好時 (HSY) 2008 Q4 法說會逐字稿

Good morning.

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

(Operator Instructions).

Thank you.

Mr.

Pogharian, you may begin your conference.

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

Welcome to The Hershey Company fourth quarter and full year 2008 conference call.

Dave West, President and CEO, 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 filed with the SEC.

If you have not seen the press release, a copy is posted on our corporate website, www.Hershey.com, in the Investor Relations section.

Included in the press release are 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 presentations of earnings excluding certain items provides additional information to investors to facilitate the comparison of past and present operations.

We will discuss our fourth quarter and full year results, excluding the net pre-tax charges associated with the Global Supply Chain Transformation program, and business realignment and impairment charges recorded in 2007 and 2008.

These net pretax charges were $79.7 million in the fourth quarter of 2008 and $95.9 million for the fourth quarter of 2007.

For the full year 2008 and 2007, these net pretax charges were up $180.7 million and $412.6 million respectively.

Our discussion of year to date results and the 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.

2008 was a year of challenge for businesses in every sector.

The food and consumer packaged goods industry faced unprecedented input cost volatility and worsening macroeconomic trends.

These conditions were difficult for Hershey, our retail customers, and certainly our consumers.

Against this backdrop, we implemented the Global Supply Chain Transformation program, one of the largest and most complex projects the company has ever undertaken.

We also initiated an in-depth strategic review, including new market structure work and a category and portfolio review to determine the new marketplace strategy, and an approach to price realization and brand investments.

We also upgraded capabilities and added talent where needed.

I'm proud of the way our associates rose to the occasion during these times to ensure the success of these initiatives.

As a result of their hard work, we exited the year with positive marketplace momentum.

Our core business is currently performing well in the marketplace, and we believe we have the right initiatives in place to continue to deliver solid 2009 market share performance.

Let me give you some details.

Results for the fourth quarter were strong, and we are pleased with the progress we continue to make.

Our core brands continue to respond to investments.

Net sales increased 2.6% in Q4, driven primarily by net price realization, offset by shipment timing and volume elasticity related to the August price increase, as well as the impact of foreign currency exchange rates.

Bert will have further details on the sales numbers later.

Fourth quarter net sales were in line with retail take-away, after adjusting for the 2 points of buy-in related to the August price increase, which shipped in Q3 instead of Q4.

Consumer take-away for the 12 weeks ending December 28 in channels that account for over 80% of our retail business increased by 5.2%, driven by core brands.

Specifically, the Reese's and Hershey's and Hershey's here excluding Bliss, Kit Kat and Twizzler's franchises were up mid single digits.

When including Hershey's Bliss and the Hershey's franchise retail take-away, the total franchises were up high single digits.

These gains were offset by softness in snacks, refreshment and a mid single digit decline in Kisses.

This Kisses decline is moderating, but this is not acceptable.

I'll have more on Kisses in a bit.

For the full year, consumer take-away in channels that account for over 80% of our retail business increased by 3.2%.

Our marketplace performance improved sequentially throughout the year and benefited from the investment we made in our core brands.

This is evident when you look at our first half versus second half marketplace performance.

Specifically, year to date through June 15, 2008, our retail take-away was plus 1.6%, and the second half of the year, Hershey's retail take away accelerated, increasing 4.6% in the second half.

This gain was driven by core brand performance resulting from more advertising, improved merchandising and retail coverage, and good seasonal execution.

In 2009, we'll continue to invest behind our most responsive brands and further build our selling capabilities.

The gains in Q4 were broad based, as the category has held up reasonably well despite economic difficulties.

For the 12 weeks ended December 28, in the channels measured by syndicated data, that's food, drug, mass excluding Wal-Mart, and convenience, total candy, mint and gum, or CMG growth was 3.3%, with Hershey retail take away increasing 5.2%, resulting in a market share gain of 0.5 points.

For the second consecutive quarter, Hershey retail take away was up in all classes of trade, albeit versus a somewhat poor performance in the year-ago period.

Hershey did particularly well in the food and convenience classes of trade.

In the food channel, the category grew by 2% in the quarter.

Hershey retail take away increased 3.9% resulting in a 0.6-point market share gain.

Our chocolate performance in the food class of trade was particularly strong.

The chocolate segment was up 1.6%, while Hershey's take away increased 3.6%, resulting in a 0.9-point market share gain in chocolate.

This was driven by higher levels of advertising across many core brands, including Reese's, Hershey's and Kit-Kat, as well as by Hershey's Bliss.

Hershey's Bliss continues to perform well in the marketplace, as sales, ACV and repeat rates exceeded our expect stations.

During the fourth quarter, we continued on-air advertising and in-store merchandising.

The sell-through of Hershey's Bliss cream de menthe, an in and out holiday item, was also solid.

Hershey's Bliss will continue to anchor Hershey's commitment to the trade-up segment in 2009.

Overall for Q4, the trade-up segment within the category was off slightly.

We saw good gains in trade-up package chocolates where Hershey's Bliss is positioned.

This was offset by declines in trade-up gifts and novelties.

We'll support Bliss throughout 2009 with strong year 2 advertising, year-long sampling and merchandising and continued promotion to further drive trial generation.

This investment will ensure the brand grows in 2009 and beyond.

Turning now to Halloween and holiday seasons, as expected, in Q4, total seasonal category retail sales in food, drug and mass ex Wal-Mart declined versus year-ago.

Clearly channel shifting towards value-oriented retailers impacts the FDMX growth rate.

Specifically, in FDMX, Halloween was down 2.7%, and holiday down 7%, driven by a decline in gifting and a slowdown in premium items, most likely attributable to current macroeconomic challenges.

Hershey performed better than the category with flattish take-away, resulting in FDMX market share gains in both the Halloween and holiday seasons, plus 0.9 points and plus 1.4 points respectively.

In line with the slowdown and higher price point seasonal items, the Starbucks Chocolate portfolio was mixed.

In 2008, premium represented 6% of the total FDMXC category sales with growth of about 9% for the full year.

But with an even more noticeable slowdown in Q4.

In Q4, the premium segment was about flat versus year-ago.

Looking ahead, we expect to see premium segment growth continue to be moderated by the softer economy.

Also, this segment is reaching a saturation point in terms of retail shelf productivity.

Distribution of premium items has been growing faster than velocity.

We believe in 2009 retailers will begin reallocating premium space back to core brand offerings.

Over the past few years, we have gained considerable earnings from our participation in premium chocolate.

Highly crafted items, such as Starbucks truffles will continue to offer an exceptional experience for discerning consumers.

We'll also continue to develop high end specialty brands like Dagoba and Scharffen Berger, based on the learning that we are gaining as we continue to participate in the space.

The critical component in premium will be ensuring that we have fully qualified, unique, and meaningful consumer positioning for these brands.

Let's turn from take-home and seasonal usage and look more at impulse occasions.

In the C-store class of trade, the category was up 6.7% for the 12 weeks ended December 28, more than double the growth achieved through the first 9 months of the year of 3.1%.

Total Hershey C-store take away increased for the third consecutive quarter, and was up 9.4%, resulting in a share gain of 0.7 points in the convenience channel.

Hershey chocolate and non-chocolate take-away in this channel during the quarter was up 9.4% and 16.4% respectively, driven by price realization and select distribution gains.

Our refreshment performance stabilized somewhat with take-away up 0.5% as gains in gum were partially offset by softness in mints.

As a category, in C-stores and FDMX, mints are underperforming total confection category and are down about mid single digits for the quarter and double digits for the year.

The core brands that we are supporting did well in C-stores, outpacing our total results.

Increased retail coverage is paying off here as we emphasize our core brands on shelf at retail.

