paid during the quarter were $66 million, bringing the full year to $252 million.

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

There is 100 million outstanding on the current authorization that the board approved in December of 2006.

During the quarter we did repurchase 7.8 million of our common shares in the open market to replace shares issued in connection with the employees exercising of stock options.

Our goal is to repurchase all such shares.

The Godrej Hershey business India and the manufacturing joint venture in China with Lotte are progressing as planned.

In India, we achieved our 2007 sales target and invested in our sugar confection brands and the launch of Hershey's milk mix.

In the near term, we will continue to enhance our relevance in India and extend our reach and distribution.

While the Godrej, Hershey business will have a positive impact on net sales, we do not expect any meaningful contribution to earnings given our plans to reinvest and build that business.

In China, we made significant progress in 2007, and we established the joint venture with Lotte, began local manufacturing and developed and launched a new portfolio.

We look to increase our relevance in 2008 with focused marketing investment to grow that business.

Now for an update on the global supply chain transformation that was announced back in February of 2007.

During the quarter, we recorded total Global Supply Chain realignment charges of $83 million pre-tax.

This reduced reported earnings per share by $0.25 for the quarter.

We recorded $35 million in cost of sales, consisting of accelerated depreciation and write-offs.

The $4 million recorded in selling, marketing and administrative expenses reflects program management costs.

An additional $45 million was reported as restructuring in the P&L included $32 million related to employee costs and $13 million in asset write-offs and contract terminations.

For the year, pre-tax expenses related to the Global Supply Chain Transformation totaled $400 million or $1.10 per share diluted on a reported basis.

As we previously communicated in the third quarter conference call, we increased our full-year 2007 estimate related to the Global Supply Chain Transformation to $380 to $400 million versus the initial estimate of $270 to $300 million.

This is primarily due to greater than anticipated number of impacted employees volunteering for the early retirement package.

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

This is an accounting timing change, and has no impact on our planned cash flow or the total cost of the Transformation program.

Our estimate of total pre-tax charges and non-recurring project implementation costs remain at $525 to $575 million, inclusive of project management and startup costs of $50 million.

For 2008, our estimate of total pre-tax charges and non-recurring implementation costs are $140 to $150 million, and total three-year on going savings remain at $170 to $190 million with a significant savings increase in 2008 compared to 2007.

To improve our competitive position in Brazil, we have undertaken a restructuring and recorded a pre-tax business realignment and impairment charge of $12.6 million.

It should be noted that this is not part of the Global Supply Chain Transformation program.

Specifically, we have entered into a joint venture agreement with Bauducco, a leading baked goods manufacturer and will leverage their strong selling and distribution capabilities throughout the country to enhance profitable growth.

We also expect operating margins to improve as we reduce overall head count and fixed costs in the coming months.

Hershey will retain a majority control of the joint venture.

Let me now talk about 2008, where our primary goal is to stabilize U.S.

marketplace performance.

We will continue to invest in our brands and businesses in both the U.S.

and international markets.

Investment spending will support consumer and customer merchandising programs for core brands as well as the launch of new products, especially Hershey's Bliss and Starbuck's.

Combined with the benefit of a full 12 months of increased retail coverage, we expect net sales to grow by 3% to 4% in 2008, including India and China.

At this point, we have a good assessment of our 2008 cost basket.

While dairy costs have moderated recently, a broad range of ingredients have accelerated over the last 12 months, and the outlook is for input costs to remain above historical averages in 2008.

Therefore, we expect input costs to increase at roughly similar levels in 2008 as they did in 2007.

Savings from the Global Supply Chain Transformation program and the aggressive pursuit of additional based productivity will help moderate the impact of these increases.

In 2008, EBIT margin will be down as we invest in our businesses.

Specifically advertising, consumer promotion and coupons will increase.

Selling expense will be higher due to the retail associates brought on board over the last four, five months of 2007.

In addition, employee related costs and investment in international businesses will also increase.

As such, we expect 2008 EPS diluted from operations to be in the $1.85 to $1.90 range.

Despite the inflationary cost environment that is pressuring margins, we are committed to investing behind our brands and expect to stabilize our U.S.

marketplace trends in 2008 Given year-on-year input cost comparisons and investment plans we expect quarterly plans to improve as the year progresses.

Dave will now provide some specific insights regarding our business.

Thanks, Burt.

2007 certainly was a difficult year.

To sum it up accelerating commodity costs, primarily dairy was one of the toughest issues we faced.

While we expected dairy costs to be higher year-over-year the rate at which it accelerated during the second quarter surprised both the market and us.

Beyond dairy the markets for the raw materials increased significantly later in 2007 and will result in significant increases again in 2008.

Increases of this magnitude and in back to back years represent a challenging operating environment.

Our Global Supply Chain Transformation program, which we instituted and announced in February of 2007, prior to the run-up in commodity costs is on track.

The savings from this program as we initially indicated represent the fuel for reinvestment to drive core brand growth.

Despite the unprecedented increase within our input cost basket we remain committed to the investment spending.

This decision will obviously impact the bottom line in 2008, but it is the right decision for the long-term health of the business.

Throughout 2007, competitive activity intensified in the form of both innovation and spending.

The activity was strongest in refreshment and the premium and trade-up chocolate segments.

This came at a time when we were transitioning our portfolio with less than normal levels of innovation and higher amounts of discontinued items.

As 2008 begins, we are operating under the assumption that that competitive activity will remain at current levels.

So overall, we are not pleased with full year 2007 marketplace performance and financial results.

However, we did make progress in areas that will benefit Hershey in the long term.

Specifically the Global Supply Chain Transformation is well underway.

The program will generate the savings anticipated, enabling us to reinvest in our business, while also giving us the manufacturing flexibility that will allow us to come to market with products and packaging that we couldn't previously make in a cost-effective manner.

We also made good progress in international markets.

Sales there continue to increase, and we are making the necessary investments to improve profitability over the long term.

As I mentioned a moment ago, within the U.S.

business, results were poor.

However, there were some bright spots that we will replicate and expand upon in 2008.

Let me give you some specifics.

From a customer view, business at one of our largest customers was on track and increased meaningfully in 2007 driven by increased retail coverage and net gains by our core chocolate brands.

This led to fourth quarter and full year retail take way of 0.9% and 1.3% in the food, drug, mass including Wal-Mart and convenience universe.

This is higher than our shipments and measured take away and reflects that shipments and consumption will be more in line as we head into 2008.

Total Reese's franchise take away in 2007 increased by over 4% behind closed in news and variety with Reese's Crispy Crunchy, Reese's Elvis Peanut Butter and Banana and fourth quarter launch of Reese's Whips.

