好時 (HSY) 2008 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to The Hershey Company second quarter 2008 results conference call.

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

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

(OPERATOR INSTRUCTIONS.) Thank you.

Mr.

Pogharian, you may begin your conference.

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

Welcome to The Hershey Company second quarter 2008 conference call.

Dave West, President and CEO, and 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 2007 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 Company uses these non-GAAP measures as key metrics for evaluating performance internally.

These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP.

Rather, the Company believes the presentation of earnings, excluding certain items provides additional information to investors to facilitate the comparison of past and present operations.

We will discuss our second quarter 2008 results excluding net pretax charges.

The majority of the charges in both 2008 and 2007 are associated with the global supply chain transformation program announced in February 2007.

These net pretax charges were $39.3 million in the second quarter of 2008 and $124.4 million in the second quarter of 2007.

Our discussion of 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 Dave West.

Thanks, Mark, and good morning, everyone.

Results for the second quarter were roughly in line with our expectations.

Net sales increased 5.1%, reflecting the progress Hershey continues to make in the marketplace.

The consumer-driven model we unveiled last month is focusing our efforts on brands and innovation that offer the greatest potential for sustainable sales and earnings growth.

Marketplace momentum is building, driven by core brands such as Reese's, as well as new products, particularly Hershey's Bliss and Starbucks Chocolates.

Continued brand investment should result in further year-over-year improvement in the second half.

In terms of second quarter marketplace performance, the reported IRI and Nielsen data for the period ended June 15 is impacted by the timing of Easter.

Therefore, my remarks related to second quarter take-away and market share will exclude the effect of seasons and be focused on the everyday business.

During the quarter, we continued to make significant progress on initiatives that will net benefit sales and earnings throughout the remainder of the year and beyond.

As I stated a few weeks ago in New York, focused investment on our brands is driving retail take-away.

Every day, consumer take-away for the 12 weeks ending June 15 and channels that account for over 80% of our retail business, increased by 5%.

Specifically, the Hersheys and Kit Kat franchises were up about 7%, while the Reese's and Twizzlers franchises were up low double-digits.

These gains were offset by softness in Kisses as we are lapping the 2007 100th Anniversary promotion as well as softness in snacks and refreshments.

As we highlighted last month, market structure and segmentation work is well underway to begin to address the positioning of certain brands, especially Kisses.

In the channels measured by syndicated data, FDMxC, total Hershey retail take-away excluding the Easter effect increased 3.3%, greater than the total CMG category growth rate of 2.8%, resulting in a modest market share gain of 10 basis points.

Clearly, a step in the right direction for our business.

Performance within non-measured customers remains good.

Shipments of back-to-school, Halloween essentially had no impact in the second quarter, with sales within the quarter down slightly year-over-year on Halloween.

We expect an overall solid Halloween, so this is only a timing issue.

Seasonal programming is in place to ensure that we have good third quarter sell-through.

In the second quarter, marketplace performance improved in all classes of trade, especially in C-store and food channels where we have added retail resources.

In the convenience store class of trade, the category continues to grow.

In the second quarter, the category was up 4.1%.

Hershey take-away increased 3%.

While this resulted in a share loss of 0.3 points, it was an improvement sequentially and year-over-year.

In convenience store, Hershey's chocolate and nonchocolate segments were solid during the quarter with take-away up 3.7% and 5.7% respectively.

Offsetting this performance was softness within refreshment, particularly mints.

Positive results were driven by additions to retail coverage and increased levels of core brand investment, including advertising, merchandising, and unique C-store programs, such as our Reese's and Coke partnership, as well as Cash For Gas, where consumers can instantly free gas when they purchase a Skor Payday candy bar.

Continued core brand advertising, as well as Reese's Batman Dark Knight, Olympics, and NASCAR programming, will ensure momentum continues in the third quarter.

Turning now to the food class-of-trade, where everyday retail take-away increased 2.6% in Q2.

Specifically in the May 18 quad, market share was flat and in the June 15 period, we gained 0.9 share points in food.

These results were driven by increased retail coverage, merchandising, and the success of Hershey's Bliss.

The Bliss launch launched benefited the chocolate segment in the food class-of-trade.

To date, the Hershey's Bliss launch has been highly successful, exceeding all internal targeted sales metrics.

Consumer take-away and trial has been particularly strong, making Hershey's Bliss the number one new brand launch in the chocolate category for 2008.

During the quarter, we exceeded our ACB distribution targets.

Incremental merchandising and product display activity, combined with strong consumer support, anchored by TV advertising, product sampling, and traditional trial vehicles, drove take-away.

As it relates to household penetration, Hershey's Bliss ranks significantly above all of our bench market targets in this point in its launch.

Importantly, early repeat purchases are exceeding our initial estimates.

Net to launch has more than met our expectations and Hershey's Bliss is on track to exceed its year-one sales target.

The Starbucks Chocolates product launch is also progressing.

This is a more focused opportunity and therefore overall ACB distribution will not mirror that of Hershey's Bliss.

Where it is in distribution, Starbucks is doing well, driven by advertising and consumer support programs.

Repeat among consumers who have tried the Starbucks line is above expectations and importantly, about half the consumers buying Starbucks are making it an incremental purchase to their category shopping.

ACB is a bit behind our target, but we have plans in place to close the gaps in the second half.

As we outlined last month, investment in our core brands will continue throughout the year, including advertising, merchandising, and consumer promotion.

We are on air with continuity levels on Reese's and we are initiating spots on Hershey's Almonds and standard bars.

Hershey's Bliss and Starbucks will continue on air as well.

Overall, we are pleased with our US marketplace performance in the second quarter, as we improved in all classes of trade.

Price realization, increased retail coverage, combined with higher levels of advertising and in-store activity, is having the desired effect.

We are gaining traction and we expect this will continue with year-over-year US marketplace performance improvement in the second half of the year.

Our international businesses continue to deliver on our expectations and we also expect this to continue throughout the remainder of the year.

The global supply chain transformation program is progressing.

We expect to recognize the majority of the 2008 global supply chain savings in the second half of the year, as production in our new facility in Monterey ramps up.

Bert will have a few more details for you in a moment.

The global supply chain transformation savings, combined with price realization, and good visibility into our cost structure in the second half of the year will enable us to expand consumer investment, support solid seasonal programming, and continue to build our international business.

Therefore, for the full year 2008, we continue to expect net sales growth of 3% to 4%, and earnings per share diluted from operations of $1.85 to $1.90 per share.