Lower gas prices also appear to be having a positive effect in this channel.

So for the full year, 2008, in the channels measured by syndicated data, FDMxC, total CMG growth was 2.6% with Hershey retail takeaway increasing 1.8%, resulting in a market share loss of 0.2 points.

Again, this is a tale of two halves, as our performance in the second half of the year far outpaced the first half.

Specifically, our retail take-away in the second half of 2008 was up 4%, resulting in a 0.3-point share gain, versus the first half of the year, where we lost share points.

So we exit 2008 with reasonable momentum and decent take-away in share performance.

As we look to 2009, we'll continue to focus on core brand growth.

We'll add advertising GRPs on Reese's and Hershey's to ensure continuity programming of the already successful campaigns launched in 2008.

We'll support Hershey's Bliss as well, and we'll expand our approach to core brand insights behind market-leading increased support of both Twizzlers and Kisses.

I'm happy to report that our initial work on Hershey's Kisses is complete.

Packaging graphics have been updated with a more contemporary look, and will streamline our product offerings to focus on five core Kisses item.

Last week we began airing new copy, with an significant increase in weight that will be on-air for the balance of the year.

We're pleased with the advertising and believe it should generate a significant increase in retail velocity.

Hershey's Kisses is also the lead brand anchoring our summer night at the museum promotion.

In Q2, we'll run an interactive promotion in conjunction with our sponsorship of the Night At the Museum Battle of the Smithsonian movie starring Ben Stiller.

We'll have other targeted merchandising events throughout the year, aimed at driving continuity.

They include in Q1 Hershey's March Madness, capitalizing on the NCAA tournament craze, where consumers collect wrappers depicting the correct region and seed numbers matching the 2009 men's final four matchup.

Consumers then win a trip to the 2010 final four.

Promotion will be featured on pack for Hershey's, Reese's, Kit-Kat and Payday brands.

In Q3, we'll focus on back-to-school and an even bigger S'mores summer promotion featuring Rascal Flatts.

In Q4, we'll add the Halloween and holiday with a focus on the fall and holiday baking seasons, reaching consumers resurgent eating at home trends.

Importantly, the first half of the year, will be anchored in the store by Valentine and Easter seasonal programs.

So with continuity ad spending on Kisses, Reese's and Hershey's, strong seasonal programming, and a good merchandising calendar, we believe we will continue to hold our own and maintain our market share performance.

Focus on core brands and our strong executional capabilities are the right formula for 2009.

Consumers and customers are looking for tried and true brands and products and we are well positioned to deliver.

To date, the category has proven to be resilient in these difficult economic times.

This has historically been the case.

Q4 activity was driven largely by Halloween and holiday programming.

In Q1, Valentines and Easter are key drivers.

These events were sold in prior to the August 2008 price increase.

Outside of the seasons, the consumer has begun to see higher everyday prices.

In C-stores, notwithstanding the expected unit declines, we have experienced good growth in dollars and overall category buoyancy.

As we move through 2009, primarily after Valentines and Easter, consumers will see higher everyday and promotional price points across all channels.

Consumer sentiment, channel shifting and other macro factors are difficult to predict.

We will make the needed investments in our core brands and capabilities to win in the market.

The pricing actions we have taken are dramatic, but they are necessary.

In 2009, our commodity cost basket is up markedly.

When we announced our price increase in August of 2008, we are anticipating a $225 million increase in our commodity input costs in 2009.

This has mitigated somewhat, as we now anticipate the increase to be about $175 million.

However, the factors which drove commodities down also took pension plan asset values down as well.

We now see higher 2009 pension expense of $70 million.

And while we'll see good local currency growth, ForEx will negatively impact our international businesses on both top and bottom lines.

Between price realization and global supply chain savings, we believe we have taken the appropriate steps to create the affordability to invest in brands capabilities, as well as to ensure an appropriate future margin structure for our business.

Advertising will increase 20 to 25% in 2009, and we'll forge ahead with expansion in India, China and Brazil.

We'll continue to execute in the market in an attempt to maintain share momentum.

Overall, we expect 2 to 3% net sales growth in 2009, including the impact of foreign exchange, which we anticipate to be a major drag on our sales growth.

We continue to expect earnings per share diluted from operations in 2009 to increase, however, at a rate below our long-term objective of 6 to 8% growth.

This is consistent with our statements last June and throughout the balance of 2008.

I'll now turn it over to Bert, who will provide some additional financial detail.

Thanks, Dave, and good morning, everyone.

Net sales and earnings per share diluted from operations for the full year 2008 were at the high end of the initial ranges we communicated at the beginning of last year.

Overall, we are pleased with our financial and marketplace performance in 2008 given the volatile environment in both commodity and financial markets.

For the full year, we achieved our financial objectives and stabilized our marketplace performance.

Fourth quarter consolidated net sales of $1.377 billion increased 2.6% versus the prior year.

EPS diluted from operations of $0.59 increased 9%, primarily due to price realization and supply chain savings.

For the full year net sales increased 3.8%, and earnings per share diluted from operations were $1.88, a decline of about 10%.

In the fourth quarter, sales gains were driven by net price realization, positive mix and international growth.

Offsetting these gains was lower volume elasticity related to our 2008 pricing actions, as well as about 2.5 points due to foreign currency exchange.

Dave provided details related to our marketplace performance.

I'll focus on a review of the P&L and balance sheet starting with gross margin.

During the fourth quarter, operating gross margin increased 370 basis points as net price realization, supply chain savings from the transformation program, which were higher in Q4, lower asset disposals and the timing of favorable material price purchase variances more than offset higher commodities of about 200 basis points.

For the full year 2008, gross margin was 35.8% versus 35.5% in 2007, up 30 basis points.

Pricing and productivity initiatives inclusive of the Global Supply Chain Transformation offset 240 basis points of unfavorable input costs.

EBIT margin increased 30 basis points in the fourth quarter as pricing and higher gross margin more than offset higher advertising, marketing and selling expenses, employee-related costs and expenses in selected international markets.

Advertising expenses of 23% in the quarter, supporting the ongoing Hershey's Pure and Reese's Perfect campaigns, as well as Hershey's Bliss and brand building initiatives in international markets.

For the year, advertising increased 26% to $161 million.

Selling, marketing and admin expenses in the fourth quarter, excluding advertising, increased due to higher international infrastructure investments, strategic portfolio work related to our ongoing market structure and segmentation studies, higher employee costs related to incentives and capability development, as well as hiring of executive talent to fill open positions.

EBIT from operations for the year declined 11.6%, with EBIT margin down 260 basis points to 15% from 17.6%.

The decline was driven by higher advertising, employee-related costs and the investment in retail coverage that began toward the end of the third quarter in 2007.

Now let me provide a brief update of our international businesses.

In 2008 we completed the integration of the Godrej business in India, the Lotte Hershey Manufacturing in China, including the implementation of SMP in both China and India and the JV in Brazil with Bauducco.

These businesses met expectations in 2008 on a constant currency basis.

On the US dollar basis, significant appreciation of the US dollar in the fourth quarter did impact our international business results.

We expect foreign currency exchange rates to be a head wind in 2008 compared with the full year 2008.

We'll continue to invest in our strategic international markets to increase our presence in chocolate, increase brand awareness and further develop go-to-market capabilities.

While these investments will not contribute to near-term margin improvement, we are committed to these strategic markets to ensure the company's continued long-term success.

Moving down the P&L, for the quarter, interest expense decreased, coming in at $25 million versus $28 million in the prior period.

For the year, interest expense was $98 million versus $119 million a year ago.

The fourth quarter and full year both benefited from lower short-term rates on a commercial paper and improvements in working capital.