We also made progress within the Hershey's franchise in 2007 where retail take away increased 6%.

A number of brands and initiatives did well including Hershey's Milk Chocolate Six-Packs driven by the Smore's and Brad Paisley merchandising programs and Hershey's Special Dark, Extra Dark and Cacao Reserve benefiting from the growth in dark chocolate and trade-up segments.

So as you can see where we realigned our investment from a customer and brand perspective the results were positive.

We'll support this type of growth in 2008 across more of our portfolio brands and customers with increased levels of advertising, retail coverage, merchandising events and new products.

This necessary level of investment should allow us to be more competitive, beginning to stabilize U.S.

marketplace performance, especially within our core chocolate brands.

In total, advertising, consumer promotion and coupons will rise nearly 20% in 2008.

The biggest portion of the increase on a percentage basis will be in advertising.

Among the most exciting 2008 initiatives are the launch of the Hershey's Bliss and Starbuck's product lines late in Q1.

These additions enhance our premium and trade-up portfolio and will enable Hershey to build scale in these growing sub-segments.

Appropriate brand support will ensure he products get off to a strong start.

Additionally these launches include dedicated merchandising fixtures, and in-aisle shelf-attachments that call out the products.

We'll further expand into the trade-up segment later in the year with the introduction of a Signatures line that will leverage Hershey's existing mainstream brands including Hershey's Extra dark and the new Reese's Select Clusters.

Combined with Cacao Reserve, Scharffen Berger, Joseph Schmidt and Dagoba, Hershey will have a broad portfolio of premium and trade-up chocolate products.

This portfolio approach leverages our scale as we bring our category management techniques to the premium and trade-up parts of the aisle.

Our core brands will also enjoy increased brand support, especially Reese's.

We will be on air more frequently in 2008, and will benefit from increased retail coverage as the nearly 20% more sales associates we hired in Q4 2007 execute merchandising events across all channels.

These include Hershey's and Kit Kat, Dale Earnhardt Collector Series at the start of the racing season of Q1 followed by the Smore's Brad Paisley promotion and the sponsorship of the upcoming Batman movie event The Dark Knight in Q2 and then in Q3 sponsorship of the U.S.

Summer Olympic team.

Overall, we'll increase merchandising versus 2007.

These actions will ensure that new product launches will get off to a successful start and that core brand performance improves.

We do have parts of our portfolio that are under-performing and we are working to address them.

Through the middle of 2007 Kisses franchise retail take away was growing driven by the 100th Anniversary program.

However in the fourth quarter the trends reversed dramatically resulting in a retail take away decline of 3.6% for the year.

A disappointing holiday season with increased competitive activity within packaged candy and trading up were major drivers.

Kisses continues to have an extremely high level of awareness of brand awareness and loyalty upon which we need to capitalize.

However our packaged candy lineup which includes Kisses as well as Hershey's Miniatures and Hershey's Nuggets has changed very little over many years.

The laydown bag, merchandising and purchasing queues have not kept pace with emerging trends and the demands.

As a result we need to address our consumer proposition within this segment.

This is also true to a lesser extent on our loose bar business.

We need to upgrade our benefit perception with consumers.

When I mentioned this on the October call, some read this as a reduction of price points.

That is not the case.

We need to contemporize these businesses with product and packaging improvements to meet current and unmet needs and provide new benefits to consumers.

Work is well underway on the front and we'll have more to share with you later in the year.

We also need to continue to involve our refreshment business.

In 2007, competitive activity and innovation in this segment were at the highest levels since Hershey purchased the business in 2001.

Ice Breakers retail break away was down 10% for the year.

Distribution gains on new product launches including Ice Breakers Ice Cube Gums, Ice Breakers Wellness Mints and Gums and York Mint Tins improved late in the second half of 2007 as additional retail coverage came online.

We will build on these gains in 2008.

However, the business did suffer as we transitioned away from Care-Free, Stick-free and rolled mint items.

We do have news in 2008 as we'll launch Ice Breakers Ice Cube Packs, a 40-count travel container and Ice Breakers Chewy Sours.

However we will have a tougher start than anticipated in the refreshment business in early 2008.

You may recall that late in the fourth quarter of 2007, we launched Ice Breakers Packs, a unique product what delivered the burst of cooling sensation by coupling breath strips in a pouch filled with xylitol.

The launch in Q4 was limited to a few customers and the product is not in broad distribution.

Consumers who tested and purchased Ice Breakers Packs are very satisfied with the fun and innovative product.

However some community and law-enforcement leaders have expressed concern about the shape of the pouch in xylitol form and the possibility that it could be mistaken for illicit items.

We are sensitive to these viewpoints and thus made the decision that we will no longer manufacture Ice Breaker Packs.

The product on the shelf in retail will sell-through in Q1.

The 2007 results and 2008 financial outlook that Burt discussed earlier includes an assumption for the unwinding of costs relating to this discontinuance.

As we had client support behind this item early in the year, we are now realigning our profession plans to make sure we stay on track.

Additionally our R&D group is working on exciting ideas that are unique, creative and deliver consumer benefits that can leverage Hershey's retail and technology scale within refreshment.

I hope to share these with you soon.

Let me turn for a minute to international.

As we look at 2008 and beyond, we will continue to employ a disciplined focus on key emerging markets where confectionary growth is strong.

We are pleased with the progress being made really in Mexico, the Philippines, China and India.

The integration of the Godrej business in India is nearly complete and resources will now be focusing on growth.

We are developing go-to-market trade capabilities that will allow us to keep up with expansions in the modern trade while at the same time allowing redistributions in other channels in the country.

While the venture will have a positive impact on net sales we don't expect a meaningful contribution to earnings as we invest in building distribution and in consumer efforts.

In China that we made significant progress in 2007 as we established our manufacturing JV with Lotte and developed and launched our business into the market in Q4.

As we look to 2008, we'll continue to invest and build our brands capabilities and distribution in key outlets and cities.

Specifically plans call for both advertising and consumer sampling.

We'll also open a retail store, Hershey Shanghai Chocolate World prior to the start of the Olympic Games.

We expect China sales to be up year-over-year with operating margins pressured due to the investment that will ensure the business prospers over the long term.

Turning now a built closer to home, Brazil.

The company purchased a small business there in 2001.

In-country sales have increased year-over-year, however a limited scale, reach and distribution have led to a disadvantaged position and unfavorable margin structure.

Increasing distribution throughout the country is an essential element to improving the competitive profile.

