好時 (HSY) 2009 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Hershey second quarter 2009 conference call.

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

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

(Operator Instructions).

Thank you.

I would now like to turn the call over to Mark Pogharian.

Please go ahead.

Thank you, Tanya.

Good morning, ladies and gentlemen.

Welcome to the Hershey Company second quarter 2009 conference call.

David 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 for 2008 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 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 2009 results excluding net pretax charges.

The majority of charges in both 2009 and 2008 are associated with the Global Supply Chain Transformation program.

These pretax charges were $42.7 million in the second quarter of 2009 and $39.3 million in the second quarter of 2008.

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

With that behind us, let me turn the call over to Dave West.

Thanks, Mark, and good morning, everyone.

Our results for the second quarter were strong and exceeded our expectations.

Net sales increased a solid 5.9%, as core brands continued to perform well in the marketplace.

Sales gains were driven primarily by pricing.

Recall in the year-ago period sales growth was also in the 5% range.

We gained US market share for the quarter and are pleased with the strength and responsiveness of our brand in this challenging economic environment.

Overall, commodity costs were higher than last year in the quarter.

However, similar to the first quarter, dairy prices remained in a very narrow range, thus the total commodity cost impact and margin was favorable versus our initial expectations and Bert Alfonso will have further details on that in a moment.

Second quarter retail takeaway, as reported by IRI and Nielsen, is impacted by Easter timing.

Stripping away Easter, total CMG -- that's candy, mint and gum consumer takeaway -- for the 12 weeks ended June 14th, per our internal custom database -- and again, this is excluding Easter -- in channels that account for over 80% of our retail business was up a strong 5.4%.

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

Given the impact of the Easter selling season, a better measure may be the year-to-date period in which the timing issue is eliminated.

And here, US retail takeaway for the 24 weeks ended June 14th -- again, in channels that account for over 80% of our retail business -- was up 8.9%.

This is higher than the FDMx data that most of you received from either IRI or Nielsen.

While an important part of the business, FDMx only captures about half of our retail takeaway and it excludes both one of our larger customers, as well as our most profitable channel.

Importantly, Hershey CMG market share in FDMxC has increased 0.5 points in both the Q2 and year-to-date timeframes.

Our second quarter results were driven by solid mix marketplace performance on both everyday and seasonal products.

A big driver in Q2 takeaway was Easter, during which we leveraged our sales force and seasonal Navigator tool to help us work with retailers to maximize category, customer and Hershey growth.

This resulted in excellent Easter sell through and a gain of over two market share points in this season.

We have now gained market share in each of the last four seasons.

Looking at everyday, excluding seasonal items, Reese's, Hershey's, Kit-Kat and Twizzlers all gained, with combined takeaway on these brands up mid single digits on everyday items.

As we have previously stated, work continues on Kisses.

Everyday silver Kisses takeaway was up slightly in the quarter; however, declines in sealed Kisses and Kissables were a drag to the overall franchise, which was down.

If you look at year-to-date performance in FDMxC, excluding Wal-Mart, the category grew a solid 4.7%.

This is also in line with the latest quad, the June 14th four weeks, and greater than the historical growth rate of the category of 3% to 4%.

Growth is being driven by mainstream and everyday confections offset by continuing softness within the premium, gifting and novelty subsegments.

Other major manufacturers beyond Hershey also gained share.

Trade-up rebounded in the second quarter and for the 24 weeks ending June 14th the trade-up portion of the category was up 4.1%, roughly in line with the mainstream growth rate.

Hershey's Bliss remains on track and is responsible for driving about one-third of the trade-up segment category growth.

Hershey's Bliss continues to respond to our advertising and merchandising investment.

Shipments and trial and repeat are basically in line with our projections and we expect this to be the case throughout the remainder of the year for Hershey's Bliss.

In premium, Starbucks, Cacao Reserve and our online Hershey's gift business have been challenged.

So specifically, our online gift business will be closed as of July 31.

And we stopped shipping Cacao Reserve this quarter and we will do the same with Starbucks on October 1st.

These Q2 actions were not in our original 2009 plans.

Product currently on the shelf will sell through.

Obviously these actions in gifts and premium will be a drag on second half net sales growth detracting a couple of point of sales growth in Q4 versus our original plans.

While premium has slowed, we do believe it will have a role in the category in years to come.

Our Scharffen Berger and Dagoba brands play here and while still relatively small, the opportunity exists for growth.

We have strategic work underway, which includes an assessment of the entire premium category, as well as our own brand so as consumers return to this subsegment in the future, we are better positioned to participate.

Looking now to C store class of trade, where the Easter impacts are small, the CMG category was up 4.5%.

In the second quarter Hershey's C store takeaway increased for the fifth consecutive quarter and was up 6%, resulting in a share gain of 0.4 points.

In Q2, Hershey C store chocolate and non-chocolate takeaway were both up, 6.7% for chocolate and 11.2% for non-chocolate respectively, driven by price realization, king size distribution gains and strong in-store selling and merchandising.

Similar to the first quarter, C store volumes were off a bit, but better than our elasticity models had predicted.

This was driven by successful programming, including the Reese's lucky back promotion where consumers instantly won cash, as well as Kit-Kat and Breathsavers programming.

The Breathsavers programming resulted in C store mint takeaway of 5.7% and 2.5 market share gain in the mint subsegment.

The convenience store channel continued to be a meaningful contributor in 2009.

However, as we make our way through the remainder of the year, retail dollar takeaway growth will most likely slow as we lap the August price increase.

This was evident in the second quarter, where marketplace performance, as expected, was not as strong as the first quarter, as we cycled the February 2008 pricing action.

Midway through the third quarter, we will lap the August 2008 price increase.

programming and merchandising, including a NASCAR co-promotion with Coca-Cola, a king size promotion, and a Hershey's rock your block standard bar program to win a private concert are on tap in the third quarter to drive our C store business forward.

The second quarter included several key consumer promotions in food, drug, and mass outlets, primarily Hershey's S'mores and Kisses' Night at the Museum.

These two promotions were at new higher promoted price points, with promoted price hikes of over 20+% seen in most customers.

This does give us some insight into how consumers will react and migrate to the new everyday promotional price points.

We were satisfied with the S'mores campaign, as Hershey's six-pack dollar retail takeaway was higher year-over-year and the volume elasticity was within our estimated range.

Kisses performance during Night at the Museum was mixed with only core silver Kisses reporting higher retail takeaway.

Overall, volumes were about in line with our models for these promotions.