In 2009, we expect interest expense to be about flat versus 2008.

The tax rate in the fourth quarter was 35.7%, down slightly versus year-ago.

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

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 affordable to business realignment and impairment charges.

For 2009, we expect the full year tax rate to be up to about 36%.

However, due to the timing of certain tax events and related accounting, the quarterly tax rate will be uneven next year, particularly in the first half.

As such, we estimate that the tax rate in the first quarter of 2009 will be roughly 40% and 30% in the second quarter.

In the fourth quarter of 2008, weighted average shares outstanding on a diluted basis were approximately 228 million versus 230 million in 2007, leading to EPS of $0.59 per share diluted from operations, up 9% versus year ago.

For the year, shares outstanding were approximately 229 million versus 231 million in 2007.

EPS diluted from operations for the full year was $1.88, down about 10%.

Turning to the balance sheet and cash flow, at the end of the year, net trading capital decreased versus last year, resulting in a cash flow benefit of $66 million.

Accounts receivable were down $32 million and remain extremely current and of high quality.

Year-over-year, accounts receivable sales days outstanding improved by 1.5 days.

Additionally, we continuously monitor our accounts receivable aging and despite current conditions in the financial markets, we have not seen an impact on our customers' payment patterns to date.

Inventory declined by $8 million and accounts payable increased by 26 million.

We expect working capital to further improve in 2009, but not by the same magnitude as we achieved in 2008.

In terms of other specific cash flow items, capital additions including software were $72 million for the quarter and $283 million for the full year.

This was slightly less than our $300 million forecast for 2008 due to the timing of projects related to the Global Supply Chain Transformation program.

For 2009, we are targeting total capital additions to be in the 175 to $185 million range.

About 40 to $50 million of that spend is related to the Global Supply Chain Transformation program.

Depreciation and amortization was $59 million in the quarter.

This includes accelerated depreciation related to the Global Supply Chain Transformation program of $12 million and operating depreciation and amortization of $47 million in the quarter.

For the full year 2008, depreciation and amortization was $250 million, of which accelerated depreciation and amortization was $60 million.

2009, we are forecasting total depreciation and amortization of about $190 million, including accelerated depreciation and amortization of approximately $10 million.

Dividends paid during the quarter were $66 million, bringing the full year to $263 million.

We did not acquire any stock in the fourth 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.

During the quarter we did repurchase 5 million of our common shares in the open market through placed shares issued in connection with employee exercises of stock options.

Our goal is to repurchase all such shares.

As it relates to our short-term cash needs, the company is currently well positioned.

While the credit markets are volatile, market conditions have not had an impact on Hershey's day-to-day operations, liquidity or longer-term planning.

Our cash flow continues to be strong and will improve as the goal of supply chain transformation is completed.

Our capital structure is on target with three quarters of our debt, or $1.5 billion, in fixed rate notes, with maturities starting in 2011.

We have not encountered any difficulties in our short-term commercial paper funding and have been able to place our CP at attractive rates.

Our cash balance will vary during the year due to seasonality of our business.

Cash on hand at year end was $37 million, down versus year-ago, as our strategy this year has been to pay down short-term debt with excess cash whenever possible.

As stated in the press release, the decline in the financial markets in 2008 will result in a 2009 pension expense of approximately $70 million, or $0.20 per share diluted.

Note that on a quarterly basis in 2009, pension expense will be about $0.05 per share diluted.

This has also impacted our deferred income tax liability and other assets on the balance sheet as of December 31, 2008.

While a decline in financial markets has impacted the value of our pension assets, as of the end of 2008, our pension plans remain well funded based on our projected obligations.

As a result, minimal cash contributions of about $3 million are required in 2009.

Let me now provide an update of the Global Supply Chain Transformation program.

Construction of our Monterey, Mexico facility continues, and about two-thirds of plant manufacturing lines are installed and producing product.

Progress continues essentially in line with our implementation schedule.

During the December, the scope of the Global Supply Chain Transformation program was expanded to modestly include the closure of two sub-scale manufacturing facilities of the artisan confectionery company, a wholly-owned subsidiary.

Consolidation of associated production lines into US facilities along with associated rationalizations to select portfolio items.

The effective facilities are located in Berkeley and San Francisco, California.

This change will enable us to leverage the scale of our high quality beans and bar operation in our Robinson, Illinois facility, where the majority of Scharffen Berger items are currently produced.

The unique technologies and creative production of Joseph Schmidt have been incorporated into the company's manufacturing network and applied to other product lines.

The total cost of these actions, which includes severance for approximately 150 impacted employees is expected to be $25 million and will be recorded in 2009.

Ongoing annual savings from these initiatives are expected to be $5 million.

Cumulative savings for the global supply transformation program are $81 million, in line with our original forecast, and the estimate for total ongoing initial savings by 2010 was increased by the previously mentioned $5 million and is now 175 to $195 million.

During the quarter, we recorded global supply chain realignment charges of $34 million pretax, including $12 million of accelerated depreciation, $5 million of project start-up, and $2 million of SM&A expenses reflecting program management costs.

In addition, the company reported noncash impairment charges of $46 million related primarily to the Mauna Loa trademark.

The total of these charges reduced earnings per share diluted by $0.23.

For the full year 2008, the company recorded one-time charges of $181 million.

The majority of these charges, $135 million, are associated with the Global Supply Chain Transformation and the previously mentioned $46 million impairment charge.

The total of these charges reduced 2008 earnings per share by $0.52.

The forecast for the total project charges related to the initial program remains the same at 550 to $575 million, although we are currently forecasting toward the upper end of that range.

Adding the previously mentioned increase in project scope, we now estimate total pretax charges and nonrecurring project implementation costs at the upper end of 575 to $600 million.

This cost range excludes possible pension settlement charges in 2009 and 2010 as discussed in Appendix A of our press release.

Total charges do include project management and startup costs of approximately $60 million.

In 2009, the company expects to record GAAP charge of about 45 to $70 million, or $0.13 to $0.20 per share diluted, primarily related to the Global Supply Chain Transformation program, excluding possible pension settlement charges.

Let me close by providing some context on our 2009 outlook.

In 2009, our goal is to sustain our marketplace momentum that we achieved during the second half of 2008.

This could be challenging based on the economic backdrop and consumer sentiment.

Over the last few weeks, the news has been full of retail sales declines across many industries, including food, drug, convenience and select mass channels.

We will continue to invest in our brands and businesses in both the US and international markets, bringing strong programming during these times via advertising and merchandising will help to ensure confection remains a destination category.

While commodity spot prices have moderated, a broad range of ingredients are up year-over-year in 2008.

We expect costs of our key inputs to remain volatile and above historical averages on a spot basis.

Last August, we estimated that our 2009 commodity cost basket would increase by $225 million.

As the year progressed, commodity costs declined somewhat, reducing this projection to an increase of $175 million.

However, this decline has been more than offset by the increase in pension expense of approximately $7 million, resulting from the decline in financial markets.

As a result, we now estimate 2009 cost structure will increase approximately $245 million, or $0.70 per share diluted.

Our business investment spending will also be higher in 2009 to support consumer and customer merchandising programs for core brands, as well as Hershey's Bliss.

Specifically, advertising is expected to increase 30 to $35 million, or about $0.08 to $0.10 per share diluted in 2009.

These cost increases will be more than offset by higher net pricing, ongoing operating productivity improvements, and savings from the Global Supply Chain Transformation program.

As such, 2009, we expect net sales growth of 2 to 3% as pricing action will -- as well as core market growth, will be partially offset by lower volumes and the impact of unfavorable foreign currency exchange rates.

As we stated since midyear 2008, prior year 2009 earnings per share diluted from operations is expected to increase.