While it is too early to give details in specificity around 2009, we are encouraged with the latest marketplace trends and feel that in 2009, net sales will be within our long-term top line growth rate of 3% to 5%, driven by further brand investment, the previously announced pricing action and international growth.

We do expect commodity costs to increase again significantly in 2009, and to remain volatile for the foreseeable future.

We continue to focus on productivity and other initiatives to offset higher input costs and consumer investment.

We'll continue to invest behind our focused brands and international businesses.

Therefore in 2009, we expect earnings per share to grow, but below the long-term operating EPS rate of 6% to 8%.

Now Bert will provide more detail.

Thank you, Dave, and good morning, everyone.

As already highlighted, Q2 results were in line with our expectations.

Consolidated net sales in the second quarter of $1.1 billion increased 5.1% versus the year-ago period.

Diluted EPS from operations of $0.29 declined 17%, primarily due to higher levels of consumer investment and selling expense.

Importantly, marketplace performance is improving and our 2008 plans are on track to deliver full-year net sales growth of 3% to 4% and EPS diluted from operations of $1.85 to $1.90.

Now for some additional details.

Net sales performance, up 5.1% in the quarter was essentially in line with our internal forecast.

Net price realization driven by the April 2007 and January 2008 US price increases contributed about 3 points.

Volume was lower, about half a point due to softness in snacks and refreshments.

In June, we lacked the results from the Godrej acquisition and the two-month benefit in the quarter accounted for about 1.5 points of growth.

Dave provided details related to our marketplace performance, so I'll focus on a review of the P&L and balance sheet, starting with gross margin.

During the second quarter, gross margin increased 80 basis points, as favorable price and productivity offset overall input costs that were higher by 20 basis points in the current period.

Recall in the second quarter of 2007, commodity costs were markedly up, mostly driven by the timing of higher dairy costs.

Our full-year outlook related to commodities has not changed and as such, we still expect our input costs to be up about $100 million year-over-year.

Net obsolescence costs were at normal rates in the quarter and were slightly favorable year-over-year.

Outside the US, the Godrej Hershey business generated lower than Company average gross margin and modestly impacted the quarter.

Now that we have lapped the Godrej acquisition, future quarters will be more comparable.

EBIT margin was down 280 basis points, as selling, marketing, and administrative costs increased about 24%, or 350 basis points as a percentage of sales versus the prior year.

Advertising and consumer promotion was up 34% in the quarter, supporting Hershey's franchises, including the launch of Hershey's Bliss, Starbucks, the Reese's Perfect campaign and brand-building initiatives in key international markets.

For the year, we expect combined advertising and consumer promotions to be up about 25%.

EBIT margin was also effected by a few other factors.

These include the cost of added retail coverage that began during the second half of 2007, employee-related costs of our international expansions in India and China and slightly higher corporate administrative costs.

We expect our EBIT profile to improve in the second half, as we lap the expanded retail coverage and international infrastructure investments.

Now moving down the income statement.

Interest expense for the quarter decreased, coming in at $24 million versus $29 million last year.

This was driven by lower short-term rates on our commercial paper of about 300 basis points and lower average step balances resulting from working capital improvements.

For the full year 2008 on a percentage basis, we expect interest expense to be down from 15% to 20%.

The tax rate for the second quarter was 39%, a bit higher than the prior year due to the timing of state taxes and tax accounting.

For the full year 2008, we are projecting a tax rate of 36%.

Note that on a reported tax rate, it is higher than the pro forma rate due to the effective tax rates applicable to business realignment charges.

Weighted average shares outstanding on a diluted basis for the quarter were $229 million versus $232 million for the second quarter of 2007, leading to an EPS of $0.29 per share diluted from operations, down 17% versus year ago.

Let me now provide a quick recap of year-to-date pro forma results.

Net sales increased 2.8% in the first half.

EBIT from operations declined 22%, with EBIT margin down 210 basis points to 12.6% from 16.7%.

Advertising and consumer promotions increased 21% on a year-to-date basis.

Gross margin was 35.3% year-to-date versus 36% last year, due primarily to increased input costs.

EPS diluted from operations in the first half declined 23% to $0.66 per share.

Next, I'll comment on our balance sheet and cash flow.

At the end of the second quarter, net trading capital decreased from the end of last year's first quarter, resulting in a cash inflow of $224 million.

Accounts receivable were down $75 million and remain extremely current and of high quality.

Inventories were lower by $116 million compared to the second quarter last year, and accounts payable increased by $33 million.

We expect working capital to improve in 2008, primarily driven by inventory reduction and lower accounts receivable DSO.

During the quarter, capital additions including software were $76 million.

For 2008, we continue to target total capitalization to be in the range of $300 million to $325 million, driven by the global supply chain transformation program.

Depreciation and amortization, $57 million in the quarter.

This includes accelerated depreciation related to the global supply chain transformation program of $11 million.

Together, operating, depreciation and amortization totaled $46 million in the quarter.

In 2008, we are forecasting total depreciation and amortization of about $245 million to $255 million, including accelerated depreciation and amortization of approximately $55 million to $65 million.

Dividends paid during the second quarter were $66 million.

During the quarter, we did repurchase 23 million of our common shares in the open market to replace shares issued in connection with employee stock options being exercised.

Our goal is to repurchase all such shares.

We did not acquire any stock in the second quarter related to the current repurchase program, and there is $100 million outstanding on the current authorization that the board approved in December of 2006.

Let me quickly provide an update of the global supply chain transformation program, which we announced back in February of 2007.

Construction in Monterey continues and manufacturing is now underway on a limited amount of product being produced.

Relocation of manufacturing (inaudible) in our existing network is largely complete, although installation and commissioning of certain production lines is ongoing.

While we are satisfied with our progress to date, there is still a lot to accomplish in the coming months to complete the project on schedule.

During the quarter, we recorded global supply chain realignment charges of $40 million pretax, including $15 million of accelerated depreciation and write-offs to cost-of-sales and $2 million reported in SM&A expenses reflecting program management costs and plant closure-related costs.

These charges reduced earnings per share by $0.11 on a reported basis.

For 2008, our estimate of total pretax charges and nonrecurring project implementation costs is $135 million to $145 million and the total three-year ongoing savings remain at $170 million to $190 million with a significant increase in 2008 compared to 2007.

We expect cumulative savings to reach roughly $80 million to $90 million in 2008, due to the second half of the year.

Our estimate of total pretax charges in nonrecurring implementation costs remains at $550 million to $575 million, including project management and start-up costs of $60 million.