Thus, as I stated earlier, all else held equal in the marketplace today, we believe we have established the right pricing structure, merchandising and programming and feel cautiously optimistic about the upcoming challenges related to the new promotional price points in the Halloween and holiday seasons.

Shipments of back-to-school and Halloween essentially had no year-over-year impact in Q2, with sales in the quarter down just a few million dollars on Halloween.

To date, retail customer Halloween orders are on track with expectations.

As a reminder, Halloween will be the first major season where consumers, including the light users who only purchase the category once or twice a year for the specific season, will see markedly higher promoted price points.

We believe we have the right mix of seasonal-specific advertising, coupons and programming lined up to help consumers adjust to the new promoted price points.

However, we will not be able to measure our sell-through results until we enter the September-October timeframe.

The price increase we initiated in 2008 was necessary to deliver an appropriate margin structure for our business for the long term, given the significant commodity and pension cost pressures.

Category dollar growth is solid and so far, volume has declined a little bit less than anticipated.

While Hershey's marketplace performance is tracking nicely, we do expect that some bumps in the road will occur, such as we encountered in the May quad, due to year-over-year timing of merchandising and programming, as well as the typical selective competitive activity.

As we look to the remainder of the year, our first half strength has created the flexibility to further invest in our brand and business capabilities.

This investment is greater than what was initially expected as we entered the year and therefore, it will be back half weighted.

Our progress has positioned us to start some strategic work earlier than we had highlighted when we met with you in New York City last June.

In the second half we'll look to expand and enhance our category management and business capabilities, consumer and customer insights, our innovation process, and begin working digital marketing, to name a few of the capabilities.

We'll also continue to focus working on towards achieving continuity levels of advertising, including seasonal-specific ads on Hershey's, Reese's, Hershey's Blitz, Kizzlers, Twizzlers and Kit-Kat.

We have further increased our full-year advertising expense and expect it to increase a total of 40% to 45% in 2009.

To wrap up, the category continues to grow, despite the macroeconomic challenges that exist.

In channels that account for over 80% of our business, year-to-data takeaway growth is robust, over 8%.

Going forward it's difficult to predict consumer sentiment and purchasing patterns.

As we have stated since the analyst day in 2008, we are committed to doing the right thing for the business in the short and long term.

To help consumer navigate the remainder of the year and higher seasonal promoted price points, advertising, merchandising, in-store programming and couponing will all be higher.

We continue to closely monitor category trends, our performance, consumer purchasing patterns, and competitive activity, and will react appropriately to ensure the strength of the category and our business.

We exited the second quarter with marketplace momentum and will operate the business from a good position during the second half of the year.

We do continue to expect our US volume to decline in 2009.

Additionally, pricing gains will abate during the second half of the year as we lap the August 15, 2008 price increase.

Our international business is on track on a constant currency basis.

However, we continue to expect foreign currency exchange to negatively impact both the top and bottom lines, as it did in the first half.

As such, we now expect full-year net sales growth to be within our 3% to 5% long-term target.

To date, dairy costs are favorable versus our initial estimates and we do not expect material dairy price inflation during the remainder of the year.

However, many of our key input costs remain volatile and are up significantly on both a year to date and year-over-year spot basis.

We continue to expect our commodity cost increases for the full year to be significant; however, it will be less than our initial estimate of $175 million.

On a year-to-date basis, gross margins have expanded by 200-plus basis points.

We expect this trend to continue through the year.

As previously stated, our business momentum has given us the flexibility to increase brand-building advertising and make the necessary investments in strategic capabilities that will benefit the Company over the long-term.

Due to our strong first half performance and solid seasonal programming for the second half, we have increased our full -- outlook for the full year and expect adjusted earnings per share diluted to be slightly above our long-term objective of 6% to 8% growth.

We feel good about our position as we enter the second half of the year.

We participate in the category that is impulse-oriented and that continues to offer consumers affordable enjoyment.

This is evident, as category growth is at strong rates, higher than historical norms.

During these challenging times, consumers continue to turn to the brands they know and love, such as Hershey's, Hershey's Kisses, Reese's and Kit-Kat to name a few.

Chocolate is a destination category for much of the year and consumers love the moment of happiness that Hershey's brings to Halloween and the holidays.

Our recent performance shows the value and quality that our brands offer to consumers and the opportunity that continues to exist for The Hershey Company.

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

Thanks, Dave, and good morning, everyone.

Second quarter results were better than expected, with consolidated net sales of $1.171 billion, up 5.9% versus the prior year.

Adjusted earnings per share diluted at $0.43 increased 48% versus the prior year, primarily due to price realization from the August 2008 price increase; better-than-expected volume trends versus our original estimates, particularly within the instant consumable product line; supply chain volume efficiencies and productivity; and a lower effective income tax rate in the quarter.

The second quarter sales gains were driven by US pricing action announced in August 2008, partially offset by volume.

In the second quarter, sales gains were driven by US pricing announced in 2008 and partially offset by volume declines, driven by pricing elasticity and unfavorable currency exchange of about two percentage points.

Dave already provided details related to our marketplace performance.

Based on that data, I'll point out that year-over-year FDMxCW retail takeaway comparisons to year-to-date net sales indicate that inventory at our key distributors and retailers are near our desired levels.

Now turning to [markins], during the second quarter adjusted gross margin increased 300 basis points, driven by net price realization, supply chain efficiencies related to fixed cost absorption, as actual volume was better than expected versus our initial estimates, and supply chain productivity savings.

These margin gains more than offset higher input costs of about 130 basis points, reflecting total consolidated cost increases for raw materials, energy, and packaging.

Higher employee benefit costs, including pension expense for our manufacturing facilities, also reduced gross margin in the quarter.

Note that the second quarter includes minimal seasonal sales and is therefore our smallest quarter on a volume basis.

Unit volume is higher in the second half of the year and thus our commodity cost impact versus 2008 will be greater during the remainder of 2009.

In the first and second quarters, the commodity cost impact was lower than we expected, due primarily to lower dairy costs.

Our current expectation is, we will not see material price inflation for dairy products during the balance of the year.

Additionally, as we adjusted our annual outlook for dairy costs, the first half favorable catch-up was captured in the second quarter.

Dairy aside, our year-over-year commodity cost increase remained significant, although it will be less than our initial estimate of $175 million.

We believe we have good visibility into the majority of our costs for the remainder of the year and expect gross margin to be higher in 2009, in line with our year-to-date gross margin profile.

Second quarter adjusted income before interest and income taxes increased 19.5%, resulting in pro forma EBIT margin expansion of 150 basis points to 13.6% from 12.1% last year.

This was driven primarily by higher gross margin, partially offset by higher advertising expense, increased pension expense, employee-related costs, including incentives, and exit costs related to our online gifts business.