However, due to the of a aforementioned items, growth will be at a rate below our long-term objective of 6 to 8%.

As you work on your models, I remind you in the first quarter, we will begin to recognize higher commodity costs, but will not yet fully benefit from the incremental supply chain savings and higher pricing, as we've honored pre-August 2008 negotiated price points on Valentine and Easter promotions.

Additionally, advertising expense will be much higher in the first quarter versus the year-ago period, as well as incurring costs related to Kisses' Free launch and Hershey's Pure campaign that began late in the second quarter of 2008.

Now let me open it up for questions.

(Operator Instructions) Your first question comes from the line of Judy Hong with Goldman Sachs.

Good morning, everyone.

Good morning, Judy.

Dave, I'm wondering if you could share with us your thoughts in terms of what you observed as far as the volume price elasticity is concerned following the August 15 price increases and I understand the promoted prices haven't gone up, but anything you can share with us and whether you feel the 2 to 3% number in 2009 as far as sales growth is concerned may be turning out to be a little bit more conservative.

I'll give you -- just give you thoughts on what we've done.

The price increase in August obviously, we did, we did honor previously committed prices for Halloween, holiday, as well as Valentine's and Easter.

In the fourth quarter, roughly half the volume that moves through at retail is in that holiday and Halloween.

So we did get obviously the list price increases, which was roughly 10% across half the business.

So you can get to somewhere around mid-single digits in terms of price gains in the quarter.

We did start to see a dampening effect of foreign exchange.

As Bert said, it was a little more than 2 points of growth in the fourth quarter because of loss to foreign exchange and we had the volume shift out of the fourth quarter into the third because of the timing of the pricing.

So you can kind of take that mid-single digit list price gain and work it down to get the math to work.

With respect to elasticity, a couple of things that we did see through the quarter, clearly most of the merchandise in the quarter is seasonal and a destination.

We did gain considerable share in both Halloween and holiday and we're very pleased with our execution there.

And we also saw a reasonably good mix shift in two different ways.

One, everyday versus promoted volume, so we got decent trade promotion performance versus our expectation and then also good channel mix, especially with C-stores being up.

So overall, kind of too early to tell because the destination category effect of Halloween and holiday, the consumer really hasn't seen it and they won't see the full blown list pricing and promoted pricing increases until sometime after Easter.

So it's really kind of early to tell.

We're pleased with what we've seen so far, but way, way too early and frankly every day you read the paper, you see consumer sentiment, you see job loss, so it's kind of early to take a read.

And then we will have the foreign exchange, our foreign exchange -- our international business is relatively small compared to a lot of other folks.

But it's still a pretty big drag for us in terms of the top line.

So when we look at the 2 to 3, clearly the elasticity effect is still a little bit of an unknown and we're going to have the foreign exchange drag next year as well.

Okay.

And then Bert, in the fourth quarter, can you walk us through the expansion of gross margin that we've seen both sequentially and on a year-over-year basis, and some of the factors that -- perhaps you can quantify those factors.

Yeah, I think, the right way to think about gross margin in the period was we certainly had, as Dave mentioned, good net price realization, and certainly you see the pricing that we got on about, on about half the business, which he mentioned, which is nonseasonal, as well as some better performance on the trade line.

And that gave us good expansion.

We also had mentioned during the year that our supply chain savings were certainly more fourth quarter oriented and that's just a sequence of the way our plants were closing and the fixed cost benefit that we were getting.

So we did see in the fourth quarter, as we anticipated, that we would get good supply chain performance in that quarter.

And I would say that those were -- there were some offsets, but those were the bigger drivers to a stronger margin in that quarter.

Okay, thank you.

You're welcome.

Your next question comes from the line of Jonathan Feeney with Janney Montgomery Scott.

Good morning, guys.

Good morning.

Congratulations.

The -- Dave, could I dig in a little bit more on the premium segment, particularly Bliss, but you mentioned, Bliss and Starbucks, you mentioned some of the slowdown.

Could you talk a little bit more, in a more granular way about what the, what the retailers are telling you about the outlook for premium chocolate, what your outlook is and just also how much of the increase in advertising would you say has been geared towards those sort of premium products?

You know, in the context of the expansion you -- I think 35 to 50 you talked about for '09.

Sure.

Let me just talk a little bit.

I think the essentially the consumer sentiment has shifted in such a way that in categories where the consumer can actually trade out of the category, they have traded out.

So durables, appliances some of those categories the consumers traded out.

In food, we obviously -- we won't see a trade-out, as consumers will continue to eat.

What we have seen is somewhat of a trade-down.

So we've kind of thought of the market in three kind of tiers or layers if you will.

Premium, trade-up, then kind of the core everyday.

And Bliss, Hershey's Bliss is in that trade-up kind of segment of the market and Starbucks and Scharffen Berger and Dagoba for us are more up in the premium.

We saw a significant slowdown in both premium and trade-up and has shift more toward everyday in the fourth quarter to the point where both the premium and the trade-up segments were pretty much flat for the fourth quarter, which is a significant slowdown versus historical growth rates.

Most of that we saw was more in gifting and novelty, so the packaged chocolate components of trade-up particularly where Hershey's Bliss is planning actually grew pretty nicely in the quarter, but it was more than offset by declines in gifting.

Within premium, I mean the premium growth rates have been pretty high the last couple of years and we saw that, even through the first part of this year, I said for the full year premium growth, the segment growth was 9%, but for the fourth quarter it was basically flat, so you can see a deceleration racing there.

And what I think you're seeing there, again, is consumers are really trading kind of down out of premium to trade-up or out of trade-up into everyday.

And so I think what you saw mostly in the fourth quarter is the destination effect of holiday and Halloween as well.

So consumers are making sure they make those purchases.

So I think essentially what we'll see in the category next year is the I think a little bit of space at retail will shift out of premium trade-up as those parts slow down and are less productive and they will move back into things that are everyday.

As we mentioned on the third quarter call, we're relatively well positioned in the category for that kind of a shift because of the strength of our core brands and we did see some of that happening in the fourth quarter and we think we'll see it through the beginning of 2009 as well.

And just on the ad spending, Dave, I'm curious, how much of the sort of increase would you say would be represented by those trade-up in premium you have this pretty big commitment -- behind Bliss -- spending versus core.

We did spend on both Bliss and Starbucks.

Much more so on Bliss than on Starbucks.

Starbucks advertising was very targeted and over a shorter period of time.

And I'm not going give you exact numbers, but Bliss -- we made a significant increase in Bliss, enough to get to continuity levels of coverage and we will continue to do that in 2009.

We very much believe in the trade-up part of the category.

Consumers will continue to kind of treat themselves and reward themselves in that space and the economy, the economy will come back someday.

I hope you have a better projection than I do.

But when that comes back, we will see premium and trade-up continue to be part of, even in today's market, what consumers are buying.

But we want to be well positioned as the economy comes back and people start to trade back up.

Thanks, Dave.

And just one question for Bert.

When you look at the Global Supply Chain Transformation, specifically the Monterey plant, as I understand it, I mean weakness in the peso should actually help you, help your outlook for those cost saves going forward.

Is that the case and is there any way you could quantify that?

There -- you know, there's some benefit from that.

I would tell you that it's mostly on the labor side, but it is a dollar functional he wanty because it's a [McKeela] operation, operates on the McKeela regulations.

Oh, okay.

And so it's not the same as a fully-Mexico operation, as you might think.

So there's some, but not what you're thinking.

Okay.

Thanks very much.

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

Good morning, everybody.

Hi, Eric.

I guess my first question, Dave, has to do with your comment about the category being up.

I guess that's in dollar terms, given all the pricing that's going on, but I'm a little bit concerned with volume.