Let me close by providing our outlook for the remainder of 2008.

For the full year, we continue to anticipate net sales growth of 3% to 4%.

Year-over-year US price realization improved US marketplace performance driven by consumer investment and international gains will drive second half net sales.

We expect that EBIT margin will be lower year-over-year due to higher input costs and increased investment in advertising, consumer promotion, and selling expenses in the US, and in selected international markets.

As a result, for the full year 2008, our projected EPS diluted from operations remains in the $1.85 to $1.90 range.

We are encouraged by the latest marketplace trends and feel confident that 2009 net sales will be within our long-term top line growth rate of 3% to 5% driven by focused brand investment, previously announced price increases, and international growth.

We continue to expect commodity costs to rise again in 2009 and remain volatile for the foreseeable future.

I'm sure that all of you are aware that the majority of the commodities are up significantly since the beginning of the year.

With this in mind, we continually assess our margin structure and key P&L drivers for opportunities.

As we recently communicated in June, due to the increased spending against key growth initiatives and the difficult cost environment, we anticipate that in 2009 our earnings per share from operations will increase, but not within the stated long-term operating EPS growth rate of 6% to 8%.

With that, I'll close and we'll now open it up for questions.

(OPERATOR INSTRUCTIONS.) Your first question comes from Christine McCracken with Cleveland Research.

Sorry.

I had you on mute.

Good morning.

Hi, Christine.

How are you?

I'm well, thank you.

Just in terms of your 2009 guidance, I guess a little disappointing relative to our expectations.

Is there anything specific that you would call out aside from the obvious cost inflation, challenging environment that's driving that?

I think as we said, and I think we said it in the June analyst meeting as well, there's a lot of volatility in the commodity markets.

The complex pretty much across the board is up.

We expect it to probably be another difficult year from a commodity standpoint and we know we need to continue to make the investments in the business, both in the US and internationally.

As we do that, while we see growth next year at this point from an earnings per share standpoint, it's just too early for us given the cost environment to commit to anything other than a gain.

We don't believe we'll get into that longer-term range.

But it's not a function of not being able to get maybe sufficient pricing to offset that commodity cost.

There's no pushback from the retailers that's maybe making you less confident in your outlook?

Right now, we did get good pricing realization in the second quarter and we're pretty much on track from an elasticity modeling standpoint from what we would have expected right now.

That's about all I'll comment on pricing.

All right.

I'll leave it there.

Thanks.

Thanks, Christine.

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

Good morning, everybody.

Hi, Eric.

Hi, Eric.

I guess my questions revolve around the gross margin.

I don't -- and then also working capital.

I just don't understand how there could be such a change from the last four or five quarters when it seems like most input costs other than dry powdered milk have gone up.

Most of the companies in the industry are reporting higher working capital usage due to the flow-through of the inputs and yet you said that inventories were down $117 million.

Can you just walk through some of these, some of the gives and takes on the gross margin line and what's happening and how that's influencing working capital?

Sure.

I can give you some further details.

We don't, as you know, provide outlook guidance on gross margin.

In terms of the commodity impact this year, we've been pretty consistent in saying that we believe it's about the same order of magnitude at as last year at about $100 million.

We do have global supply chain transformation savings which do help us quite a bit in the back half, not so much in the first half.

In terms of the quarters in gross margin, you're quite right.

The second quarter last year had a pretty significant dairy spike.

This year obviously from the dairy perspective, things are better than they were last year, then quantities are not.

There's some balancing that goes on there.

I would say that in the second half of the year, we expect that the commodity impact to be more comparable to 2007 with respect to gross margin, with again as I mentioned, gains from the supply chain perspective.

In terms of working capital, there are a couple of drivers.

Certainly one is the consolidation of our facilities as part of the global supply chain transformation, and we have as well, done some outsourcing of certain components of our supply chain.

The receivables is really just a function of a smoother sales pattern, I would say, in the quarter.

And we have been aggressive, as most companies have been, I think on their accounts payable and getting the maximum that we can get from that part of working capital.

Those are the things that are combining to help us both on a gross margin basis, as well as working capital.

We had good working capital gains last year.

We expect them this year.

Obviously, we don't expect to continue that level of improvement as we get into next year perhaps.

In terms of the second quarter, there's obviously that catch-up from last year with respect to the dairy.

Okay, and then just a followup on that same line.

Pepsi Co this morning highlight add $0.02 mark-to-market gain from hedging.

General Mills has adopted that and their swings, as a result of that accounting adoption, are much more significant.

Why are you not adopting that accounting principle and maybe explain why not.

Well, to the extent that there are mark-to-market adjustments, that would reflect that while there's hedging in practice, there's not hedging from an accounting perspective.

The accounting that we employ is GAAP accounting, same as everyone else, for hedges.

To the extent that they are passing the effectiveness testing on the underlying commodities, there should be no mark-to-market.

You put it in -- okay.

Let me just understand this.

You still keep it in, what's it called -- ?

Other comprehensive income?

Yes.

Other comprehensive income on the balance sheet as opposed to putting it on the income statement?

Yes.

Again, it's really a matter of the matching of the underlying and the effectiveness testing.

You can have hedging that qualifies as a hedge for accounting and hedging that doesn't.

Ours by and large pretty much do in its entirety.

Okay, all right.

I'll pass it on.

Thank you.

Thanks, Eric.

Your next question comes from the line of Robert Moskow with Credit Suisse.

Hi, good morning.

Hi, Rob.

How are you?

I'm okay.

You know what, I'm going to follow up on Eric Katzman's question because it's not even just the inventories that are a lot lower and receivables are a lot lower, over the past two years.

But it's also the payables are a lot higher.

That's helping your working capital numbers, too.

Are you actively trying to slow down the pace of your payables?

Well actively within the terms that we agree to with our suppliers; I wouldn't say we were doing anything Draconian or trying to muscle the market.

Having said that, we did not compare favorably to our peers more than two years ago.

It's in an area of emphasis for us.

And we had good gains last year and we continue to have those gains.

As I already mentioned, we don't see that level of gains going on indefinitely, but working capital and cash flow will continue to be a high priority.

Maybe a little bit higher than it has been in the past.

I can't comment on that.

And as we negotiate our contracts, we are getting better terms and that's part of our strategy, yes.

Okay.

And then one quick follow-up on the back half of the year.

It looks like EPS will have to grow -- well, probably be about flat in order to get to the midpoint of your guidance.

You were down about -- in the low 20% range in the first half.

Can you give us a sense of what the drivers are to get you back to a flat pattern in the second half of the year?