As Dave stated earlier, we continued to invest in our core brand, as advertising expense increased 46% in the quarter.

We were on air supporting our core brands, including Hershey's Pure, the Reese's Perfect campaign, Hershey's Bliss, traditional silver Kisses, as well as Easter programming and our annual S'mores promotion.

Now, let me provide an update of our international businesses.

The countries where we operate are facing many of the same economic challenges as are impacting the US.

Overall, on a constant currency basis, sales were about flat.

Our businesses in Canada and India were up, but sales were softer in Brazil and Mexico.

On a GAAP basis, total Company net sales were impacted about two percentage points due to the stronger US dollar year-over-year.

Although total reported profitability improved slightly versus year ago, we do not expect a material near-term profit improvement in the international businesses during the remainder of 2009.

We will continue to invest for growth and expect foreign translation to be a headwind to both top and bottom lines, particularly in the third quarter.

Moving down the P&L, for the quarter, interest expense decreased, coming in at $22.7 million versus $23.6 million in the prior period.

The decline resulted from lower commercial paper balances and related interest rates.

For the full-year 2009, we expect interest expense to be slightly favorable to 2008.

The tax rate for the second quarter was 28.3% due to the timing of certain tax events and related accounting.

The lower 2009 second quarter income tax rate versus the 39% rate in 2008 added about $0.06 to the second quarter EPS, roughly in line with the outlook we provided in April.

In the second quarter of 2009 weighted average shares outstanding on a diluted basis were 228.5 million versus 228.7 million in 2008, leading to adjusted earnings per share diluted of $0.43, up 48% from a year ago.

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

Net sales increased 6.2% in the first half.

Adjusted income before interest and income taxes increased 15.6%, resulting in an EBIT margin gain of 120 basis points to 13.8% from 12.6%.

Advertising increased 46% on a year-to-date basis.

Gross margin was 37.4% year-to-date versus 35.3%, or 210 basis points higher.

Gains were driven primarily by pricing, offset by commodities of 230 basis points.

Our adjusted earnings per share diluted in the first half increased 23% to $0.81 per share.

Turning now to the balance sheet and cash flow, at the end of the second quarter, net trading capital decreased versus last year's second quarter, resulting in a cash inflow of $84 million.

Accounts receivable were down $30 million and remain extremely current and of high quality.

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 $55 million and accounts payable decreased by $1.5 million.

In terms of other specific cash flow items, capital additions, including software, were $36 million for the quarter.

For 2009, we are targeting total capital additions to be in the range of $155 million to $165 million.

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

Depreciation and amortization was $46 million in the quarter.

This includes accelerated depreciation related to the Global Supply Chain Transformation program of $1 million, resulting in adjusted operating depreciation and amortization for the quarter of $46 million.

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

During the quarter, dividends paid were $66 million.

We did not acquire any stock in the second quarter related to the current repurchase program and $100 million outstanding remains on the current authorization.

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

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

Our cash flow continues to be strong and will improve as earnings grow and the supply chain transformation program is completed.

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

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

Construction of our Monterey facility in Mexico is essentially complete.

We are on schedule with our implementation and entering the final phase of relocation, installation of manufacturing lines.

All program savings projections remain on track.

During the quarter we recorded Global Supply Chain Transformation program charges of $43 million pretax.

This includes a non-cash $31 million pension settlement charge resulting from the level of withdrawals from the hourly pension plan, $1 million of accelerated depreciation, $2 million of project startup, which is in cost of sales, and $2 million of SM&A expenses reflecting program management costs.

The forecast for total charges related to the program has been narrowed and is now expected to be $640 million to $665 million, including $40 million to $65 million of non-cash pension settlement charges as discussed in the prior quarters.

For 2009, total charges related to the Global Supply Chain Transformation program are expected to be $85 million to $120 million, including non-cash pension settlement of $40 million to $50 million.

Now to summarize, we are pleased with our second quarter and year-to-date results.

The investments we have made in our brand and productivity initiatives have resulted in solid gains in sales, market share, and profitability.

The global recession has pressured consumers and we believe that this will persist throughout the remainder of the year.

As such, we continue to expect that our volume will be down in 2009 due to sales volume elasticity of last year's price increase.

While we believe we have the right mix of upcoming seasonal and nonseasonal support, consumers will see higher promoted retail price points on take home and seasonal packaged candy in the second half of 2009.

To ensure we support our brands, we plan to increase full-year advertising expense by 40% to 45% and now expect full-year net sales growth to be within the 3% to 5% long-term objective.

While commodity spot prices of some of our major inputs continue to fluctuate, we have good visibility into our cost structure for the remainder of 2009.

Our year-over-year commodity cost increase remains significant, although it will be less than the initial $175 million.

In addition to the previously mentioned increase in advertising, we'll also make further investments in category management and global go-to-market capabilities.

With respect to profit, we have increased our outlook for the full-year 2009 and expect adjusted earnings per share diluted to increase slightly above our long-term objective of 6% to 8%.

As you work on your models, I remind you that net sales growth in the third quarter of last year benefited from a buy-in related to the August 2008 price increase and we begin to lap the price increase in the second half, impacting primarily the fourth quarter.

In addition, other second quarter -- second half net sales comparisons include the wind down of Starbucks, Cacao Reserve and Hershey's gifts, as well as the 2008 launch and rollout of Hershey's Bliss.

We will now open it up to questions.

(Operator Instructions).

The first question comes from the line of Eric Katzman with Deutsche Bank.

Morning, Eric.

I guess my first question to Dave is, do you -- how much do you think the move away from the premium channel by the consumer to the more mass-oriented channel is helping the business?

And what do you think needs to be done -- should the consumer recover and go back to a more premium channel, what do you need to do to -- I guess for Hershey to do a better job in that area?

Eric, I think there certainly is a trading down effect of premium -- from premium down into trade-up, if you will, and trade-up down into mainstream and we think that that's certainly helped our business, as well as it's helped the other mainstream manufacturers.

They're also gaining some share, as well.

And we think the advertising -- the increase in advertising that we've done on those core brands is certainly attracting consumers who want to be in the category and I think we're providing -- we're getting our message out there on the brand by targeting and our message is good.

Our merchandising has been good, So I think we are helping facilitate some of that shift, if you will, from premium or trade-up into the more mainstream part of the category with our programming.

That said, we do think there's going to come a point in time as the economy starts to get better where the premium segment will start to gain and grow again.

The few things that we have tried in premium, frankly, as you can tell from our announcement today, weren't all of that successful.