It seems that volume was down this quarter.

It's been about, by my count, six or seven quarters now where volume has been down and yet your advertising is up significantly.

So can you just kind of talk about how we should think about that trade-off and what that kind of means for capacity utilization and the restructuring?

Yeah, I think that, that's a fair question in terms of the unit versus the dollar trade-off.

I mean when you take the price increases and you look at the elasticity models, we would expect to see some unit decline.

That's how we've thought about it.

That's how we've planned it.

I think what you need to continue to look at for us in the quarters leading up to the fourth quarter here, we have seen good core brand momentum in dollars and reasonably good volumes on some of those core brands and so that focus on the core is clearly paying off for us.

We are certainly more efficient and profitable by getting that core to work harder for us.

And we think that strategy is still working out.

And we've got some things that are still kind of in the tail of our portfolio that are declining.

I mean we've seen a decline in mints, we've seen a decline in some of the second and third tier brands on a unit basis, so I think the volume story's a little bit more of a tale of two parts of the portfolio.

The core has held up reasonably well from a volume standpoint up until obviously the fourth quarter here and then the tail's probably off a little bit more from the volume basis.

And with respect to what we saw in the fourth quarter, that trade-off of units and dollars, it's early to tell.

But given the cost -- the cost increases over the last two or three years we've really believed that the pricing is necessary and appropriate.

Do you have any indication as to whether competition is going to follow the increase in the promoted price post Valentines or Easter?

Eric, I can't speak to what anybody else's programming is.

We have had our conversations with customers and done what's right for our business and our cost structure and from my standpoint, we'll be appropriately priced to build the right model.

It remains to be seen when we get out there how retailers and consumers react to those price points and I don't have anything specific to give you on those price points coming out of Easter.

Okay, and Bert, last question on the cash cost of the restructuring, plus the minimal cash contribution from pension in '09, what will that be?

In terms of the, in terms of the pension, I mentioned the full expense is $70 million and as we go through the pension obligation projections, what we anticipate making cash distributions is quite minimal.

It's around $3 million, which is the number that we're pretty confident in.

So there's not a lot of cash contribution requirements in terms of our, in terms of our funded plans.

On the supply chain, global supply chain side, I mentioned that the expenses in the coming year are actually down quite a bit, as you would expect, because we're we're down to our last couple of plant closings and a lot of the prior costs have been accrued.

So I think I would put the number out there somewhere between 45 and 70 and no more than about half of those would be cash related.

So you're going to generate maybe a buck, depending upon where earnings come out, like $1.70 plus of cash flow per share predividend, it would seem?

Well, we're not -- right now we're still crushing through exactly our cash model and finalizing the balance sheets.

We're really not providing that type of guidance.

Okay.

I'll pass it on.

Thanks.

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

Thank you.

Good morning, everyone.

Good morning, David.

Well, congratulations on a nice end of the year and regaining some momentum in the brands.

Dave, I would like to talk to you a little bit about the advertising spending.

First off, 30 to $35 million, can -- again, you sort of alluded to this in your prepared remarks, but can you just talk a little bit about where this incremental money will be focused?

Sure.

I think, David, couple of points I would make in terms of what we saw actually in the latter part of the, of 2008 is going to carry forward and be true in 2009.

It's become a little bit more efficient to buy media in the latter part of '08 and into '08, so when we looked -- when we look forward to '09, the Hershey's Pure campaign -- will be continuity advertising all year.

We just started Kisses advertising.

I hope you've seen the commercial, started running it last week and that will run for the balance of the year.

We'll continue to have continuity on Reese's and similar levels on Hershey's Pure.

We're also looking at adding GRPs on Twizzlers and a few other places.

Essentially the good news about efficiency, both because of continuity and marketplace efficiency, the GRP increase is much, much higher than the actual increases in the rate of the advertising.

And that's where we'll be putting it this year.

When we focused in on Kisses, when I look at our Nielsen data food drug and mass channels, Kisses for the latest 52 weeks is down just shy of 15%.

Would you say that that number is the -- again, that's packaged candy, so it's more -- I generally think that our data is accurate.

Number one, is that about right to what you've seen in 2008?

And then number 2, talk about how you're going to fix that franchise in 2009 and will we see strong growth here, or is the expectation just to arrest the decline?

Let me try and unpack that question and take it in two or three different chunks.

The first is about your data and not your data, but the data in general.

We use a custom database, both from IRI and Nielsen and it does tend to differ a little bit from what you guys have in terms of growth rate and some of the segment growth rates.

But let's just say it's directionally correct for sake of argument.

But it's not exactly to what our data would be.

The decline you saw in Kisses, as we said, we watch that and we're working on that throughout the year.

We're not pleased with it.

It moderated some in the fourth quarter and we think that we have part of what we went through last year was a rationalization of some of the items we have proliferated into too many flavors and SKUs, so some of what you saw was just a slowdown and a discontinuation over time of the tail, if you will, of the Kisses portfolio.

As you think about 2009, we've got new graphics on shelf.

We've got a much better representation of the core strong items on shelf and the advertising to back it up.

We'll also -- Kisses will anchor our second quarter promotion, the night at the museum promotion, so I think we have pretty good news around Kisses for the year.

I think the challenge for modeling right now is obviously the whole question of the consumer has yet to see increased promoted prices on the packaged candy line.

They won't see that till post-Easter.

So projecting forward we feel like we can arrest that decline in terms of dollars.

As we head into 2009 and that's probably where I would leave it.

Okay.

One final question.

Bert, can you just talk to us about how the quarterly pattern might evolve for the commodity costs?

IE, is the commodity increases, are they substantially weighted to the first half of the year, and thus we would see an easing of commodities in the back half?

Well, I think as you take a look at the commodities, they are pretty evenly spread across.

What's different in terms of how the margins will evolve, I suppose, is more related to the way our savings, again, continued to be a bit more back end oriented.

I mentioned that advertising will certainly be higher early in the year, tipping Q1.

I talked about the tax rate tipping the first half being a bit uneven.

But from a commodity perspective, there's not a huge fluctuation across the quarters.

Great.

Thanks a lot, everyone.

Your next question comes from the line of Chris Growe with Stifel Nicolaus.

I just wanted to verify, in relation to some data you gave earlier, I think, Dave, you were talking about roughly 5% pricing in the quarter.

But that, I think that would be just related to the August price increase.

There was still some pricing coming through from the January price increase as well, right?

I think we took two increases in the, during the year.

Recall the first increase was only on the standard bar component of the portfolio.

It was not, it was not a full line pricing.

So there's a little bit of that that would have come through obviously in the fourth quarter.

But only on a smaller part of the portfolio and as you look at the way the components of the fourth quarter are, it's a much more packaged candy seasonally-driven quarter versus the instant consumable part of the business.

You haven't given a good sales breakdown.

Pricing was up, sounds like a little over 5%.

Volumes were not down as much as I thought they would be, actually flattish.

Is that the right number to use?

I think mid-single digits from pricing, and then we had foreign exchange as a drag.

I talked about that being a couple-point drag and then the 2 points of shift into the Q3.

Right.

And then clearly what I would say is we had reasonably good holiday performance in the quarter and that would have -- that holiday volume probably offset some of the elasticity volume losses.

So if you kind of balance those two things together, the volume performance overall was not too bad in the quarter, but I think it's holiday offsetting some of the elasticity from the price increase.

Okay, and then just one other question on sales.

That is that you reported 2.5% and 2.6% increase in sales.

You had the buy-in knock a couple points off that.

But you also had negative foreign exchange and your retail take-away was up 5%.

So was there a surprisingly, I guess a retail inventory increase in the quarter that, given the way your sales performance was relative to the take-away?