Hence we have announced a restructuring of the business and entered into a joint venture agreement with Bauducco a leading baked goods manufacturer.

We will have a controlling interest and be responsible for manufacturing and creation of the marketing plans related to Hershey products.

Bauducco will be responsible for selling and distribution of Hershey brands throughout Brazil.

After we complete the integration in 2008, we expect profitability trends in Brazil to improve into the future.

As you can see, 2008 in both our U.S.

and international businesses is an investment year.

Investment in our brands, people and processes is the right thing to do for the long-term health of the business.

As I stated earlier, it was our intent that the Global Supply Chain Transformation program announced in February 2007, before the unprecedented escalation of input costs would provide the necessary funding.

We will make these investments in spite of increasing commodity costs.

With this investment we expect marketplace trends to improve as we make our way through 2008.

This will begin after the first quarter, which includes a shorter Easter season as we roll out Hershey's Bliss and Starbucks.

Based on new product plans, global growth and the increased invest to stabilize U.S.

marketplace performance in 2008, we anticipate net sales growth to be in the 3% to 4% range.

We expect overall commodity and energy costs to again increase in 2008 at levels similar to encountered in 2007.

Gross margin will be under extremely severe pressure in the first quarter due to year-over-year comparisons of dairy as well as other input costs and will then sequentially improve as savings from the Global Supply Chain program and annual productivity will help moderate the impact of rising input costs.

Given the increased spending in key growth initiatives and the difficult cost growth environment we expect EBIT to decline in 2008, thus resulting in earnings per share diluted from operations of $1.85 to $1.90.

We are confident that the strategic initiatives highlighted today will enable us to achieve these goals.

As we look to the long term Hershey has many opportunities to leverage its global brands and U.S.

scale.

Work is already underway as we evaluate our approach to consumer insights and innovations and further evaluation and develop a consumer approach to the portfolio.

Additionally we are assessing our margin structure, every line item within the P&L given the continued escalation of operating costs.

We'll complete this work in the coming months and in the second quarter of 2008 provide greater details of our assessment, including innovation plans, core brand building initiatives, international growth objectives, portfolio strategy, capital structure and long-term net sales and earnings per share goals.

Through out this review and analysis our commitment remains to get back on track and to deliver consistent financial performance that will reward share holders over the long term.

This long term view is shared by the Board of Directors of the Company, they have been supportive of me and my senior management team.

We will do the right things in the short term that will benefit the business over the long term, putting Hershey in a position to deliver consistently upon its net sales earnings per share expectations, so that all share holders are rewarded as the Company succeeds.

Thank you and we will now take your questions.

(Operator instructions) We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Jonathan Feeney with Wachovia Securities.

Good morning, and thank you.

Good morning.

Dave, with the general environment of inflation out there, I know you mentioned some items on your cost basket, but how are others in the industry, you know, pricing?

Because it seems like most food items, pricing is up pretty dramatically and if I look at the measured data through chocolate pricing in the categories, are you having the conversations with retailers, and is there any thought of, because you have these pervasive costs that are actually less severe for maybe your company and then some of the other more grain-based companies out there, you could get some room and margin back there?

Jon, I'm not going to comment specifically on pricing, on any price-related issues.

The category remains competitive as I mentioned in my remarks, particularly innovation and spending and merchandising, and it is a tough market, but I'm not going to get into specifics about pricing.

Okay.

And just the convenience channel, you mentioned particularly, hat seemed particularly competitive.

Is there anything that was done in the past particularly through that channel or certain SKUs through that channel that have made that difficult and not make it a bottomed and easier for the company to grow next year?

I think a couple of things in the convenience channel that we certainly are pointing to for 2008, first is retail coverage.

We certainly have expanded our retail coverage with part-time sales merchandises that are going to be focused on the convenience channel.

We will be much more active in making sure that we get core distribution on all of our items in the right places, and we have a much better merchandising program of key events in 2008.

In 2007, we still had an impact of some discontinued items, and we did not participate as fully in the refreshment growth that occurred in the category.

As we go forward, we're focused on execution at the convenience store shelf.

If and just finally, your balance sheet is extremely strong right now.

I was a little surprised to hear there wasn't much stock repurchase activity in the fourth quarter.

Is that something that -- is there something that you're saving up money for, or is that something you might pursue more aggressively through the course of 2008?

Jon, in the fourth quarter, as you are aware, we had a few news items going on, so we were pretty maxed out.

So we were not active participants in the market in the fourth quarter.

We still have a $100 million dollars left on the share repurchase that we have out there.

Obviously, this is a topic for board level discussion.

We are engaged with the new board in the conversation around capital structure and that conversation is ongoing.

Okay.

Thank you.

Your next question comes from Terry Bivens with Bear Stearns.

Good morning, everyone.

Hi, Terry.

How are you?

Good.

Thank you.

A question on marketing.

I was not a marketing major, but it seems to me that one of the disappointments that Hershey has experienced over the past couple of years is you've had this really rapid growth in dark chocolate, and the company wasn't able to forge the market share there that you've there that you have had in the general market.

You know, looking back why do you think that was?

Did you underestimate how hard the competitors would come in?

And most importantly, how do you think that gets back on track?

Terry, it's interesting.

We do have a very good share of solid dark chocolate.

The normal Hershey's Special dark bar and the extra dark products have done very well.

I think what is happening -- and there's a blurring obviously of premium and trade-up.

Some of those products are dark, or richer or more indulgent.

That's the area we have not played as well as a consumer looks to trade-up from an experience standpoint.

You know, Cacao Reserve last year was an entry we made into that area.

We feel good about the progress we made on Cacao Reserve, but we just don't have the scale in that segment and that's what Hershey Bliss and Starbuck's launch that we have coming this year gives us.

It gives us scale and ability to play toward our strengths which is retail coverage, category management, and we do believe that the Hershey brand with Hershey's Bliss can play in that space, and we're very excited about the product offering.

Okay.

Thanks very much.

Thanks, Terry.

Your next question comes from Christine Mccracken with Cleveland Research.

Good morning.

Hi, Christine.

How are you?

All right.

Just, I guess, to your last comment on the Bliss and Starbuck's.

Do you feel that with those additions that you're going to get to a size that gives you the capability to get more involved in the category management?

Because the sense I get, at least from the retail community is that they're actually maybe changing the way they handle managing the category.

What gives you the -- I guess the insight -- or have you had those discussions that you get more involved in managing kind of that premium and super-premium effort at retail?

Maybe give us a little more color around that.