We just didn't get enough scale in our online Hershey's gifts business to make it a profitable business.

We're still committed to online and reaching the consumer base that way, we just didn't have the right business model.

And the timing of the launch of the Starbucks proposition, frankly, we just missed the window.

We were in the wrong window.

Our partner obviously had some other business challenges and the consumer at that price point just wasn't stainable.

So I think what we've done, as I mentioned today, we have several insight -- consumer insight and category projects going on under way right now.

We're focused more on our Scharffen Berger and Dagoba brands as we go forward and we are preparing ourselves for when the consumer does go there.

It's all about differentiation.

We learned an awful lot by doing the Starbucks and the online gifts about what the consumer likes and what resonates with the consumer and now it's just a question of us making sure that we can do that in a profitable way.

Okay, thank you for that.

And then if I could follow up with just a more specific question, can you give us a sense of what was volume in the quarter and whether that -- I don't think there was acquisition benefit this quarter, I think that ended.

But if there was, what it was with or without acquisitions?

And when you say the elasticity was comfortable with your model, can you get a little bit more descriptive there?

Yes, we can.

I think -- we took about a 10% to 11% price increase across pretty much the entire line last year and that's about what we saw in a gain from pricing, That 10% to 11% roughly number is about what we saw as a gain from pricing, so you can pretty much figure that the rest of the difference between what we wound up with on price versus after-net sales, we had a couple points of FX, as Bert said, and then the rest of it was a volume drop off.

So I think you can pretty much get the model.

The Van Houten acquisition was [$0.02 of a percent] of sales growth in the quarter.

It was very small in the overall.

So roughly that 5.9%, a couple of points of FX offset double-digit pricing and then a volume falloff and I think the modeling would tell us in the second quarter on a take-home packaged candy and the S'mores event, pretty much in line with what our elasticity models would tell us.

The instant consumable business, still the volume conversion was a little stronger than what our original models would have told us.

So as we go to the back part of the year now, obviously a third of the back half volume is seasonal in the US business and that's -- again, it's a little bit of a different consumer and a different occasion and that's what we're also starting to look at now in terms of how the business will respond.

Okay, thank you.

I'll pass it on.

Thanks, Eric.

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

Good morning, thank you.

Good morning.

I just wanted to follow up on Eric's question about volume a little bit.

And as we get into Q3 and Q4 and lap those price increases, do you anticipate a more balanced top line between volume and pricing?

I think a couple of things as you look at the back half.

Remember, the price increase was August 15th, so as we get out into the latter part of the year the everyday part of the business, we will have lapped the price increase.

So the real pricing activity that happened in the back half of the year is around the Halloween and the holiday business, that we did not have the increase on last year, so the third quarter you'll see a similar type of gain from pricing and then that abates as you get out into the fourth quarter, a little less pricing.

The only price we get on the fourth quarter is on the holiday, so a little less price gain.

We would expect, again, as we come into it, that in the back half of the year, the Halloween and the holiday, consumers are going to see higher price points and significantly higher promoted price points in the seasons for the first time and holiday maybe as many -- as long as seven or eight years since they have seen a change in the price of holiday packaged candy at retail.

So we do expect that there's going to be that volume elasticity falloff.

Again, I think it'll be -- it'll model much more like the second quarter packaged candy than it will the instant consumable, more in line with what our original volume models were.

And then we also have, as we exit the gifts and the Starbucks business in the fourth quarter, a little bit more of a drag on the top line.

That didn't really contribute a lot of profit, but it was certainly was top line a couple of points in the fourth quarter.

Sure.

I guess the real question then is, how promotional -- given some of the commodity tailwinds a little bit, how promotional do you think this category will get and how much volume response do you think there'll be?

Can you give us any commentary about -- you had some -- you mentioned it in the release that you'll be monitoring competitive developments.

Can you give us a little bit more commentary about what the competitive environment looks like?

What's the chatter around the trade going into the holidays?

I think we're -- we certainly have -- we're watching -- the most important thing is to watch the consumer, frankly, because the consumer's going to come across higher price points at retail and our increase was pretty much, as I said, 10% to 11% across the line.

What we've done to make sure that the consumer has a soft landing on the higher price points is we certainly have more seasonal-specific advertising, we've upped our core brand advertising, we've increased our couponing activity and we're making sure that we have the right kind of merchandising out at the seasons.

We really very much focused on the consumer aspect of this and I think that that is appropriate for us.

That's what we did at Easter, for example, and at Easter we had a very successful season.

So we're running a similar playbook at Halloween and holiday that we had in for Easter, which turned out to be a pretty good benefit for us.

Well, obviously, we'll continue to watch competitive activity out in the marketplace, but I think we've got it right lineup to make sure that the consumer gets adjusted to the new price points and I think that's the right strategy.

If we see anything unusual out there -- you're always going to see in certain places in, certain parts of the category, those things happen, but widespread we think we have the right programming in place and we think that we feel pretty good about what we've done.

Okay.

Thank you very much.

Your next question comes from the line of Bryan Spillane of Banc of America Securities.

Good morning.

Hi, Bryan.

Hey.

Just a question on the increase in advertising expense.

I think it makes sense that you're going to increase, especially in front of the higher price points, but I guess the question would be, is this now a rebasing of your advertising expense and so as we model going forward, should we use this as the new base to model from, or is this more tactical, you've got the extra money to spend and you want to give some support to the price increases?

I think a couple of things.

When we came into the year we already were modeling a 20% to 25% increase on -- across the portfolio and that included getting to continuity levels on some of the brands, particularly Hershey's and -- the Hershey's brand and the Hershey's Kisses brand where we hadn't run much copy last year, at least not for a full year.

The brands have been very responsive.

We're modeling and watching our ROIs and our lifts on a monthly basis.

Importantly on the Reese's brand where we got to continuity sooner, we actually continued to see improved ROIs and lifts from the advertising.

So, given the responsiveness that we have seen, we're going to add some weight on some of those core brands, but more importantly get to continuity levels on some of the other brands, such as Twizzlers and Kit-Kat, a little bit sooner.

And then also we were very successful, we think, with the Easter-specific advertising that we ran and we're going to run some seasonal-specific advertising again at Halloween and holiday.

We think it's proving to be, in this environment, a very good way for the consumer to convert to the higher price points and we are watching it on a -- as I said, on a monthly basis continue to look at the ROI and the returns on it.

And we're not at any point of diminishing return so we thought it was a very good spend, given the strength that we had in the first half and the concerns we have about the second-half volumes.

So fair to say, if the spending works, then maybe it stays in the base and if it doesn't work, then maybe it won't?