Is it -- how much of that is the savings that you said is back half-loaded?

How much of that is other items?

If you look at the underlying top line in the second quarter and take out the overlap of the Godrej acquisition, which was incremental.

You look at the top line growth rate on an organic basis of 3.5% in the second quarter.

We're starting to see better traction in the top line.

We would expect that to continue as we look out into the second half, we're starting to get some traction there.

You'll have better top line draft throughout the second half.

We certainly didn't get that kind of traction in the first quarter, although we did in the second.

Then we do start to get the global supply chain transformational savings, which are significantly back-end loaded.

We also have our international and US selling ramp-up really started to occur in the latter part of last year.

As we get out into the later part of this year, the -- those G&A component comparisons become a little easier.

Great.

Do you expect sales to accelerate beyond organic growth of 3.5%?

We're not going to comment and give you anything specifically, but we're starting to get -- we're getting underlying take away at 5%.

If you look at the marketplace every day in the last quarter, and even if you look at the last eight weeks, it's even a little bit better than that, where you've got eight weeks of nonseasonal.

We're starting to see some pretty good traction there.

I don't want to give you a projection, although you can do the math.

If we continue to save 3% to 4% for the year and we're up 2.8% for the first half, you're going to have to see a better second half from us.

Okay.

Thank you very much.

Thanks, Rob.

Take care.

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

Good morning, everyone.

Good morning.

Dave, you started your comments off by saying that the quarter was roughly in line with your expectations.

I just wanted to get a better understanding of -- sounds to me like a couple of things might not have clicked, vis-a-vis what you were hoping for.

Can you just outline what those were?

Yes.

I think roughly in line, we were probably a little bit better on the top line than we would have thought going in.

But, we expected to see this kind of momentum coming in the marketplace.

But it was probably a little bit better than we would have expected.

Obviously there's some puts and takes within the cost environment.

Overall as we exit the business here throughout the first half, we're pretty much where we thought we would be.

What we're really encouraged by is the marketplace performances that we're starting to get some traction and you see it in our share and in our take-away, particularly in that US business.

Okay.

If I could just clarify your initial comments on 2009.

If I'm correct, they are not any different from what you said at the analyst meeting a month ago.

Is that correct?

That's correct.

Okay.

Then finally on spending, you -- if I'm correct, you've raised your spending expectation from 20% to 25% for the full year.

And you spent higher in the quarter.

You spent -- I think you said 34% this quarter.

Was that spending above your expectations for the quarter?

Did something happen during the quarter that caused you to nudge that up?

Or why are we going from 20% to 25%?

Well, it's -- there's a little bit of timing in there.

I think we always knew we would have -- we have the Bliss and Starbucks launches coming in the second quarter.

Clearly, we always knew the second quarter was going to have a heavier spend.

And there were some timing issues.

We were a little light on some of the timing of the spending in the first quarter which fell into the second.

As I said, we committed to increasing Hershey's spend behind the core.

Hershey and Hershey Almond, you started seeing Hispanic advertising running in the second quarter.

Probably a little bit more spending in the second quarter than what we originally expected, but not much.

And in other words, in the back half of the year, you're still spending, according to your previous plan and the higher numbers, just the flow-through of what you did in the second quarter?

Pretty much.

Okay.

And let me just -- last question, just on your pleasure with the market share performance that is based on your original spending expectations?

In other words, you're not -- the market share performance that you exhibited during the quarter is what you expected based on what you expected to spend, not on what you spent ahead of that?

Well just to be clear, we're not satisfied with where we are.

But we are pleased that we're starting to get some traction.

The retail coverage and the selling efforts have really helped us in food and convenience, so you're starting to see that.

We've got the Hershey's Bliss launch off to the where we would like it to be.

The core brand spending on Reese's is working.

We also have -- we're working through -- we're much more focused on the core versus prior year, where we would have been focused a lot of smaller -- some smaller innovation in the rest of the portfolio.

The focus is working.

Listen, we're not -- certainly not in any way, shape or form declaring victory or anything like that.

We're still not gaining share, but we've seen it flatten out.

Pretty much we thought we would start to see that after Easter and it's important for us to continue to prove to ourselves and to the market that we can -- we're going to do what we said we're going to do.

This quarter is really for us -- starting to become much more predictable and seeing consistency from our performance.

Okay.

I guess the last question I had, I believe that you're anticipating another acceleration in spending next year.

I just can't help but wonder if we're going to get there earlier.

Maybe that the spending is going to go above trend, or above your expectation in the back half of the year.

Is that an unreasonable thought?

We have no change at this point in time to what we've already communicated and we don't anticipate anything like that.

Okay.

And then, Bert, if I could just ask you to remind me, or remind us, you still have some room in the existing share repurchase program and just why you're not being aggressive on share buybacks at this point.

I mean we said it before.

Value-added share buybacks, they are an important consideration as we look at our capital structure.

Today, we have a couple of different priorities perhaps.

Given the credit market, we're valuing more our solid investment rating.

But we do have an elevated capital expenses as part of this supply chain transformation.

We continue to look for opportunities for either acquisitions or joint ventures that are bolt-on in the international side.

We're maintaining more financial flexibility.

Okay.

Thank you very much.

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

Great, thank you.

Good morning, everyone.

Hi, David.

How are you?

Very well.

Bert, just to clarify, I might have missed this.

Did you just say flat out that gross profit margins would be higher in the back half of the year?

No, I did not.

What I stated was that we don't give outlook guidance.

What I tried to do was put into perspective the different components that might shape gross margin, such as the fact that commodities are more comparable versus '07 in the back half and that we do get the majority of our supply chain savings in the back half.

The way I interpret that is the comparable commodity cost is more of a favorable issue versus the front half of the year, which was a real negative variance in commodity costs.

And then the supply chain savings is obviously good, is that correct?

You have to look at commodities a little bit differently.

We had a pretty big impact in Q1.

We had less of an impact in Q2 simply because there was such a big impact of the dairy impact in Q2 '07.

The only thing I mean by more comparable is that those anomalies don't effect us in the back half.

Okay.

On trade promotion, I believe that in 2006 and 2007, it was up both years.

I think '07 was a record year for Hershey.

Dave, do you see this number flattening out or coming down over the course of time?

How does trade promotion fit into the ongoing strategy?

Yes.

It's really -- you have to think of trade promotion as part of the price realization, because price realization was a real contributor to our top line in the second quarter and also to our margins.

You have to take -- because so much of our category, such a merchandising-intensive category.