Well, Christine we are the category captain in just about every major account within the aisle in confectionary.

So we are involved in those conversations, although it's very difficult to be involved actively managing in that part of the category when we, frankly, don't have a lot -- we didn't have a lot of items or scale.

With those items or scale, obviously we will continue the category captain.

We've been involved in the dialogue all along.

We just have more breadth and portfolio scale to bring into the marketplace right now.

Just on Cacao Reserve, you mentioned you made a lot of progress there, but it seems like a lot of -- we've seen a lot of discounting in that product lately, heard that -- is that part of the strategy maybe to develop the brand to get more awareness?

I mean, how are you managing that brand to kind of solidify your presence in premium and super-premium?

Actually, we are very pleased with the household trial penetration that we've gotten, and the repeat rate has been very good on some of the new Cacao Reserve items, and we are the number one dark chocolate in consumer reports under the Cacao Reserve program.

So we're pleased with the progress we made from a consumer standpoint.

I think what you may be seeing in the marketplace from a discounting standpoint is likely going to be, as we rotate through the portfolio.

We launched a number of items in 2007.

Some of them were very well received by the consumers, and there were a couple of forms where we launched that were not, and those we're rotating through the system right now and getting them out of the shelf when we come back in with truffles and tasting squares that are more a little bit more in line with what the consumer in that segment wants.

We did learn a lot through 2007 on Cacao Reserve.

The portfolio will change somewhat.

It will be more in line with what consumers are playing back to us that they want and we're excited about it going forward, and it now has -- as we bring Bliss, as we bring trading up on Hershey's Signatures into the category, again Cacao Reserve kind of doesn't stand alone, but becomes something that we now have the ability to do in broader scale.

And the Global Supply Chain transformation as we get further down the road with our facility in Monterey, Mexico.

We have the ability to make items I think that are a little more unique and in different packaging that we've made before.

Great.

Just and then finally, on this competitive activity and kind of the general everyday business, I'm wondering, do you see any change to that?

I mean, has there been any I guess shift from a competitive standpoint, from your competitors, I guess, in terms of, you know, their plans or their level of discounting or is it just this constant ongoing struggle you're going to have in this largest part of your business?

Why are you kind of hurting yourself?

Why does the category not get more disciplined?

Christine I think the category traditionally is one that really drives around innovation and merchandising.

Frankly we didn't have a particularly good program because we didn't have the type of innovation we needed in 2007.

So we're very focused as we go forward in 2008 around the innovation we have particularly in trade-up and premium.

But in terms of the retail investment we made to improve our merchandising and a better merchandising calendar.

That's really what's going drive the change, I think, for us in terms of our share of merchandising.

And it's really less around anything around promotion.

It's really more, do you have something to promote?

Great.

Thanks.

Your next question comes from David Driscoll with Citi Investments.

Good morning, everyone.

Hi David.

So this is really going to go down here as quite a disaster for Hershey.

In 2007 you lose 270 basis points of operating margin, in 2008 another 200 basis points.

In two years we're going to be down almost 500 basis points.

Dave, I've got to go back to the pricing side.

This seems to be an unprecedented period of cost inflation.

Your margins are getting absolutely hammered, and we're not hearing anything out of you guys on pricing.

Can the category -- if you don't want to -- I understand you don't want to announce future price increases before they come, but is there historically, this category has been extremely good about getting price increases because of the inelasticity of demand.

Has something changed here?

Is there some reason we should believe that it's not possible to get pricing?

David I'm not going to comment specifically on pricing.

It is an unprecedented run-up in costs over the last couple of years.

You know, we are working very hard at getting our gross margins in line among any number of levers.

The Global Supply Base Transformation, productivity, et cetera.

I'm not going to comment on anything about pricing policy.

Even for the category or just a historical perspective?

I mean, has anything changed in there that you would want to call out for us?

I'm not going to comment again on pricing, David.

It's not appropriate for me to do that.

But, you know, the category growth rate last year was again 3% to 3.5% and that's been historically the category has grown in that 2%, 2.5% and 3%, 3.5% range.

The biggest difference in 2007 was we didn't drive the growth.

We have to get our programs and our people aligned to drive the growth in the category, and that growth came in premium and it came in trade-up and it came in refreshment where we didn't participate as we should.

That's where we're focused on is to make sure we have the appropriate programs to participate in the category growth.

So the fundamental growth rate in the category remains good.

For us a matter of gaining share rather than losing share.

Just a final question.

For a long time you've defended the long term growth model of the business, at 3% to 4 % top line and 9% to 11% on the bottom line.

Today will be a very tough day for shareholders of the Company.

You've only given perspective on 2008.

Can you give us some thoughts as to what you believe the long-term model can and should be?

David, as I mentioned back in October, that is currently under review.

It certainly is a board level conversation that is already underway.

The management level of the team has already had those conversations.

We will communicate something to you out in the second quarter on the long-term outlook.

Obviously given the investment required in the business that we feel from a consumer standpoint as well as the current cost environment, we are looking very closely at that growth algorithm.

Okay.

I appreciate the comments.

Thank you.

Thank you, David.

Your next question comes from Dave Powers with Edward Jones.

Good morning.

This is actually Joe [O'Harrick] with [Godelman] Research A couple of questions.

Regarding your operation improvement initiatives.

What are you doing to improve on those in terms of Lean TPN, Six Sigma and how do you see the benefits impacting the company?

In terms of the productivity programs that we have underway they're really twofold, and I think we talked to them in the earlier comments.

The Supply Chain Transformation is very focused on a flexibility of our plants, and a concentration of our manufacturing resources that will provide not only greater product and package capabilities, but also lower costs.

We do have a full program of base productivity where we look at all the other parts of our business and are more focused on those than ever given the cost environment.

In terms of Six Sigma specifically, we do look at Six Sigma where it's applicable within our business and use it as a tool the same as we would any of the other productivity tools that we use.

What metrics are you guys using to measure results like OE and [Arona]?

What's important to you so you see how your core business is running?

We don't comment specifically on the metrics that we use and within our supply chain, we do have a set of metrics that we measure ourselves against to make sure we're achieving the savings and productivity targets that we have for ourselves internally.

And going forward regarding your operation initiatives, what systems and solutions are you putting in place to accelerate these initiatives?

In terms of initiatives, we are continuing with the plans that we've put in place.

We're making the progress that we expect.

You know, I had mentioned that all of the savings targets over the next couple of years that we've -- that we've put out in the marketplace, we believe, are achievable at this stage, and the ranges remain exactly as we had anticipated when we started the project.

We are making good progress, and moving forward in that regard.