Is that --?

Well, I think if the spending -- any time we're doing -- any spend we're doing, if we spend it's going to stay -- it's become part of the base.

Right now we're very pleased with it.

We think we have good copy and it seems to be working and as long as that's the case we'll continue to spend.

That's the same with anything we spend on.

We're looking at our return on retail investment by class of trade.

We're looking at trade promotion ROI.

So it's not just the advertising spend, it's all of the leverage that we're pulling on and we're going to dial our dollars to the right spots.

But right now, the advertising seems to be working and we're very pleased with that, and given what the consumer's going to see in terms of higher price points, we think it's a good spend.

Okay.

And then just related to that, as you've sold in your second half promotions, and given the dynamic with premium -- the premium segment slowing, but then your prices, and I'm assuming mainstream prices moving up, has there been a change in shelf allocation?

Are you getting more display space, more shelf space, just what's happening there in terms of the way the retailers are looking at the category and the shelf space?

Are they actually allocating more to mainstream going into the back half?

Absolutely.

What's happened is there was a downsizing in space, particularly coming out of premium, and there was quite a bit of space that came out of the category in premium.

Some of it went into trade-up, but trade-up space is about the same, so mainstream has gotten more space and what we're seeing also is in a lot of instances double spacings on some of the strong core brands, which is a good thing because I think it correlates to the way the advertising is being spent in the category.

Okay, great.

Thank you, guys.

Thank you.

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

Good morning, everyone.

Good morning, Andrew.

Of the 10% or 11% pricing that you had in the quarter I'm curious if you could give us a little bit of color on what piece of that might have been gross pricing versus, let's say, the netting off of that of promotions and whether that was up or down meaningfully either way year-over-year in the quarter?

I think, Andrew, the -- it's good question.

For the second quarter, it's the smallest quarter and it's largely mixed towards instant consumables, so we got most of that -- the list price goes through as it is and as I said, it was pretty close to the 10% or 11 %.

We might have ticked up a little bit more on trade promotion -- in terms of trade promotion favorability, but not much.

It pretty much was the list price coming through.

Trade promotion, all things being equal about where it would have been a year ago.

Got it.

And then as you look forward to the second half, obviously the seasonality of the business changes and the product mix, would you assume there'd be a little bit more of a netting off of the gross price?

Obviously relative to the second quarter, yes, but I don't know if that would change much year-over-year from last year in the third quarter.

Yes, I mean I think the -- I don't know, but as you said, the mix part of it is as you get out into the latter part of the year, we recycle the August price increase.

From a promotion standpoint, we would expect to maybe be a -- pick up a little bit more in the gross to net area, but obviously we're not getting the full list anymore.

So part of what we're doing is obviously, hopefully as we moved our prices up that we're getting to a -- we're getting a lot of that pass-through at retail.

It's up to, obviously, the retailer to what they run, but we are trying to get a little trade promotion efficiency in the back part of the year.

[We're planning on a little].

Got it.

Last thing would just be, with some of the potential strategic investments that you may be able to make or decide to make in the back half of the year, would any of that potentially including -- but it would include some more of the feet on the street that you were doing over the last year in convenience store and the food channel, because it certainly seems like that's -- at least best we can tell that that's paid off in a pretty big way?

So maybe just some thoughts around that would be helpful.

Yes, I think it's one of the areas that we are looking at in the back part of the year in terms of investment.

I think what -- all I will tell you is that across classes of trade, we're looking at the ROI on that investment.

I do think the convenience store investment particularly, Andrew, has paid out for us.

We've been very pleased with the type of selling and merchandising we're getting done at retail there, and we think the distribution gains have been pretty significant for us.

So we're pleased with that.

We're evaluating a number of different coverage models, if you will, and coverage frequencies, so I wouldn't expect there to be a material change to the coverage levels through the back half of the year, but that's not to say that we aren't looking at it as one of the things that we're investing in.

Thanks very much.

Thank you.

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

Thank you, everybody.

Good morning.

If I could just follow up on the ad spend question.

Your ad spend you're saying is up over 40%, but given that rates are probably lower year-over-year how much would you estimate your impressions or whatever unit of measurement you want to use is up?

It's higher than that.

It's -- I don't really know that I want to get into the specifics of how we're buying, but you can add certainly double-digit impression points above that 40% to 45%.

Okay, terrific.

And on the online business, you said -- or you indicated that that was going to take off about two points off the top line in the back half, what is the effect below the top line from that?

Was that -- how profitable of a business was that relative to the average margins?

Basically, as I said, I think it's going to take -- between that and the premium discontinuations, it's a couple of points at top line but really no impact on the bottom line.

We just didn't get the scale with the business so it really wasn't profitable.

Okay.

And then lastly, if we look at what your new sales guidance implies for the back half of the year, at 3% it'd be 50 basis (inaudible) 5% it'd be 4% growth, so -- and you're lapping 6.4% in 3Q and 2.6% in 4Q and I understand what's coming out of the online and so forth.

But does that reflect a conservative stance or an expectation of increased promotional spending?

It just seems -- that just seems pretty achievable, relative to where you are in the year.

How should we think about that?

Well, I think I -- as I said, we talked about a couple of points of growth coming right out of the fourth quarter on the gifts and the premium immediately.

If you think about the US business specifically, a third of that second half business is seasonal in nature, it's either Halloween or holiday, and we are going to see, as I said, some -- the consumer's going to see significantly-higher price points and in the second quarter we ran our S'mores and our Night at the Museum, if you will, and at retail, those price points turned out to be 20% to 25% higher.

That's what the consumer's going to see.

They haven't seen that type of increase in Halloween for probably three or four years and I think in most cases in seasonal packaged candy for seven or eight years, so we expect the volume elasticity on that type of an increase to be pretty significant.

I think what we learned in the first quarter on instant consumables was we converted a little bit better on volume.

In the second quarter our model would tell us we converted about on par with the model, but we have not hit a seasonal period where the dynamics are different.

It's usually a lighter user, for one, it's more of a destination category and frankly, the way the seasonal business works, if we get better conversion you're kind of capped because you only make so much seasonal product and sell it in, so essentially if the elasticities turn out that the volume turns out to be better, what we'll see is better sell-through, which is good from a profit standpoint, but not necessarily a chance to accelerate the top line.

Okay, understood.

Thank you.

That's helpful.

Sounds like you guys are well positioned.

Maybe last question for Bert.

What do you think it's going to take in order to make use of that $100 million share repurchase program?

Well, at this point, we're very happy with our cash flow.

As I indicated, we continue to make progress against our working capital and also against the Global Supply Chain Transformation program, which as that winds down, we get both benefits on the capital expenditures side, as well as profitability.