No, I think that that's actually -- if you normalize the 2.6% take-away and you take out the international and the foreign exchange, et cetera, shipments were very much in line with take-away.

And our inventories out at retail I think are in really good shape right now.

Okay.

And then I just wondered, in relation to the C-store trends picking up, would you attribute that to lower gas prices?

I know you have some promotions and programs there as well, but would lower gas prices be what you consider the main driver of those sales?

It's kind of hard to tease out lower gas.

I think one of the things we're most pleased about is retail coverage.

We put retail coverage on -- we started a little bit later in the latter part of last year, but really got it going in the first part of 2008.

And the retail coverage really seems to be working.

We've got we've got good ACV gains on the core items out there.

Clearly gas prices have to be helping.

The decline in gas prices have to be helping traffic in and out of the store.

Historically there was a point at which we didn't see a lot of correlation between the gas prices and, and store traffic.

We crossed the threshold obviously at some in time when gas prices just kept sky rocketing, where we did see an impact to the consumer.

And now obviously the same has to be true on the way down, so I think the good news is that the consumer is actually in the store more and buying.

So that has to be helping us.

And we'll look for the correlation going forward.

But with the volatility, it's kind of hard to find the correlation just yet.

Sure.

Bert, can you give a cost, rough cost inflation figure for the quarter?

Like the incremental increase year-over-year?

In terms of Q4?

Yeah, Q4 input cost inflation, whatever dollar amount that is or however you want to give it.

It was about 200 basis points, Chris.

200 basis points.

Okay.

the only thing I would mention, which I didn't mention in the past, certainly some of our costs were up, as I mentioned, were up year-over-year.

The one exception to that was dairy.

And I think we've mentioned that in the past, which is not has high as it was in 2007.

Sure, thanks a lot.

And obviously we don't hedge dairy.

Absolutely.

Thanks.

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

Hello?

Good morning.

Just following up on that last comment that you just said, in terms of the reduction of your commodity costs basket going down from 250 or 225 to 175, was it largely because of dairy costs coming down and that's unhedgable and that's kind of what had happened?

Is that a fair assessment?

Well, I think that's one way of thinking about it, yes.

If you look at the rest -- if you look at the rest of the inputs in the basket two of the commodities -- about the only two commodities that haven't seen any kind of moderation are cocoa and sugar.

Nuts haven't been particularly as friendly either.

So dairy is one way of looking at it, but I mean fuel came down and so we had started to take a position to get visibility.

I mean first and foremost for us, if you think about what we think about in commodities, one, it's certainty of supply.

And then once you get to certainty of supply, the visibility to understand what it's really going to cost you on a forward basis so you can plan the business and make necessary pricing decisions.

And then the third component of that is once you've got those two done, you would like to beat the market.

We think actually in 2008, and as we head into 2009, we did all three of those things and but clearly cocoa and sugar have not come back, so dairy has come back to a certain extent.

We think we've done a pretty good job across all of them in terms of our performance versus the market.

But as you look at that change, unfortunately pension goes the other way with respect to what's happened in the fourth quarter and kind of offsets that favorability in commodities.

But the dairy is the main one you can't hedge.

Like you could hedge -- as you said, you were looking for certainty.

That's the only reason I thought that was the major reason for the decline.

You cannot hedge dairy, that is true.

And then in terms of just the -- make sure I understood.

40%, 30%, then what did you say for the third and fourth quarter?

I didn't mention anything about the fourth quarter.

I did mention that we expect the rate on an annual basis to be about the same, 36% as we came in in 2008.

I tried to give a little bit more color on the first half because it is a wider range than typically across the quarters.

Okay, and then the other question is just going back to sales growth, if you were excluding foreign currency, what would you think the sales growth would be in 2009?

We -- yeah, we really didn't give anything specific, but if you look at the trend in the fourth quarter, it cost us a couple of points.

We're a little bit more heavily we're a little bit more heavily loaded in terms of the SKU of the seasonality of international sales.

But -- we've already kind of taken that in the fourth quarter.

So we still have three more quarters to go of something that cost us 2 to 2.5 points in the fourth quarter.

So you can kind of figure it's costing us close to a couple points, a point to two.

Implicitly, you are actually raising your internal sales growth relative to what you thought last quarter.

Is that a fair assumption?

Well, I think if you think about where we're headed in 2009 and what we've gone through in 2008, we set, we kind of set long-term, our long-term goals of 3 to 4 on the top and 6 to 8 on the bottom back in June.

We said at that time we would be less than 6 to 8, be growing earnings this year.

When we talked about the price increase in August, we went from the 3 to 4 down to 2 to 3, 3 to 5, I'm sorry, down to 2 to 3.

As we've managed through the year, there's been an awful lot of puts and takes.

We're actually kind of pleased we've been able to figure our way through the puts and takes and being able to hold to 2 to 3, despite the foreign exchange.

I think what you could read into that is there may be a little bit more strength in the underlying US business coming out of the fourth quarter than we would have anticipated last June.

That's what I was getting at.

And is part of that strength, is that because you mentioned it, but didn't seem like you kind of hit home on this, as the retailer shifts away from the higher end chocolates to the core brands, which again is still your concentration, you get to pick up share?

Is that the part of it as well?

I think it's a number of factors.

I think it's clearly advertising has increased merchandising effectiveness, those two things are key drivers for us.

And then I do think that there's a favorable movement within the category.

But listen, we've got a lot of stuff in premium and trade-up other than Hershey's Bliss that are that are feeling the same effect of consumers trading down.

But the good news is, in this kind of economy, both customers and consumers want to make sure that they are buying something that they know they are going to get value for and that they know.

If they are going to spend money, they are going to spend it on something that's tried and true.

We fit the bill there.

There's a little bit of that as well.

I think it's it's a combination of good brand support, really good merchandising, and then just some of the dynamics itself out there in terms of channel shifting and the way the consumers are spending.

Great.

Thank you very much.

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

Hi, thanks.

Hi, Rob, how are you?

I'm good.

Couple questions.

One is on the cash flow.

I mean you're forecasting a big decline in CapEx in '09.

You haven't told us what cash flow was in '08.

But should we expect some kind of a step up in '09?

Secondly, what are you going to do with that cash?

You used to have some pretty big share repurchase programs.

Can you update us on whether that is still in the equation or whether debt reduction is the focus?

Then lastly, can you talk about the category for chocolate in general, do you find that it's a relatively rational category today?

I know it's always highly competitive, but do you feel like the steps that you're taking on pricing are pretty well matched by everyone else, and do you think there's a chance here that everyone can hold pricing even as commodities perhaps decline?

Let me take a shot at the cash flow and sort of turn it over to Dave on the pricing.

You're correct.

We did talk about a sizable decline in capital expenditures in that $100 million range.

We also talked about some pretty big declines in our depreciation numbers.

To some extent because a large component of accelerated depreciation from the supply chain transformation becomes much smaller in '09.

So while that's a noncash item versus a cash item in terms of the way the cash flow works, they are somewhat offsetting.

And there are other moving parts in terms of how the pension liabilities and the deferred taxes work.

So again we're not giving guidance per se.

We, we do think we have a strong cash flow and expect to be strong again in '09.

With respect to the savings and the things that come from the cash flow from the transformation program, we think of those more in terms of how we manage the cost structure.

I think, Rob, with respect to the category, I mean it's, for us, we need to do what's right for our business and cost structure and we've done that.

I mean it's a fairly dramatic price increase, and until we really get out in the middle of next year and see what -- the biggest factor for me is really the consumer dynamic and how the consumer reacts to seeing higher promoted price points and higher list prices.