You've been telling us after quite some time and over the last two years, your stock is down 80%, and you won't -- I mean, you talked about what metrics you're measuring against.

Everything is very vague.

The shareholders on this call want to hear what you, David West, are going to be doing in terms of how you measure yourself, and that's very critical to investors that want to buy your stock.

Return on that net assets is very important to most CEO's, OE is extremely important to most CEOs how you guys measure yourself so we know whether you're doing the right job?

This is Burt Alfonso.

It wasn't David.

I just didn't want to cause confusion for you.

You know, we hold ourselves to the measures that are common within the marketplace.

Certainly all of the financial measures that we talk about in our press release are critical measures for us, and on the operating side we use a different set of measures, more margin related, and cost per production unit related.

Cost per production.

Okay.

And how do you see those benefits impacting your bottom line?

They benefit us in terms of how much we can offset, you know, the rising costs within our business.

I already mentioned previously in the comments our savings from the Supply Chain Transformation are targeted to achieve $170 to $190 million of savings between now and 2010.

We believe that we're firmly on track to achieve those, and as I already said we do look for productivity across business, not just in the supply chain.

Okay.

And going forward, my final question, what is your number one goal to accomplish this year in terms of reducing costs, improving throughput through all your plans?

How do you plan to improve throughput through all your plans to ensure you're getting the right product to the right customers at the right time, at the right price?

In terms of the number-one objective, obviously it's to achieve the costs that we've planned for 2008.

But there are a number of variables that affect that.

You know, you're talking throughput.

That's more about our marketing programs and our ability to increase our sales.

So obviously there's some relationships, but purely, from an operational view.

When I say throughput, I'm not talking about marketing and sales.

I'm talking about throughput through your plant.

How are you improving that?

That is why I was talking about OE earlier.

Throughput through your plants to make sure you're maximizing your assets and making sure you're getting the right return on all your internal investments.

Clearly we're focused on having the best cost profile that we can.

Honestly, not sure where you're going in terms of trying to pin us down to one measure.

This is Mark Pogharian.

We gave a lot of detail back in February about metrics related to capacity utilization and you and I can follow up after the call on that.

Okay.

Thank you.

Your next question comes from Robert Moskow with Credit Suisse.

All right.

Thank you.

Hi, Rob.

How are you?

I'm okay.

Dave, I wanted to know, are you comfortable with the management team and the restructuring that you've done over the past couple of months?

Do you feel like you have the right people in place, or are you going outside and trying to bring more faces in at top levels; and if so, are you -- if you are doing any hiring, are you having any trouble persuading people to come to Hershey in the midst of this challenging time for the Company?

Rob, actually very pleased with the management team that we have in place.

We used our internal succession team management plan to fill four key roles in the latter part of last year, the CFO role, the Global Chief Marketing Officer as well as the heads of the international and North American Commercial Group.

We have made some changes in early December to the way we're working through global marketing and innovation, and some of the branding work, you know, clearly, our 2007 results would bear, it wasn't working to the way that we would have liked it to have, so we did make some changes in global marketing and innovation.

Very pleased with the team we have in place.

We have two open spots on my staff, the Senior Vice President of HR has announced her retirement and she's obviously helping through transition until that spot is filled, and then we also have the Global Supply Chain job open.

Both of those are active searches internal and external and at this point there time we would tell you, based on the prospects of the company, the opportunity to work with the kind of brands we have, we aren't having any issues getting a list of candidates that we're happy with.

Okay.

And lastly, when you come back to us in the second quarter, I guess my first question is-- how long have you been working on this revised plan and thinking about, you know, changing your growth algorithm.

You know, why can't we hear about this today?

What are you still analyzing?

And then, secondly, you know, you say you're assessing your margin structure, but the guidance already implies another 200 basis point decline in margins to 15.5.

We haven't seen those kinds of levels since 2001, so isn't your margin structure already adjusted?

Rob, I think that the answer to your question, when we talked back in October on the call and Rick had just announced that he was going to retire, we had talked about coming back to you in January with a view to the long-term growth model.

Obviously a few things have changed since then.

We're in the process of finalizing some of those things at the board level, and those conversations obviously need to happen first before we can communicate with you, and clearly, the operating margin structure and the reduction obviously we had in 2007 that we're calling for here in 2008 reflect the need for us to make the necessary investments in the business, in the U.S.

marketplace, in the core brands as well as in the trade-up and premium space and also internationally.

So we'll have a little bit more flavor for you, but I think what you need to hear from us is that we are going to make the necessary investments in the long term health of the business.

The work has been underway, and we will continue to review that at the senior management and board level and be back to you sometime in the second quarter.

I guess my question to you, then, is do you feel like you have a good idea of what you want to do to improve the operations at the company, and then it's just a matter of the new board members being in place and you need time to get in front of them or they need time to get comfortable, or, like, do you feel like you've had these plans already in place, and now it's just a matter of getting in front of the new people that are involved, or are things changing and you're still analyzing what to do.

We're clearly not standing still.

We have a Global Supply Chain Transformation which is the largest project the company has ever undergone.

That one is underway.

We have done the joint ventures in manufacturing in China and India, and were are going invest in those businesses.

We have Starbuck's and Bliss.

We have a number of key initiatives which are aimed at improving the results of the business.

A couple of things that I did mention today when I said, for example, about the Kisses brand.

There are some things in the portfolio that aren't working as well as we want them to.

Some of them are specifically brands in pack sites.

Others might be segments of business that we're looking at, and that work as I said, back in October, had already begun, and as part of the long-term growth algorithm as well as capital structure, et cetera, we've begun those conversations with the new board, and we're going to continue to work it through at that level, and that's the appropriate way for us to go about it.

Thanks, Dave.

Thanks, Rob.

Your next question comes from Alexia Howard with Sanford Bernstein

Hello there.

Good morning.

A couple of quick ones.

Can I ask about some of the non-core businesses that you have?

I'm thinking particularly about the Mauna Loa acquisition and perhaps some of the forays into more of the snacking categories like cookies and so on?

Can you give us a quick update on where those stand and what the plan is for these?

I understand the Mauna Loa business was quite disappointing in margins for awhile plus the acquisition, and I think cookies, the foray in there has been somewhat challenging in getting growth in there.

Is the idea to really focus back on the core chocolate portfolio and spend mostly of your investment dollars going forward on that part of the business?

Hi, Alexia.

Good Morning.

This is Burt.

Hello.

I guess the first comment I would make is, you know, we generally don't comment or speculate on any acquisitions or divestments for that matter.