So we're pleased with the cash flow at this stage.

It's a discussion at the board level that we have and we're got an upcoming meeting there, so that's something that we certainly will discuss in terms of how we might best serve the shareholders.

So I would just stay tuned.

It is a board decision.

It's one that we discuss pretty frequently.

Do you think maybe getting through Halloween with the all clear would be a key gating point?

I wouldn't want to give you a definite timing or a key gating point.

What I would tell you is we're encouraged by our cash flow increase, we're encouraged by the performance of the business and all those things certainly help in the conversation.

Okay.

Thank you, and congratulations on the very nice results.

Thank you.

Your next question is from David Driscoll with Citi Investment.

Hello, David?

Sorry about that.

Good morning, everyone.

Hi, David.

I just want to say congratulations on the results.

Dave, you and the team have done a fantastic job here over a multiyear period, preparing the advertising budget, increasing the sales coverage on the firm.

This is a -- this has been critical for Hershey and I just compliment you on the multiyear effort.

Looking at it I really have two specific areas that I wanted to ask about.

Again, it is -- first one is just on advertising.

We have had now two successive years, '08 and if I can talk about '09 even though it's not complete, two very significant years of advertising budget increase.

Without attaching a timeframe to it, can you give us a sense as to what's the maximum advertising as a percentage of sales that you could see this go to?

And in the backdrop, when I look at the numbers, certainly many of the peers have advertising as a percentage of sales quite substantially above even the projected '09 levels at Hershey.

So how do you think about that?

Couple, couple of things.

We don't have a -- we don't think of it in a specific advertising and net sales ratio for the Company and I think comparing us to some of the other companies out there, depending on who you're comparing us to, if you feel we're a much more -- we have much more of our sales concentrated in the US and North American markets so I think we don't have the kind of global reach and then, therefore, some of the spending that might change that NS ratio.

So I think also given the category dynamics it's much more impulse oriented, much more merchandising intense, and I think a lot of that in-store presence in an impulse-oriented category continues to be very important and that isn't going to necessarily be an advertising level.

That might be a trade promotion lever, not for pricing -- price-off, but for location.

So I think that we probably will -- don't have to have the same levels of advertising as some of the rest of the group.

That said, the way we are looking at it, we've got some great core equities.

We started first with Reese's, then we moved to the Hershey franchise, Bliss -- Hershey's Bliss, then Hershey's Kisses, now we're on with Twizzler and Kit-Kat.

So when you think about those core equities what we've been doing over the last few years is getting to what we think are sustaining levels of GRPs across those franchises and I think what you've seen now is, as you exit 2009 on Reese's, Hershey's Kiss, on Bliss', and certainly on the Hershey's brand, we'll be on air all year in 2009 at a sustaining level.

We just started in Twizzler, we'll start Kit-Kat later in the year so when we get to 2010 we hope to be at base sustaining continuity levels on those, as well.

Then from that point, once you get to base sustaining levels of continuity, then I think what we start to do is then try to understand the curves in the investments.

Is it heavy up with certain times of year, or copy, or as we continue to dial up the advertising, do we continue to see good ROIs?

And so far on the Reese's brand, which is the one that's the furthest along, we continue to see that.

So as long as we continue to see good ROIs we'll make the investment.

But what we've been in in the last certainly 18 to 24 months here is in that ramp-up stage on those core brands of getting to what we think is a good continuity level plan.

We're not thinking of it in terms of the Company.

We're thinking of it brand by brand, getting those brands targeted and getting them to the right levels.

And then once we get there to that kind of sustaining level, we're making the investment on the margin, those decisions.

So by the time we get out of '09, other than on Twizzler and Kit-Kat, we'll be at full-year continuity and Twizzler and Kit-Kat will get there in 2010.

That's great.

Thanks for the detail in the answer.

One more question here and then I'll pass it on.

Can you talk a little bit about the retailer response to the pricing increases?

And specifically, I get just a ton of questions, Dave, about retailers pushing back on the manufacturers to actually bring down prices, given the broader context of potentially benign inflation.

I know that's not specific for Hershey because you have that set of cocoa, sugar, peanuts, et cetera, and it's a very specific set and it's been inflationary.

But I'm very curious to hear your comments about what the retailers have said about the very significant price increases that you've taken.

And in fact, I think that this benefits them just because they make a lot of money on the category, but I'd really rather hear you talk about it.

I think what we've said and been very consistent and I think has resonated in this type of economy where consumers are looking for tried and true categories, tried and true brands, we've actually made a big investment in the brand.

So, we took the Global Supply Chain Transformation as the first step to create affordability to invest in the business.

With commodity costs and certainly pension costs running up the way they have, not just in 2008, but 2006, '07 and '08, our margins have been declining.

And so as we look at getting our margins back on track in a reasonable place where we can sustain investment, that's really what the price increase has done for us.

Yes, in this year as you look at it on a year-to-date basis, the category, FDMxCW, if you will, 80% of our universe, was up 8.9% on a year-to-date basis through the middle of June.

So I think the investment seems to be working.

The category is growing.

Now again, it's dollar growth, not unit growth, and as we get further into the elasticity curves, we need to start to get to unit growth.

That's where the advertising comes in.

So I think as long as we can continue to grow the category this way I think that that's what our role as category leader is.

And so as long as we do that, I think everybody wins.

The consumer wins I think as well, because we're still at affordable price points with really good brands.

Outstanding results.

Thanks a lot.

Thanks, David.

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

Hello?

Hi, Ken.

Can you discuss the process to which you assessed the Cacao Reserve and Starbucks to the end, or are you in the process of looking at anything else, such as like the filled Kisses or anything like that?

Yes, Ken, I think on Cacao Reserve, when we launched Cacao Reserve into the trade-up space we -- that was our first entry really into trade-up and the Hershey's Cacao Reserve business, it wasn't all that differentiated from -- either one, from the mainstream, but two, the trade-up that was already out there.

And when we really came to market with Hershey's Bliss in the trade-up space, we really decided that that had a differentiation in terms of the product delivery, but also a much better consumer positioning and differentiation.

So when we got into trade-up and started to invest behind Hershey's Bliss, Cacao Reserve really just didn't -- it just didn't make sense for us anymore.

So that's the way we thought through the Cacao Reserve.

On Starbucks, a couple of things.

I think, again, just the timing of launching into premium and then launching into premium with a partner who had other issues in their own core business, as well, just the bad timing.