While list pricing is important, the actual net promoted price is probably more important, because it's really what the consumer is used to seeing.

When -- the reason -- when you're taking price increases, you tend to protect some of those price points that you like to promote at.

Therefore, as you start to take list price increases, to a certain extent, your trade promotion rate is going to go up because we've chosen to deal back in some cases to hold promoted price points.

That's why you're seeing an increase in trade promotion rates.

But on an absolute basis, what you've got to look at is on a net basis, we did start to see a gain.

Over time, we've got to work our way out of certain price points, because we've got to cover the commodity cost increases that are out there.

And we're starting to work our way out of some of those price points and you saw it in the marketplace in the second quarter.

When you look at the market take-away, we saw both unit increases in volume, as well as price per unit.

That's a good mix for us.

As you go forward, you hope to be able to find a way to flatten out the increase in the trade promotion rate.

That's real helpful.

Bert, was all the $50 million in increase in SG&A year-on-year in the second quarter related to advertising and consumer promotion?

No, not all of it.

We did have a pretty big portion that was there.

And if you remember, the selling expense, we started to increase the sales force in the second half of last year, so you did have a bigger impact.

There was the impact of the international infrastructure that we put in place with China and India that, again, was started around the back half.

The second half effected us much more last year, so you had some year-on-year impact there.

And then, we had slight increases in just normal salary, administrative costs.

Maybe, Dave, if I could just get in one more question.

Bliss is pretty exciting.

Is there any way you could give us any numbers here on consumer trial rates or ACB?

Or the repeat rates?

Any numbers here?

How does this compare to some of the other major Hershey product launches of the past?

Sometimes, those comparisons are also helpful.

I'll prefer to not give you any specific numbers for competitive reasons.

What I will tell you with respect to Hershey's Bliss is it is tracking well ahead of most of the benchmarks of our own historical database.

And the reality of that is we would expect it to because we -- with this particular new product at launch, we expected this to be more incremental, much more focused and targeted in the marketplace.

And the good news is right now as we look at it, we are seeing that to be the case.

As we talked in the June analyst meeting in New York City, with respect to this launch, we are getting from it what we hoped which is a very focused, targeted launch.

We are getting the the ACB distribution build that we expected.

Right now, if you look at IRI, you'll see the ACB of Hershey's Bliss is already in the mid-80s.

That's pretty good in a short period of launch, where we really started shipping this in March.

We're already in the mid-80s on a -- from ACB standpoint.

The important thing is this is something this we're going to support as aggressively in year two as we are in year one.

It's a nice product.

Congratulations on it.

Thank you.

Appreciate it, David.

Your next question comes from the line of Terry Bivens with J.P.

Morgan.

Good morning, everyone.

Hi, Terry.

Good morning, Terry.

Couple of things.

Dave, as you look at C-store performance, it was a little better than I thought it might be in the second quarter.

I know it's tough to predict gas prices, et cetera.

But at least one of the trade magazines for that category is dramatically lowering what they think non-gasoline sales may turn out to be in the second half.

I guess the question would be, do you feel that the C-store performance you saw in the June quarter is sustainable?

Terry, good question.

I think if you look back historically.

If you look at '06 and '07 category growth rates for total confection area category in C-stores, they were around 3.5% to 4%, both '06 and '07.

What we saw in the second quarter for the category was around 4%.

That's fairly consistent with what historical growth rates would be.

Our take-away in the second quarter was -- for example, our chocolate take-away in the second quarter was up 3.7%.

Our non-chocolate was up 5.7%.

We weren't nearly as good in refreshment as we needed to be.

And that's a trend up from us, because we were pretty much flat in the first quarter on take-away.

We're not seeing a slowdown.

Now what you are seeing is a change in the mix between pricing and units.

You're also starting to see a mix change between standard and king, as people are trying to digest the value equation.

Right now, the category has historically done reasonably well.

We're cautiously optimistic that we've put good programming in place and added a lot of retail coverage there to keep our trend rate going on forward.

But we're very intimately involved with the [NAX] industry association.

We're helpful as part of the thought leadership of where the industry's going and so we're very careful to make sure that this is such an important channel for us that we are doing the right thing from a programming standpoint.

But so far, we're pleased with our take-away.

And the category still continued to be pretty good.

Okay.

Clearly the deal hasn't closed yet, but you're looking at some pretty formidable competition once -- in the event that Wrigley and Mars combine.

Can you give us a sense of what the early planning is at Hershey for how to deal with this?

Actually, I won't.

Okay.

I'm utterly floored

I know I'm going to surprise you by not going to give specifics, Terry.

As I said, we clearly -- we have a respect for Mars as a competitor.

We have a respect for Wrigley as a competitor, so we'll certainly have respect for Mars and Wrigley together.

There are a number of things within the category where we still continue to feel very good about our business.

Obviously, we've got great brands.

And they combined, we still have great brands.

We'll obviously watch what they do closely, but they continue to be very pleased with our business in terms of the brands, our presence in the aisle, our seasonal presence, and some of those things that we think are our competitive advantages, so that's including our retail sales force.

We're going to focus on who we are and what we do well, and continue to do that.

And we believe that we have some advantages that we'll continue to take to the market.

Okay, and just one last quick thing.

These obsolescent costs, we've had these for a while.

How much longer do you think these will be mentioned?

Obsolescence has improved year-on-year.

To some extent as we focus more on Poor's and some of the limited edition product has made its way through to the market, we believe that it's an improving trend for us and one that we have a lot of focus on these days.

Is it still out there in inventory, Bert?

Is that the problem?

Well, not necessarily from that perspective.

My point is we're much more focused on making improvements in all aspects of our business given our cost pressures.

We have resources that are put against making sure that obsolescence is as low as it can be.

We're pleased with our year-on-year improvement in obsolescence and we continue to make gains there.

Okay.

Thank you very much.

Thanks, Terry.

Your next question comes from the line of Ken Zaslow with BMO Capital Markets.

Hi, Ken.

I have two questions.

One is, how far along are you in the pace of increasing your retail coverage?

Where do you think that can go?

Where are the major gaps that you still have?

Yes.

Ken, we hired the associates, really starting late third quarter and fourth quarter of last year, so they are on board.

The third quarter, again, will be incremental year-over-year from a cost standpoint for the large part and from an hours standpoint.

We're starting to get very good productivity from them as the training is -- starts to be largely complete by now.

You see it in our food share which continues to get better.

You're starting to see it in our traction and convenience stores as well.

We're feeling that we're getting the bang for the buck that we've made the investment in.