With respect to the businesses that you mentioned, we regularly look at our portfolio analysis, and we're in the process of that, and it is part of the work we're doing, as Dave mentioned, to have discussions with the board.

The core business refocus strictly within the chocolate side of the business, yes, there's -- we're clearly putting more resources of what has been put into chocolate against those core brands as we focus more on reviving Hershey's and Reese's, Kisses and Kit Kat.

So I won't comment on what the exact plans are for those businesses, but I would say, though, that yes, it's a regular part of our practice the look at our portfolio breadth and have those discussions with the board.

Great.

Thank you.

And then, just finally, coming back to just general sales growth guidance, bouncing back to between 3% and 4% this year is, you know, quite a decent step up from where things have been over the last couple of years.

Given that we're talking about similar levels of competition and that's clearly been an issue since late 2006 and, you know, some of the market dynamics out there, can you just give us a quick sort of two or three top items of what gives you the confidence that things can be reinvigorated this year on the top line?

Yes, Alexia, we're much more confident in our ability to compete in the trade-up and premium space which drove a lot of the category growth last year with the Hershey's Bliss and the Starbuck's launches.

We have a better merchandising program supported by retail coverage, which is some, you know, 20% more people than we had last year, and as we left 2008, we are shipping much more towards the consumption pattern in the U.S.

You'll remember in the latter part of the year, we had some distributor inventory reductions.

So that would cover the U.S.

And then globally, we continue to get good growth.

We have five months of our India acquisition.

We made that in May of last year and expect to get good growth in China and other markets as well.

Okay.

Great.

Thank you very much.

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

Hey good morning everyone.

Good morning, Ken.

The 3 to 4% for net, that is internal or including acquisition?

It sounds like it's including acquisitions?

It includes just the sub-period of the Godrej acquisition.

Okay.

And maybe I missed this, but you said that the commodity increase for 2008 will be similar to 2007.

What was the commodity increase in 2007?

Don't quote me on the number.

I believe we said in the past that of the margin impact, it was the majority of that around 220 basis points.

Okay.

So that's still the -- that's still exactly what happened in '07?

That's what happened in '07.

Okay.

Similar levels in '08.

Okay.

And then, in terms of when you say you're assessing the margin structure, does that mean that '09 could potentially be another down year, or is 2008 the bottom of where you think, you know, EPS growth will be?

Our comment about assessing the margin structure is beyond the Global Supply Chain Transformation.

We -- you know, we clearly know that we need to generate significant amounts of productivity throughout the P&L given the input cost structure -- the input cost environment that we're in.

So I wouldn't read it as anything other than us making sure we have a full assessment of where the productivity is going to come from going forward.

It doesn't mean that your margin can contract again in '09 and we haven't reached a bottom on your margin structure yet then?

Is that not the implication.

Again I'm not going to project forward beyond what we already told you here on the call today.

Just, you know, that comment specifically is intended for you to understand how aggressively we are looking through our P&L and our business to make sure that we have the appropriate levels of productivity in this cost environment.

And then my last question is, you know, since 2003, Hershey has added about $1 billion worth of sales, but your EPS is essential the same as 2003.

How are you changing the way you look at incremental sales, and how does that -- I mean, because, again, you've created this billion dollars of incremental sales, but yet your EPS is right back to 2003 level.

What is changing in how you assess the incremental sales?

I think, Ken, the one thing you need to focus on is what's happened in the cost inputs between 2003 and 2008 when you talk about the incremental sales and the gross margin obviously associated with that.

And some of the sales that we have added have been more global, which are going to come at a lower margin.

Those would be the two factors I would ask you to think about.

When it comes to incremental sales, we would -- we've already talked specifically that some of the U.S.

innovation was not nearly as incremental as we would have liked it to have been.

But beyond that -- you know, those would be the factors I would have you consider.

I mean, just as a side note, not to harp on it, but other package companies have already experienced the higher commodities and they're not having such the divergence between sales and EPS, and again, I'm not trying to, you know, kick you while you're down.

But, you know, that was kind of more the question.

I understand the commodities, but is there other internal issues while, you know, that could be corrected and changed that would not have this issue to repeat, aside from the commodity issue?

The only other thing I would say is we are investing aggressively behind your brands.

Great.

I appreciate it.

Thank you.

Your next question comes from Vincent Andrews with Morgan Stanley.

Good morning, everyone.

Good morning.

I have more of a philosophical question now that most of the other questions have been answered but seems like your competition has taken you by surprise over the last couple of years and you're still in a defensive stance trying to get back to zero in on a lot of levels.

At what point do you think you'll be able to look beyond just trying to defend yourself and perhaps come up with things that will in turn will take your competition by surprise and put you in more of an offensive mode from a competitive perspective?

I would say it's less about the competition.

It's more about consumer, and the way we approached innovation and insights took us to a place, you know, we made a choice back in 2004 and 2005 to improve our portfolio in snack adjacencies.

That proved to be not as incremental to us as we would have liked.

At the same time, within the category, consumer's needs were changing and their demands were changing with respect to premium chocolate and trading up in chocolate, and we did not meet that emerging consumer demand.

The same with refreshment.

We didn't meet some of the merging consumer demands there.

We're much more focused on consumer demand and inviting now than we would have with our innovation portfolio in the past.

Clearly some our competitors did a better job in certain areas of meeting some of those consumer needs and we didn't.

So it's less about, you know, what the competition has done to us.

More about what we didn't do with the consumer, and believe me, we have a laser like focus on that consumer insight right now, and those are some of the things we've talked about in terms of changing the portfolio.

Okay.

Thank you very much.

You're welcome.

Your next question comes from Eric Katzman with Deutsche Bank.

Good morning, everybody.

Hi Eric.

I can't believe it, but I actually do have some questions.

Did you say how much the cost basket, however you want to define that was up in '07 in percentage terms?

Did I miss that --

What we said, Eric was that our expectation in '08 is that we would have s similar level of cost increase as we had in '07.

Taking you back to the '07 numbers, just to get you grounded, in '07 gross margin decline was the 220 basis points and the productivity was offsetting a 240 basis point commodity cost increase.

Okay.

So I mean, are we then -- I mean, just trying to think here, are we then able to calculate -- because most of the companies in the business have said, our cost basket in '07 was up, you know, 7% or 10%.

So I'm just trying to get a better feel as to what that percent increase is, kind of where you are versus the group, let's say, average.

Eric, we haven't talked about it that way.

We've talked about it much more in terms of the gross margin impact -- you know, think of it roughly, you know, 200 basis points of gross margin contraction along the way and you can kind of convert that if you like, but we see a similar amount of commodity cost pressure this year.