We learned an awful lot from Cacao Reserve in terms -- or from Cacao Reserve and also from Starbucks about flavor, delivery, indulgence, the combination of flavors, but just a bad time to be launching given a set of circumstances on those.

We continue to look at the portfolio.

Within the Kisses franchise, as we mentioned, we're much more focused on the core solid kisses.

We're focused on the silver solid milk chocolate Kisses, on dark Kisses, on the Hugs and on Kisses with almonds.

So we've gotten focused on a few core five or six varieties there.

Unfortunately last year and in the prior years, we had really proliferated into some of the other filled flavors, as well as on an awful lot of limited edition and customer-specific flavors number of -- Hot Chocolate and Chocolate Marshmallow and a number of others, which frankly weren't really adding to the brand equity.

So that's a little bit of a drag, but we're mostly out of those.

They're unfortunately in the base and as we go forward, they'll fall out of the cycling.

But those are the big things in the portfolio that we're looking at right now.

If I look at your numbers for the full year, you obviously had a really good quarter.

If I look at the back half, you're not taking up numbers for the back half.

In fact, you're being -- are you being appropriately conservative in terms of -- if I take the numbers and parse them out into a first half versus second half relative to your expectations, can you talk about why the conservatism?

Or am I missing something?

I think it's -- no, you're not missing anything.

I think we're being appropriate and I think we're being appropriately conservative.

I think in the second half of the year, as I said, we do have a little bit of drag from the Hershey's Kiss business and the -- and exiting the premium and that comes in the fourth quarter and that's a couple of points of growth right out of the gate.

But really it's the seasonal nature of the business in the back half.

So what we learned in the first half, what we learned on instant consumables, if you will, in terms of pricing a conversion is certainly interesting.

But the seasonal consumer and the seasonal business is a totally different usage occasion and shopper.

And so we think that the dynamics are going to be more similar to what happened in the second quarter on Night at the Museum and on our S'mores program where we saw volume elasticity in line with our model.

And I think the other thing that, as I said, when you talk about the seasonal business it -- you kind of know what you're going to sell in, so if the consumer responds better, what happens is, I think, the overall season improves in terms of sell-through and probably profitability but the top line is somewhat governed by the amount of stuff that you sell in, if you will.

So I think that that's the dynamic you've got to think through for us in the back half.

And then my last question, is there anything that would prevent you, now that you seem to have your advertising online, you have -- the commodities aren't going wacky anymore.

Is there any reason we would not believe that 2010 would be a "normal year" for you guys in terms of your growth paradigm?

I think it's -- as I said, I think we're focused on getting the sec -- the consumer converted to these price points in the second half here and making sure that our advertising investments work.

So it's a little early to start to talk about 2010 because we got a lot of 2009 left in front of us.

We're pleased with the momentum that we have in the business right now.

We've made some choices.

I think we're further along.

This year, when we first started the year, we were talking about 2% to 3% top-line growth and something below our long-term range.

We're pleased that we've been able to accelerate ourselves to get back into that -- into what looks more like our long-term growth algorithm and I think that that's a good thing for us, but we have an awful lot of work to do here in the second half to deliver that.

And once that goes, because seasons are such a large part of our business, we really need to make sure that we get the seasonal conversion right before we start projecting forward off of that.

Great.

I appreciate it.

Your next question comes from the line of Eric Serotta with Consumer Edge Research.

Morning.

Most of my questions have been answered, but couple of, couple of areas I would like to explore.

First of all in term -- could you give us some insight into the timing of the ramp-up of Supply Chain savings, give us some frame of reference as to how big of a contribution to the gross margin improvement you saw and -- it was in the first half and then what you're expecting in terms of the ramp in the second half?

Sure, Eric.

If you recall, what we said when we announced the program back in February 2007 was that the total savings projection was $170 million to $190 million and through last year, we captured roughly half of that.

Certainly the next larger piece comes in this year because we've closed all of the plants.

The plant in Mexico is starting to get up and running and there are lines running there.

And so with this year isn't a lot different than last year in terms of we do have slightly more tilted to the back half the savings and that's a result of closing the Reading plant, which closed earlier this year.

So obviously you get some fixed costs benefits of that.

And then by next year we really are toward the final stages of it.

So I would say that we'll be three quarters of the way, if not a little bit more, through that initial projection of $170 million to $190 million.

We expect to be able to achieve those projections and slightly more back-half oriented for 2009.

Great, so I guess that gives you a little bit more flexibility in the second half, as well.

The other area I want to talk about was, Dave, you certainly highlighted the difference in elasticity versus your expectations for the everyday versus the promoted items.

In terms of the -- could you talk about some of the reasons you think why the everyday takeaway, or the everyday conversion, or the elasticity was less than expected.

It seems that you've had pricing out there on everyday of similar kind of magnitude for the past couple of quarters.

You -- on the other hand, you've been ramping up your advertising behind the core brands and seems like in the past quarter you definitely accelerated that, so what surprised you or what was the reasons for the surprise on the everyday takeaway volumes in the quarter?

Actually I think -- let me just make sure I'm clear.

The -- in the first quarter, what we really learned about was the instant consumable part of the business, largely in convenience stores, but also in other channels.

But really the standard bar and the king bar business was what -- really what was in the first quarter where we saw the increase.

That is -- again, it's a different shopping -- it's a different consumer usage occasion, it's an instant consumable event and the shopper is -- it's more bought on impulse and more for self consumption.

I think what we learned there is we're still at a very affordable price point.

We're under $1 on that instant consumable business.

The consumer also finds the king size business to be of value and we converted better on that.

And I think a lot of it is we're still at an affordable price point on an absolute basis, despite the increase, and so on the instant consumable part of the business in the first quarter we converted very well.

In the second quarter, what we learned about was the aisle, if you will, the aisle part of the business.

Our six-pack and our packaged candy event, around Night at the Museum, that's more of the take home business.

Again, that's everyday take home, but it's a take home -- more of a take home business.

It's bought, I think, by a different consumer for a different usage occasion.

There I think we converted about what we thought we would convert and I think there it's the question of differentiation in terms of good merchandising, but we were pretty much on target there.

What we're now going to learn about in the back half of the year, again, is a different part of our business, which is the destination, seasonal part of the business.

Again, a different usage occasion and in all likelihood, a different consumer, both Halloween and holiday and it's a large part of our business.

It's a third of our business in the back half of the year and we have yet to learn about that.

We think it'll probably model more like what happened in the second quarter than certainly what the instant consumable was because it's a purchase occasion and usage occasion that's similar to everyday in the aisle.

But again, it is still a bit unique and it's a big part of the business and that's what we're learning about, Eric.

I hope that gives you flavor for how we're learning as we go along here.