And at this point in time it's uncertain as to what other folks are doing out there with respect to their businesses and we have to do what's right for ours for the long-term so.

That's what we think we've done.

In this environment, your question about cash flow is the same.

There's enough uncertainty out there in terms of financial markets, et cetera, we are a good generator of cash.

Historically we might have been more active in share buybacks.

We weren't particularly active in 2008.

We like the credit rating that we have frankly and the access that we're getting to financial markets and that's something that we're going to kind of hold on to to the best of our abilities as we get into the early part of '09.

Okay.

Did you say that it's uncertain how the consumer is going to behave or did you say it's uncertain how your competition's going to behave?

Clearly it's uncertain how the consumer's going to behave.

Realistically we've set promoted price points.

We agree to them a long time ago, out through Easter.

When we get out beyond that it's -- we know what our business plan is and what our business model is and we're going to execute against that.

And again, it remains to be seen what happens in the marketplace.

In this environment, April and May are an awful long time away.

Thank you very much.

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

Good morning, everyone.

Hi, Terry.

Good morning, Terry.

You know, I don't want to get into dueling data here, but our Nielsen numbers, when you include the Wal-Mart panel data, which is usually pretty accurate, we're looking at sales growth of about 0.5% t for the period that equates to your fourth quarter, which is a long way from 5%.

Now, I know there's -- it doesn't include C-stores, but C-stores is not that huge an element.

So I guess my question is, what am I missing there?

What would you think accounts for the difference?

Terry, I honestly couldn't tell you.

I mean you're using Wal-Mart panel data.

When I do FDMxCW, I'm using actual Wal-Mart retail link data.

We have consumer take away at convenience stores at plus-9%, this is the data set we've used for the last however many years, so there's no surprise here for us in terms of what we're looking at.

I think from -- we're saying 5.2 for Hershey.

Obviously we gained share so the category growth rate is, is a bit lower than that.

But I mean we always talk FDMxC.

We don't do FDMxCW, we only get our data.

We don't get the competitive data at Wal-Mart, so I can't give you a category at Wal-Mart.

I can only give you our data.

So we can talk a little bit internally here if there's a discrepancy, but you may want to call Mark and work through some of the subcomponents.

But this is the data set we've always used and it pretty much matches our shipments and that internally is what we're seeing.

All right.

We'll, I'll try to resolve that offline.

I guess the other thing I wanted to ask you about is if you look at the way Bliss has behaved, there's some evidence out there to suggest the velocities maybe aren't quite what you would hope for despite some pretty strong spending behind them.

And I'm just wondering, have -- over the last couple of quarters, have you kind of shifted strategy in the sense that maybe there's going to be less emphasis on innovation, like Bliss and Starbucks and maybe kind of going back to much more support behind the core brands?

Yeah--

Has that been a change?

I don't think it's a shift in strategy.

I will tell you that with respect to innovation, in today's marketplace selling something that that is pretty much proven into customers and then having consumers spend against it seems to be the right formula.

Bliss is a great -- is I think a good example of how we're thinking about innovation, very thoughtful, a product that delivers to consumers, launched with a targeted incrementality versus what we would have done in the past and then certainly supported well.

As we've done internally, we certainly have set a higher bar for ourselves with respect to innovation.

What we've put into the marketplace, we want to be certainly more certain that it's incremental and that we support it appropriately and that it delivers with respect to our consumer segmentation work that we did last year, that it delivers either to a new set of consumers or a new benefit.

And so as we come to market with innovation, we're going to make sure that it's bigger and certainly more incremental.

So we're holding ourselves to a higher standard and what we've found, frankly, is the responsiveness of the core brands is so good that in this marketplace, it seems to be the right thing.

So I'm not sure I would call it an overt shift in strategy, but the way we've done innovation and filling our pipeline a little differently, we've decided to go at the core a little harder and it's so far paid out.

Okay.

Thanks very much.

Thank you, Terry.

Your next question comes from the line of Bill Leach with TIAA-CREF.

Maybe you said this but I missed T when you look at your 2 or 3% sales growth forecast for the year, how does that break down between currency pricing and volume?

We didn't say it.

We talked a little bit about the 2 to 3 that we would grow, we would certainly see growth in our international businesses on a local currency basis.

Can you -- wait a minute.

Just give me the specific numbers, please.

It's not a complicated question.

You guys have danced around it quite a bit.

We're not going give you -- as I said, we expect to see somewhere approximating a couple of points of drag on foreign exchange and with respect to the underlying volume and pricing, we're not giving -- we haven't given that, as we continue to watch where the consumer's going with respect to the price increase.

How can you give out such a specific sales forecast if you don't know the components?

We know the components of what we're anticipating, but as we're modeling through the pricing and the price elasticity, frankly that's something that I would rather not share that broadly for competitive reasons.

We have our own models and if I start to share those models I think that that might be, put me at a disadvantage of how we're thinking about the category.

But you are assuming volume will be down this year?

Yes, if you look at the list price increase that, would imply volume is down.

Okay.

Thank you.

Your next question comes from the line of Ed Roesch with Soleil Securities.

I have a question on the fourth quarter costs.

So I think the last time you mentioned the cost inflation number for '08 it was $110 million.

That was after the third quarter, so that would have implied pretty big number for the fourth quarter, like $48 million increase and it came in around $18 million.

I'm not saying I followed your numbers correctly here, but did you really see that much favorability during the quarter?

Actually I'm not following your particular calculation.

You're suggesting that about half of the inflation came in Q4.

That doesn't line up with what we're experiencing.

The other part of your statement, fully agree with.

In terms of the savings coming from the transformation program, we've been pretty consistent all year last year that there would be a much heavier component of that savings in Q4.

Just the way the phasing of the plant closings and the much lower fixed costs that we experienced in Q4, so the $100 million or so is correct, but perhaps we can -- you can call Mark and chat offline.

I can go through the quarters for the year, Ed, after the call and we can marry that up.

Okay.

All right, thanks.

Then one follow-up here.

I was just noticing the trends where your numbers, your take-away numbers excluding Wal-Mart -- well, I should say it this way.

The ones including Wal-Mart have been outperforming.

The ones that exclude Wal-Mart pretty consistently, and year to date I think the average was up 3.5 up through the first three quarters versus 2 for the excluding Wal-Mart, suggesting that you're doing better at Wal-Mart.

And then in the fourth quarter, they are right on top of each other at a 5.2% increase for both data sets.

So I mean is there anything that we should read from that?

Is there any kind of change in trend that that would signal?

No, I think what we did talk about was the acceleration in convenience stores clearly and then the reality of it is in food stores, we had a particularly good seasonal period.

So we had -- we picked up in retail coverage both in convenience and food and started to see better results there.

Okay, terrific.

Thank you.

Your next question comes from the line of Andrew Lazar with Barclays Capital.

Good morning.

Hi, Andrew.

Hi.

Just a quick one.

In the fourth quarter, for your everyday business that saw more of a full brunt of that 10% price increase in the quarter, is there any way to get a sense of kind of how the volume on that everyday business, forgetting about the seasonal piece sort of behaved in relation to more of the full pricing?

I think I made two comments and I'll come back to them and amplify them a little bit.

Within convenience stores as I mentioned, we saw very good take-away growth for us and the category up and that again, is in dollars.

As I said, we saw the, kind of the anticipated unit fall-off and the dollar response that we would have expected.

Within the -- within the everyday business, I talked a little bit about better trade promotion efficiency in the quarter.

We did see more everyday -- more of the everyday business moving off the base versus the incremental than we thought we would.

And so that's -- it was minor and small to read, but as I said, we were pleased with trade promotion efficiency in the quarter.

Okay.