It may not be on the same parts of the input basket as it was in 2007, but overall, you know, the grain complexes are up.

You know, the dairy was up markedly.

We had some of that spill over in 2008.

Fuel is up, et cetera, et cetera.

May be different parts of the basket, but pretty much the same kind of an increase.

Okay.

And then just kind of a follow-up to your last point, Dave, which I thought was very accurate, and right on point in terms of kind of R&D and innovation and that's in many ways where the company has stumbled.

You know, the argument was always made that Americans just want a Hershey sweet type of milk chocolate product and they don't want what's coming out of let's say more indulgent European type chocolate, but the company always had the ability in terms of R&D to make it if they wanted to.

And I guess, we don't get much visibility into R&D there and it's not normally something we've had to focus in on, but it seems to me that that is a pretty critical component, and I guess how -- how are we going to maybe -- I don't know if the second quarter is going to be a meeting or if it's just a conference call, but it seems to me that we have to get pretty comfortable that the R&D pipeline is really going to be resurrected, and it sounds like across most of the portfolio.

And our intention is to -- our intention is to meet live, not to do a conference call as we come forward with this, Eric.

But you're right on target with a number of things.

We have the amount to change the flavor profile of the chocolate.

We have not always had, within our manufacturing infrastructure, the ability to change package formats and piece sizes and shapes et cetera.

That's one of the things that the Global Supply Chain Transformation enables us to do, which certainly will give us a lot more possibilities with meeting consumer needs and insights.

But we are clearly -- you know, clearly our innovation profile in '03, '04 and '05 was much more around providing variety to the consumer, varieties of the brands that we already have, and that proved to not be nearly as incremental or sustainable as we would have initially liked it to have been.

So we are really now focusing on consumer insights and back to the consumer demand trying to find the white spaces in some our brands and some of the pack sizes need to be repositioned because they've lost some of the relevance with consumers over time.

That's kind of what you were pointing to last call as opposed to a price repositioning?

Correct.

It's -- you know, it's clearly a price value repositioning, based on some of our brands, frankly, the consumer -- the consumer has other alternatives and making a choice that they're willing to pay a little more for something else.

We have fundamentally some of the best brands in the category, with Hershey Kisses, the Hershey brand itself, Reese's.

Those brands can and should play with all of the consumer needs that are out there.

We need to do a better job with it, be it product packaging positioning on those core brands, and that work is underway, work with a feverish pace that you would expect it should .

Okay.

I'll pass it on.

Good luck.

Take care.

Your next question comes from Andrew Lazar with Lehman Brothers.

Good morning.

Hi, Andrew.

I guess, Dave what I'm trying to determine, is the investment levels for '08, and the lower EPS year-over-year, whether those are actually enough, and if so, why you feel that's the case.

It comes down to obviously the marketing levels that you're looking to apply.

Even if you take the difference between where, you know, estimates where they were and now are going to be for '08, even if all that incremental was applied specifically only to advertising, you know, maybe that takes the rate of advertising as a percent of sales up, you know, maybe to 5% or so, and maybe that's enough.

I don't know, but I know that some of that obviously is going to have to be applied to non-advertising consumer spend, and maybe some of it just to cover input cost during the year and things like that.

So I guess I'm trying to get a sense of what's the right level of marketing spend, and do you think that '08 is a year where you get all the way there, or is it a wait and see and there might be more that's needed as you go into '09 and beyond?

Andrew, it's a very, very good question, and one that we continually evaluate and wrestle with.

When you think about what we did in 2003 and 2004 and 2005 in limited editions; the limited edition was a known with a slightly new form.

There wasn't a lot of need to communicate that to the consumers, as long as we got it appropriately merchandise, and as we look back on that time frame, we were not investing in the brand in the core brands to the same extent.

We were allowing the limited edition to carry some of that news to market.

As we get to the trade-up in premium where we need to communicate to the user a new usage occasion, a new purchasing queue, a new packaging format, clearly that will cost us more from a consumer standpoint, and then also, we are fundamentally back to the core particularly when you think about our C store and loose bar business and we've got great core franchises.

The challenge for us is not only the level of spending, but how well we spend it.

Our Reese's spending last year worked phenomenally well.

You could argue that our Kisses spending didn't.

If you look at the Kisses brand and what happened to the Kisses brand there the fourth quarter, while we had spending we didn't get the results we wanted because the product was not positioned the way it needs to be, and we need to work on that.

So we clearly are investing more in the brands.

We did it in '07.

We're going to do it again in '08.

We will continue to evaluate that.

We do feel much better about ourselves where we are from a brand spending going into '08.

You know, clearly I'd love to not have the commodity head winds to fight into.

But that's the reality in the marketplace.

We need to do what's right for the business long term.

We'll be back to over time, with you long term with insights on how we're doing with positioning and spending, but right flow the guidance for '08 is the best I can give you.

Got it.

Thanks.

See you soon.

Thank you.

Your next question comes from David Palmer with UBS.

Good morning everybody.

I'm curious building on some of these questions about innovation, wanted to focus on the C store channel and innovation.

In particular, obviously you pulled back somewhat in some of your non-chocolate categories, but I'm perhaps more concerned with the closer to the core innovation than in single serve that perhaps hasn't really moved the needle as much as you would have hoped in recent years.

I'm thinking about things like Kissables and Take-Five.

I'm wondering away from premium, what you're doing differently in the likes of Kisses and Whips and future innovation and what would make these more incremental and sustainable in your mind.

Thanks.

Sure, David Actually, in convenience stores, our chocolate brand -- our chocolate take away was actually up a little more than 1% during the year, for 2007.

We did grow our chocolate stores in the convenience stores and Reese's Whips and Reese's Crispy Crunchy are clearly an example of that.

What we have going in 2008 in convenience is much more merchandising against our core brands, rather than limited editions being the vehicle for merchandising, it's much more on the core, and having significantly more retail help, getting the shelf right, getting distribution levels up; are the two things in 2008 that are going to certainly help us.

When you reflect back on some of these bigger -- you know, bigger innovations that were, bigger steps perhaps, you think back and think we should have spent more on marketing or maybe there's something in the taste profile in your testing that you could have done differently?

Is there any learnings that you can share with us about ways that you could make your bigger riskier innovations have a higher hit rate.

We do have a lot of learning, particularly on some of the brands that you talked about, and again, it comes back to positioning, consumer insight and what benefits the brand brings and need that they are meeting.

We do have some lessons learned on those brands.