There's always opportunities to continue to fine tune coverage models.

We will -- we continue to look at that and one of the advantages of our sales force is that we can dynamically route to the extent we have promotional changes and opportunities at certain accounts.

That won't change.

As you know, we don't cover drug stores right now.

One of the other things that we're really doing right now is we have a new technology platform that we're just rolling out, which will allow us to have upgraded handheld units for the sales force.

They are getting them right now and that will improve not only their productivity, but their ability to sell at retail.

Our sales force has always sold very actively at retail.

They will continue to do so and we've actually given them even per tools to do that going forward.

Great.

And the second question is in terms of the refreshment side of the business, can you -- I know you're focusing a lot on the chocolate.

Can you just talk about what are the initiatives you're looking to do on that side?

Or are you putting the refreshment side really on the back burner?

No, we actually have some news in -- on refreshment coming out in the back part of the year.

We have the Ice Cubes whitening gum coming out in the back part of the year.

We have some mini mint thins from an Ice Breakers standpoint coming out in the back part of the year.

Some breath savers -- new work on the Breath Savers brand.

We're working against that.

Right now, given the focus that we've put -- we've really focused our first and foremost on our core chocolate businesses.

They are our biggest brand.

When you think about it, it's Reese's and the Hershey's brand, as well as working on Kisses and Hershey's Bliss.

Those we think are the opportunities that have the biggest return and the biggest bang for the buck for us this year.

What we're doing within refreshment is where we think we're advantage, which is likely more based in [xylothol-based] gum, like the Ice Cubes product, as well as in mints where we think we have a leadership position, we'll focus our resources more there.

But we're not going to play as broadly across the entire gum category against some of that competition.

Is it fair you're trying to resize the refreshment categories within Hershey?

Are you looking to stabilize the brand share?

Or -- I guess that's what I'm just trying to figure out.

Yes.

I think it's a good -- it's actually a very valid question.

What we've said is as we go, we're going to refocus I think much more of our attention towards mint and a little bit less on gum as we go towards 2009.

We need to be a lot smarter about the way the category dynamics for that subsegment work.

It tends to be a much more pull-driven than a push-driven.

As the number three competitor, you need to be a lot more nimble because you can't afford the investment in pull that the other guys can.

We're really looking at the way we approach that business model and that's about where I would like to leave it.

Great, I appreciate it.

Good luck.

Thank you.

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

Good morning.

Good morning.

I wanted to ask about the brand-building investment.

For the full year, I'm hearing a couple of things.

Your increased brand building very nicely, but there's also a ton of new products out there that are lifting sales pretty nicely, too.

If it's possible, maybe Bert, could you give us a sense of ex-new products, what sort of consumer brand-building investment increase would be purely against the core, if you just took the core four, or however you would like to slice that?

Yes.

We don't really break out support against the different components of the portfolio.

What I would tell you is that we're very focused on few new products, frankly.

Certainly Bliss, certainly Starbucks.

Dave already mentioned some of the selected opportunities we're looking at on the gum side.

And there's no doubt that when you look at the increases that we've made, particularly on the advertising side which are more brand specific, that they are against Hershey, Reese's and Kisses.

And Hershey within that franchise, I include Bliss and Starbucks, which we've already talked about.

We also don't have a -- make a lot of noise around what we do internationally.

But certainly we're very focused on key brands and some of our international markets, such as Mexico and Brazil, and more recently in India and China.

Those tend to follow either -- a very similar pattern.

They are either part of the Hershey brand core-type of investment or specific product, like [Pulumparico] in Mexico, which is a big product in Mexico itself.

It is pretty targeted, the increases, in terms of where we're placing our bets.

Things like the sales force obviously, cover the entire portfolio.

Although obviously, they also -- from a placement perspective, key on core brand.

I guess -- but would it be fair to say that spending against core brands would be up?

Oh, definitely, yes.

Okay.

Absolutely.

Absolutely is.

The numbers that we've quoted on advertising, the 20% and 25% depending on the quarters that you're talking about, are very much focused on those core brands.

We're at continuity levels of advertising on the Reese's brand for the first time in a number of years.

Sure.

And as I said, we're running the Hershey's Pure campaign that I think some of you saw.

That will start up on the Hershey brand.

We have a very targeted and focused radio programs on certain of the brands, such as Kit Kat.

Absolutely focused on the core as well as on the new items.

And just one follow-up, Dave.

You mentioned historically advertising's not kept up with the pace of sales.

When you go back -- there's been a -- if you look, say, five years ago, advertising percent of sales was substantially higher.

Do you think -- do you have a number in mind or an area in mind where you think a right rail of advertising level is for Hershey?

I think the thing that you've got to look at specifically, a few years ago, we were spending on things that just quite frankly, weren't core.

We had a lot of spending on snacks, particularly on cookies.

We were spending on brands and businesses that frankly didn'treally work well.

I guess, Dave, I was thinking about long before that even, just in the history of the Company.

Yes.

We don't -- we're not going to certainly give an external target of what we think the ultimate right answer is.

We're increasing substantially this year.

We're increasing it fairly substantially next year.

I think when you run that through th algorithm, it starts to look very comparable to where we would have been back in 2001-2002 timeframe on a percentage basis.

Great.

Well, thank you very much.

Thank you.

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

Good morning.

Hi, Eric.

Good morning, Eric.

Couple questions about components of top line growth.

I think you said that net price realization was 3.5% and volume was down a half a point.

That would imply that -- I believe that would imply that mix was favorable a half point.

Can you just elaborate on mix a bit?

I know there's a lot of moving pieces here, considering you have some negative mix factors like you mentioned and consumers being a bit more value-conscious, and going for standard size versus king size.

What was driving the overall mix improvement?

Actually, yes, Eric, from a mix standpoint, there's -- mix is pretty much neutral.

I think what you're mixing and matching is the price and volume I think that Burt quoted, included the international business.

Okay.

When you look at the underlying US business, we had price up and volume down slightly.

And a little bit -- mix was pretty much neutral within the quarter.

This is -- the second quarter is the quarter that has the least amount of seasons in it.

It tends to be much more skewed towards the instant consumable part of the business, which is where we got some pricing.

The US volume declines were really in the snacks and mints part of the business.

The core confectionery volume in the quarter was flattish.

Most of the US gains in the second quarter were price-related.

And mix is almost not a factor.

Okay.

Along the lines that you mentioned in terms of seasons and the like, I know that seasons weren't a major factor in the second quarter.