So it's -- at least from an early perspective on the everyday piece, it wasn't like volume all of a sudden really started to sort of fall off a cliff, if you will.

It seemed like it was within the expectations or better, or at least early days you've set out for yourself?

I think that's a fair characterization.

Then just the last one, Bert, you've laid out the incremental productivity savings your expecting from the restructuring.

Is that -- how do I think about what you would consider?

And you mentioned this earlier in your comments, kind of how to think about the incremental saves that come from your ongoing productivity plans?

Yeah, that's a good point.

We do have a pretty active ongoing productivity program.

A lot of it related to supply chain, but it also focuses on G&A areas.

And that's -- there will be a little bit more of that in the back three quarters, but I would say that that's more even certainly than the, than the specific supply chain transformation savings.

Is there a rule of thumb around how to quantify that?

Some companies say it's 2% of cost of goods incremental each year or is it--

I think the way we try to think about it, we certainly try to look at what the inflationary trends are across the business and our objective is to try to cover all or as much of that as possible.

Between the two?

Between the ongoing and the supply chain?

Yes.

Okay.

Thanks a lot.

Thank you.

Your next question comes from the line of Kevin Dreyer with Gabelli and Company.

Good morning.

Good morning.

Curious, since the closing of the Wrigley-Mars deal, have you seen any change in the marketplace, whether in pricing or your ability to get shelf space and are you at any sort of a competitive disadvantage due to your lack of scale in gum?

To be clear, we've had lack of scale in gum before, Mark, and I think we came together.

So I'm not sure that that's changed any.

We come back -- to this point, obviously it's a big integration and they are in the early days, so we haven't seen a whole lot of changes in the marketplace.

Clearly it's something we take very seriously.

I mentioned in the fourth quarter us starting to spend, and I think Bert mentioned it, against some category work and customer and consumer work that we think that we need to be fairly aggressive on in terms of making sure that we continue to maintain the thought leadership with our customers.

We are the category captain pretty much most places.

We have proprietary models.

We still lead in the seasonal business.

We still lead in the aisle, and we'll continue to want to be the thought leader in the category and we're going to do what we think we have to do to preserve that.

But beyond that, I would say early days, but while we're extremely diligent, we haven't seen a lot of changes yet.

All right, and just if the industry continues to consolidate further, that's something you would look to participate in?

Not going to comment on M&A or industry consolidation or any of those kind of -- that kind of rumor or speculation.

That's just not what we engage in.

Okay.

Thank you.

Thank you.

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

Thanks.

We wanted to just kind of get some detail on the pension expense calculation.

We had -- we gave it a shot ourselves and came up with a much lower number, so if you have any kind of data points that you can give on that, otherwise perfectly willing to take it offline with Mark as well given the lateness of the hour.

No, to be honest, I think it's a pretty straight-forward accounting calculation in terms of the pension obligation.

The big changes in the year, I think I mentioned them, certainly are our pension assets declined, sort of in line with where the market declines were.

In fact, I think we did slightly better, but it's nonetheless a large decline.

And taking into account that asset base that we start the year with and the new, the new curve for pension obligation payment discounts, we do the calculation.

Obviously it has a big implication how funded the plans are in terms of what the whether there is or isn't a cash requirement.

But the calculation is pretty straightforward depending on how the assets perform and what that discount rate change is.

If you track back to last year, it's pretty explicit in the foot notes in the 10-K and if you track back from the asset values from last year and make an assumption about what market loss was and then amortize that that loss through the P&L, you can kind of get to the answer fairly quickly.

And the discount rates change as well.

We actually obviously -- we're pretty clear about how we disclose that as required in the 10-K.

But I think we did all of this, so maybe I'll just follow up with Mark to see what we did wrong.

You just said you changed your discount rate.

Can you tell me what--

Well, the discount rate does change and that's really just the market rate changes.

We used the Citibank pension discount rate.

It's pretty widely used, and the only implication for that is with your amortization period is, and that has a lot to do with your population.

We'll send you back to Mark for details if you need them.

Okay, great.

Thanks so much.

Thank you.

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

Thanks for taking the follow-up.

Dave, I guess you were very respected when you were the CFO and you're kind of proving yourself as the CEO.

But going back to your CFO days, looks like you're going to be generating a fair amount of cash.

I assume that your cost of capital as you calculate it is probably relatively low.

So when you do like a DCF model, it probably -- I mean it -- I guess I'm not really sure what it would imply, but you're not repurchasing stock even though you have a fair amount of cash coming in, but your multiple on consensus earnings is 50% above the group.

So kind of how do you -- like how should we think about your cost of capital and what is the right use of the cash that you're going to be generating?

I think clearly this is a board level topic and we discuss it, we discuss it pretty much continuously at the board.

We're we're in unchartered financial waters and right now, as I said on the call, I think it's really important for us to maintain access to capital in the markets and the rating that we have today is important to us and it gets us A1 P1 access to paper and at reasonably good rates and we think that's an important thing.

We've also had a fairly significant outflow with respect to the Global Supply Chain Transformation over the last couple of years here and we're winding that down.

So I think this is kind of unprecedented times, so we have made the choice to be fairly conservative right now with our cash and make sure that we keep that credit rating where it is and keep liquidity first and foremost and hopefully the markets will ease out here in 2009 and we'll continue to then have that that conversation at the board level about is it return to shareholders, is it dividends clearly is it in bolt-on M&A?

All of those things are things we are constantly looking at, but in today's market, I think keeping the liquidity and the rating is important.

Well, thanks for taking the follow-up.

So I guess if the markets remain, the credit markets remain semi frozen, we should basically assume kind of a cash build on the books?

Beyond obviously the need to fund the dividend?

I think as I said, we're very conscious of the liquidity need of the business and hopefully we see a thawing here sooner rather than later, but so for the short-term, I would say it's important for us to keep the rating and leave it at that.

Okay, thanks.

Your next question comes from the line of Thomas Russo with Gartner Russo Gartner.

Hi.

I have a question on the planned plant closures on the West Coast.

I seem -- I recall the numbers you mentioned may have been $75 million of costs to do so and $5 million of savings from this effort.

Is that the -- are those first of all the right numbers?

And secondly, what kind of return on investment for those charges does that represent?

No, let me just clarify.

Sure.

The costs I mentioned was 25.

Okay.

Million versus the 75, and you're correct on the $5 million of annual savings.

Excellent.

And then within the experience from the pension performance over the past year, have you done anything to reposition the pension fund or to reallocate or change the balance of the assets?

The pension, the pension plan assets are managed within our pension committee internally.

Yeah.

We have some advice from different advisors.

We're pretty happy with the allocation that we have and obviously as the numbers change, we are conscious of of reallocating the assets back to the percentages that we want against the different investment classes.

Thank you.

And last question, on the commercial paper side, you mentioned that today the markets are treating you reasonably well.

I'm just curious, over the past six months, how extreme did your exposures get?

What sort of pricing did you experience at some point?

And what was the maximum stress of that?

Yeah, we're not going to comment on specific cost of commercial paper.

Yeah.

The only thing I would say is that we have reduced the level of commercial paper, and we did that last year as we floated a long-term bond offering last January or February.

So we have reduced our exposure there.

We've not, we've not had difficulty placing the paper, so knock on wood there.

Suffice it to say, the reduction in commercial paper was some of the way that we tried to manage just the difficulty of placing that paper.

But we've not had any issues and our rating is helping us do that.

Thank you very much.

Thank you.

You bet.

At this time, there are no further questions.

Okay.

Well, thank you for joining us today for the -- on the conference call.

And (inaudible) and myself will be available for any follow-up questions that you may have.

Thanks again.

This concludes today's Hershey Company fourth quarter 2008 results conference call.

You may now disconnect.