But realistically, right now for us we are focused on those core brands in convenience stores, because we need better execution against the core.

We have better programs against them, and that's where we're going to win in 2008 in convenience.

Is it as simple -- I remember Rick used to talk about perhaps there was a paralysis through over analysis and that you wanted to get the organization moving faster with innovation.

Is there now a thinking of perhaps, you know, there wasn't enough homework done on some of the things that were pushed out to market in some way that you're thinking going forward?

I don't think it was -- I don't think it was speed issue in terms of getting things out to the market too fast.

That clearly isn't it.

I think we launched a new about of new news and that new news didn't prove to be nearly as incremental.

The challenge that we had with so much new, news going into the market at the same time is, as that new, news slows, you then have to take it all back out, and one of the drags that we have in 2007 and in the latter part of 2006 was really, a lot of that innovation as it slowed came back in the form of either returns or it just sat on the shelves longer than we would have liked and it just bogged up the system, and therefore the core brands didn't get the kind of attention we would have liked them to have.

But, you know, as I said, going forward, our approach to innovation will be very different and look forward to sharing with you over time.

I guess I'll let you have the last word, but I'm trying to figure out what reason you would present -- you know, there's one top of the list type reason that these closer to the core, single serve type innovations that you'll inevitably have, the Reese's Whips stuff, why that should be more incremental and sustainable than the stuff we've seen in the last few years.

Just, you know, if you have any final comments on that and I'll just leave it there.

I think what we've done on the Reese's brand with Reese's Crispy Crunchy, new form and texture of the Reese's brand, Reese's Whips with a lower fat claim on that big brand.

That is a very different approach on Reese's than okay, I'm going to I'll have another line extension, an inside out Reese's cup or a dark chocolate that comes in and out?

Again, having a much more targeted focused benefit that we're bringing on those brands versus just, you know, flavor line extension that kind of goes into the system and comes back out.

We did that on Reese's 2007 and we'll the that on our brother brands as we go guard.

Okay.

Thanks very much.

Thank you.

Your next question comes from Pablo Zuanic with JP Morgan.

Good morning, everyone.

Good morning, Pablo.

A question for Burt and then one for you, Dave.

Burt, in terms of the guidance for 2008, I don't know if you told us -- I know usually you bring margins down 200, 250 basis points, but what is the reason for gross margins on SG&A?

Are you implying gross margins are going to be down 200 basis points and hence SG&A to sales will be flat?

What are you assuming for guidance?

We actually did not comment exactly on gross margin, and, you know, we did comment on the commodity impact that we expect between net sales and gross margin.

SG&A, clearly, we said would be increasing, and the factors that drive those are the full year impact of the retail sales force increase.

We do have more behind our -- we do have more behind our sales and marketing as well as the innovation pieces, and advertising is going up as well, and I think we mentioned, you know, what that percentage was.

So, you know, no specific comment on the movement of gross margin other than the commodities and a lot of the offsetting impact we have from productivity and absolutely a lot more investment in SG&A.

And I guess, you know, one for you, Dave.

I'm trying to understand marketing spending, but; we look at Wrigley and they are the spending is 11% of sales and advertising, and I guess the more that you're moving to single serves away from packaged candy, and I suppose you would continue the strategy.

There is a need to move closer to a Wrigley, 11% than a 2%.

I know that was touched on before but what is the difference between chocolate and gum if you are pushing into single serves.

I assume single sales means more impulse purchases and thus more sales top of mind with consumer and thus more advertising would be needed.

Can you go back to that please?

Pablo, I think single serve is a very profitable part of our business but we have a very large seasonal business, a very large package candy business and clearly trade-up and premium are going to be in the aisle and not necessarily in any consumer version, therefore those parts of the portfolio tend to move much more based on merchandising feature and display.

Therefore they are trade promotion intensive than the front end would be and we still have a very large part of our portfolio and our scale is in the aisle and we need to win on that part of our business.

Therefore the model will tend to be different than strictly an instant consumable type of business.

And just one more Dave, if I may.

I am just trying to get a good sense of the mix sort of business between the premium and trade-up and what you call the mainstream, can you give us a sense If the market is still going at 3% then obviously premium and trade have sort of cannibalized the core.

Give us a sense in terms of what is your market trend in each of those two, premium and trade-up and where are you in terms of core.

And is it fair to say that the share loss has been really mix related and the share in mix has been stable?

Can you walk us through that?

Any color would help.

I am not going to give you specific shares.

I will tell you that the growth rate of the premium and trade-up are certainly higher than the category average.

The growth that has come in premium and trade-up was certainly, from our competitor certainly took more advantage of that than we did.

As we look at 2008 we need to grow in those growing segments to the category that are growing at a much more rapid pace.

You know the largest part of the category is in the everyday business and that is where we have the most work to do to make sure we are properly positioned to give consumers the right benefits and getting the right price value equation there.

Thank you.

Thank you.

Your next question comes from Eric Serotta with Merrill Lynch.

Most of my questions have been answered.

I will just follow up offline.

Thank you.

You have a follow up question from Rob Moskow with Credit Suisse.

Hey, Burt.

What is your cap-ex spending in '08?

How much of that spending is for the restructuring plan and how much is for core?

A larger portion is related to the restructuring.

And frankly, the cap-ex next year is higher but that is primarily a shift from this year to next year.

It doesn't affect the progress we are making on the Supply Chain Transformation but it does effect certain decisions that we made in terms of how we pace capital additions.

The majority is related to that and obviously included in that is the Monterey facility which is a sizable investment.

You mean that the majority of the increase or the majority of the overall is restructuring?

The majority of the overall.

Okay.

Thank you.

Your next question comes from David Driscoll with Citi Investments.

Hi.

Just one quick follow up.

Can you comment on the price fixing allegations in Canada and the corresponding issue that might be arising here in the United States?

Is there any comments you could make to us on what is happening on this?

Yes.

In view of the ongoing investigation by the competition bureau in Canada we cannot comment on allegations.

We can tell you that we continue to cooperate fully with the investigating authorities in Canada.

We will cooperate fully with any active U.S.

investigation.

We have not been asked to provide any information related to this matter in the U.S.

So therefore we don't have any details and we're really not able to provide you any additional information on the U.S.

matter.

Thank you very much.

There are no further questions at this time.

Are there any closing remarks?

Yes, Brandy.

Thank you for joining us for today's call.

Burt Alfonso and I will be available later this morning for any follow up calls you may have.

This concludes for today Hershey Company fourth quarter 2007 results conference call.

You may now disconnect.