But going back to June, clearly there was much more of a focus in your presentation on seasons and packaged candy versus instant consumables.

I realize a lot of your innovation this year is surrounding packaged candy with things like Bliss.

It does mark a bit of a change in focus from the past few years.

Could you talk a little bit about how you see that impacting mix going forward and the strategic rational for this somewhat changed focus?

I don't think we've changed our focus at all.

I think what we are -- we still recognize the instant consumable part of our portfolio is a large part of the business and very profitable.

We've had our challenges in the convenience class of trade.

But in the second quarter, we started to see better take-away for us.

We still trailed the category a little bit, but that was largely because of the softness that we had in our refreshment business.

The take-away on core chocolate and non-chocolate was pretty good in convenience.

I think what we've talked about is the focus for us seasonally -- the seasonal -- seasons still continue to attract the largest breadth of users across the category.

Most people are -- most consumers are in this category during the season.

It's an important part of the business, and one we've got to find the right balance going forward in terms of providing profitable solutions for us and retailers.

And then with respect to where the category has grown over the last couple of years, it's grown in premium and trade-up.

And that premium and trade-up has tended to be in take-home packages and not in instant consumables.

As we have looked to make sure that we are growing in segments of the category that are growing, our launches this year are much more focused in those areas.

I don't think it's a shifting of our focus overall.

We know how important that instant consumable business continues to be for us.

It just happens to be in this year, we were a little behind in our approach.

Hershey's Bliss, the Reese's Select items that are coming out and some programming that we have on our extra dark launch in the back half of the year, you'll see a focus on that packaged candy component.

But that's only because those are the segments that we weren't competing as effectively in.

Okay.

Thanks for the help there.

And just one quick follow-up question.

I think you or Bert mentioned that some of the price realization this quarter was driven by the January price increase.

It would seem that your -- the price protection you're offering or the promotional price point protection that you were offering to your customers is a lot less than in the previous year.

I think it took almost a year for last year's price increase to be felt at retail.

Am I reading that correctly that your price protection is less -- that you're offering your customers is less than it has been in previous years?

What should we expect going forward in terms of the pace of realization of the January price increase?

No.

We didn't specifically comment on what our level of price protection was or wasn't versus the prior year.

I think what you really saw in the second quarter was largely the carry-over impact from last year.

Last year, we did price protect, particularly on the standard part of the portfolio.

Over time you pull that -- you would like to pull that price protection, quote unquote, price protection, because it's really not classically price protection from an accounting.

I will say we protected promoted price points.

As we go into 2008 versus 2007 and start to cycle that in the second quarter, largely what you saw come through was the effect of the list pricing from last year without nearly as much protection as some of those promoted prices.

And so it's really -- I wouldn't call it out as reflective as what you would necessarily see going forward with respect to the 2008 pricing yet.

The reason you saw good price realization in the second quarter is it tends to have the least amount of seasons in it.

And the items that we did take the most price on were the instant consumables.

In the second quarter, you would expect us to get a good amount of price and we did, fortunately.

Okay, but you did say some impact of the January price increase -- ?

You have to.

This quarter?

Yes.

That portion of the units that would sell on a non-promoted basis would go at full-list price, so you have to see some.

Okay.

Great.

Thanks a lot for your help.

Thank you, Eric.

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

Hi, everyone.

On international expansion plans, I know you mentioned earlier that you're trying to keep things a little bit flexible right now.

Could you talk about how you think about the prioritization between fixing the core US business versus trying to get a little bit more of an international geographic footprint?

They are both critically important.

Obviously, we're starting to see some traction within that -- fixing that core US business.

Importantly internally, we don't believe we're resource-constrained and that we can do both.

We have the investment to do both and the people to do both.

We are currently, as you know from standpoint in the last several years here, very pleased with our progress in India and China, for example.

And continuing to roll Reese's out, for example, as a global brand in New Mexico this year.

We are making good progress.

We have the Bauducco JV in Brazil.

We've been able to help expand and strengthen our business internationally.

At the same time, start to get traction in the US.

We don't view them as mutually exclusive activities.

And in terms of the joint venture, particularly the more recent ones that have been established in India and China over the last couple years.

Are you seeing accelerating sales momentum there?

Might we expect to see an expansion of distribution coverage during 2009?

And might we see any more of those kinds of joint ventures being set up either in Asia or Latin America or eastern Europe?

I won't comment going forward on any M&A activity.

What I will tell you is that we are particularly pleased, for example, with the Bauducco joint venture.

They have proven to be a very, very strong partner for us and really have helped us in the market getting our products in the right places at the right prices.

Within China, we -- last year was our first season.

As we go to the Chinese new year season, that will really start up in the fall.

We will continue to look at our distribution base versus last year and make sure that we have the products in the right places, focused on the right cities.

And within India, the Godrej partnership has been very good for us.

We already had good distribution given the fact that we bought some local -- some gems, the Nutrine brand and [Mao Laco].

We are looking at our sales force coverage there and we believe that we'll be able to expand that going forward.

Great, and a quick follow-up on the pension expense for this year.

It seems as though couple of years ago, 2006, it was a fairly major expense item.

Last year, it looks as though it was a more positive.

What's the outlook for that this year?

What's driving those kinds of swings?

Couple of things.

First, I would say that we're very well-funded in terms of pension and so from that perspective, we don't anticipate there to be a funding requirement.

If what you're getting at is the market -- downward movement in the markets, clearly that does have an impact and we're watching that closely.

It's early to tell exactly the impact, because you've got another half a year to play out.

It's not a funding issue for us.

We do have gains from prior years that have helped us.

Right now, it's something that potentially could be a noncash expense next year.

Okay, thank you very much.

I'll pass it on.

Thank you.

You have a follow he's up question from the line of Robert Moskow with Credit Suisse.

Hi, just very quickly.

Just to reiterate.

You are increasing, compared to your prior plan, how much advertising and promotion you want to spend.

How much of that increase is going to be promotion versus advertising?

Yes.

Rob, I just want to make sure to be clear.

Advertising 2008's going to be up over 20%.

We're not really saying that we're increasing our commitment to that, and I think --

If you go back to the June 17 presentation, I believe we said advertising would be up a bit over 20%.

I think Bert just put a range on it now when he said about 25%.

There's really no change from the thought process in June.

Yes.

There was a time -- as we talked about there was a little bit of a timing issue.

It was a little stronger in the second quarter than we would have expected, but that's just timing out of the first and third.

We haven't changed the investment profile here at all for the year.

Okay.

So no changes in terms of couponing profile or trade spending profile for the year?

No.

Okay.

Great.

Thank you.

Thank you.

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

Good morning.

Hi, Andrew.

How are you?

Good, thank you.

Just a quick one.

I remember when distributors, last year I think, cleared their inventories, I guess in reaction to higher carrying costs.

I'm just curious what the positioning or inventory stocks at the retailers are right now.

Do you see distributors potential to responding once again, as prices have to continue to go up?

Yes.

I would say that a lot of that adjustment did happen last year as the credit markets started to change.

While we've continued to see some work in terms of working capital from distributors, it hasn't been as impactful as it was last year when the credit markets first started to put some pressure on folks.

And we're right now -- we believe we have very healthy inventory levels at our key customers.

They have really worked down at the latter part of last year.

We haven't seen much of a reduction this year, although there still has been a little bit.

But that's more a conscious effort on our part as we focused much more of our portfolio and got rid of some of the tail.

We just have less inventory.

Okay, thanks.

And then last, going into the back half of the year given the merchandising plans you have, also the expectation for more pricing to come through, would you expect the top line to play out largely like you have this quarter, follow more pricing oriented?

Given the [austicity], is tracking I think as you said in line with your expectations for volume to be flattish or down a bit?

Or give them what you've got planned, would you expect both pricing and volume to contribute in the back half?

I think the mix shift in the back half.

The second quarter is, as I said, the smallest quarter, it's also the most focused on instant consumables.

The programming is around S'MORES and other things, which are going to be more instantly consumable-oriented.

The Halloween and holiday programming again, tends to be more pounds.

We didn't have nearly as much list price increase in those parts of the portfolio.

I think this was probably from a price realization standpoint, the most list price you'll see.

We will obviously continue to work it down, so I think you'll see a better balance as we go forward between pricing and volume in the US business.

But as I said, I think we feel pretty good going forward.

The 3.5% top line, ex the Godrej acquisition in the second quarter is a good number for us, given where we have been historically the last couple years.

We continue to expect we'll do well in the second half, but probably a little less price realization and a little more volume because of the seasonal mix.

Thanks very much.

Thank you, Andrew.

Your next question comes from the line of Todd Duvick with Banc of America.

Yes, good morning.

Good morning.

A very quick question for you on the balance sheet.

You've got very modest short-term debt balance of $460 odd million and -- but a low cash balance.

I'm just curious in terms of your funding, do you plan to keep that in short-term debt?

I assume that's commercial paper or do you have plans of terming out a portion of that?

Yes.

Our short-term debt, you are quite right, is commercial paper.

The change that you're seeing, there are a couple of things, really two big drivers, if you will.

One was did issue 250 million of long-term debt, either at the end of Q1 or beginning of Q2.

There was a direct conversion there between commercial paper and long-term debt.

And while we've enjoyed continued receptively for our commercial paper, we just felt a little bit less exposure there in terms of the credit markets so it was a smart thing to do.

The other driver clearly is the working capital benefits that we're seeing in the business.

That's keeping our debt levels relatively flat to down.

Capital structure in particular is a Board decision, so any changes that we make there are clearly discussed and agreed to at the Board level.

Okay.

It sounds like at this juncture anyway, no plans to term out additional short-term debt in the capital markets?

Well, again, we're not saying yes or no.

It's something that we would have to discuss with the Board and that's the way we approach it.

Okay, fair enough.

Thank you.

You have a follow-up question from Eric Katzman with Deutsche Bank.

Thank you for taking the follow-up.

I think you talked or referenced the market share and the consumer off-take of 5% for both yourselves and the category.

I assume that that was dollar terms.

Can you say what it was on a unit or volume basis?

Yes.

That was, again, that's FDMxC and including Wal-Mart.

That's the all-in and that was an everyday number, Eric.

Just to make sure -- it took the seasonal skew out.

That's a 12-week number.

It's -- within those 12 weeks, the -- let's make sure I give you -- I characterize it appropriately.

Within the 12 weeks, it's a little hard to call it out because of the Easter skew in the four weeks.

There's a -- with Easter being in March and not in April this year, there would be a huge unit fall-of.

It's almost an irrelevant number to give you.

Let me give you eight weeks of numbers.

Let me give you FDMxC.

Now here, this is measured.

FDMxC for the latest eight weeks, the category grew and pounds were up as well.

The category pounds over the last eight weeks, FDMxC, were up around 3%.

There was unit take-off as well as a little bit of pricing in that eight-week number.

Try to strip that out and give you the numbers on an underlying basis.

There is volume growth in the category.

And did you keep up with it?

Did you keep share in volume terms?

Or did you lose share in volume terms?

The category was up around 3%.

We were up 2.9%, so pretty much with the category.

As you look at the second quarter, you look at the everyday basis, we gave you the 12 weeks of everyday basis.

We were up basically 10 basis points a share on that basis.

If you look at the volume trends for the latest eight weeks, basically flat with the category.

The trend improvement is there no matter how you slice the data.

And it's a tough quarter to do it in.

We got some traction in the quarter which we feel good about, no matter how you look at the data.

When you look at it by class-of-trade, we got traction.

We've pretty much held our own.

C-store, we were down as I said, 30 basis points during the quarter.

Again, that was mostly in refreshments.

Overall, no matter how you sliced it or diced it, what I would leave you with the take-away, we pretty much held our own in the category.

Okay.

Thank you.

Thank you.

Your last question is a follow-up from Terry Bivens with J.P.

Morgan.

Hey, fellas, just one other quick one that occurred to me.

To what extent is that new ADM cocoa processing plant in PA helping you guys out with cocoa inflation?

Again, I don't -- I won't go into a whole lot of specifics, but we have done some outsourcing with some suppliers.

[Barry Calibo] is the one that we've talked the most broadly about with respect to chocolate liquor and some of our cocoa processing.

You will see it as a -- particularly as help in inventory I think more than anything, Terry.

Because we're not holding nearly as much raw material in terms of cocoa beans as we would have in the past.

From a cost standpoint, we tend to look at those as tolling agreements because we still continue to want to buy the beans ourselves, but because we think we do a pretty good job of that.

Okay.

And that would in part explain the way inventories behaved over the last several quarters, would it not?

Yes, it would.

Okay.

Thanks a lot.

Thanks, Terry.

Take care.

Okay.

Bye-bye.

There are no more questions.

Thank you for joining us today.

Mark, Bert and I will be available to take any follow-up calls that any of you may have.

Thank you.

Thank you.

This concludes today's Hershey conference call.

You may now disconnect.