Yes, I was really focusing on the instant consumable, but --

(inaudible) absolute price point there, Eric, I think is still an attractive absolute price point with a good brand.

Yes.

The consumer still resonates.

Okay.

And then lastly, could you just comment on what you're expecting for the premium category as the economy recovers, It seems to me and to some others that that category became over-SKUed, overstocked with some non-differentiated items there.

As we recover from this economic downturn where do you expect that premium category to go or how big do you think it -- how large do you expect that to be relative to where it was before the downturn?

Do you think there was a bit of a -- do you think that premium dark chocolate category was -- had an element of it was a bit of a fad it?

I don't know if it's a fad.

I think what consumers continue to look for is the things that make sense and where the consumer's going to be willing in the future to pay is I think for differentiation.

There was a lot of "me too" items and a SKU proliferation there.

That's been corrected.

The segment I think is more appropriately sized now and we frankly had some things fall out of the segment because they weren't differentiated enough and we didn't do as good a job because we were a little late coming in and that's appropriate.

I think it will -- I think if and when -- and I think it will grow again, the premium segment will grow, I think it'll be a much slower build this time because I think consumers are going to be much more selective about as they trade up, what they trade up for.

So it's going to be a question of differentiation, clearly, and that's what we're working towards, as I said, in terms of understanding the category and the consumer insight.

Great.

Thanks again.

I'll pass it on.

Thanks, Eric.

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

Good morning.

Hi, Alexia.

How are you?

Good.

Wanted to dig into the overseas sales.

I think you mentioned that Brazil and Mexico were probably down, I think, this quarter a little on the constant currency basis, but that India and China are doing well.

Would it be possible for you to give us a little bit more color about the importance of those regions?

Collectively, those four countries, are they somewhere between the mid single digits, high single digits percent of sales overall?

How did it break down?

I'm assuming that India and China are still pretty early days.

Are they actually materially adding to top line growth here, or is it still really too early to claim that?

And then also on the Brazil and Mexico front, is it just the economic slowdown that's causing the top-line slowdown there?

Yes, I think on a constant currency basis, when you take the FX out the businesses pretty much didn't add or detract from the quarter and we're growing in local currency.

Our Canadian business has always been a very good business, it's a sizable business, and we're seeing nice growth on a local currency basis.

I think the softness in Mexico was, on some level, macroeconomic.

It wasn't across our entire business.

It was just in one segment of our business, and I think we've got most of the business there going in the right direction.

The one area that we're the most pleased about there is our spicy sugar confectionery under the [Fallen Talarico] business in Mexico has rebounded after a little bit of a period of dull drum, so we were pleased about that, but there was a couple other spots of softness.

India is -- in the India business particularly, but the sugar confectionery business in India continues to do well.

We're pleased with our partnership there with [Godridge] and that business is moving along.

And seasonally, China in the second quarter your right on the back end of Chinese New Year as you get into the second quarter and there's very minimal business in China.

It's not a real impact during the quarter.

Okay, great.

Thank you very much.

I'll pass it on.

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

Great.

On Halloween sales, I think you mentioned in your prepared comments that there was a slight delay shifting of sales into the third quarter, but that things had gotten back on track.

I'm wondering, was there anything specific behind the sales slowdown or a delay in orders?

Actually, Christine, it was just a couple of million dollars shifted out of -- we were at a couple million dollars more in the second quarter last year and when you talk about the size of that season, it's really immaterial.

So for all intents and purposes, from a timing standpoint, we are right exactly where we would have expected to be.

All of that is essentially one customer who probably backed up a shipment a week.

Great.

In terms of how you're going into the holiday season, obviously with more programming, but have you given the price increases, adjusted your sizes or come out with any kind of value propositions for consumers, given the importance of bag candy for the holidays?

We are -- we really have not made adjustments in sizes.

We have -- what we have done is really adjust -- made the adjustments in programming.

We've added seasonal-specific advertising the same way we did at Easter, which proves to be very successful.

At Halloween, you'll see a lot of Reese's and you'll see the familiar Hershey's Kisses bells commercials at the holiday time, as well as at the base advertising on both of those brands continuing.

We have added couponing and I think to make sure that it's essentially -- particularly to open the season and close the season strongly, we've added some couponing to make sure that we continue to stimulate consumers.

And then in terms of merchandising, we continue to have a very, very effective sales force out there.

It's one of our competitive advantages and we think that they'll do a very good job merchandising.

So we've added some things programmatically to help the consumer process the higher price point but we haven't changes bag sizes or anything like that.

I really is the same basic put up from last year at higher price point given our price increase, but we're going to try and help selectively with the consumer to get used to that with the advertising and the coupons.

In the interest of time I'll leave it there.

Thanks.

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

Terry Bivens, your line is open.

That question has been withdrawn.

Your next question is from Robert Moskow from Credit Suisse.

Hi, thanks.

David, just wanted to know if you had been tracking your competition's advertising spend.

Do you think that they're raising their spend this year, or have they cut?

We're tracking it and I think what I would say is, given our increased debt that our share of voice is probably higher than it was last year at this time.

Okay.

But do you think that's because they cut or do you know?

We track it.

I think our -- certainly our increase is at a higher right and their spend looks to be pretty much equivalent with what they were spending a year ago.

Okay, thank you.

Your next question comes from David Leibowitz from Horizon.

Yes, just a brief follow up on something you had mentioned.

What percentage of your business do you expect to come from couponing this year versus years past?

And how much more in the way of couponing do you expect to do over the balance of this year and into early next year, given the size of the price increases you're talking about?

Yes, I think the couponing across -- not just in our category, but across all categories is up.

I think a number of manufacturers in many categories are, given the economics and the pricing that's gone on in the category, using more couponing.

And so for us, it's going to be up slightly.

Redemption rates -- and I don't want to get into specifics, but redemption rates in the categories are still fairly low, and I think for us, the -- we're going to make sure that one of the good things about the couponing is it also helps us ensure that we get appropriate merchandising when we put a coupon out.

So it's a little bit higher.

I think that's true for all categories.

And just one brief add on.

Historically, the larger the dollar amount with cents amount on a coupon the greater the chances it will be redeemed.

Are you actually going to increase the face value of the coupon?

No.

I think we're going to be pretty consistent with the value of the coupons.

Thank you very much.

Thank you.

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

Congratulations.

Thank you.

Good morning, Ed.

Good morning.

I wanted to ask you, reflecting on the past year or so why would price not factor in your expectation as a larger component of sales -- sales drivers going forward, especially, given some of the difficulties that the organization has had growing the franchise from a volume perspective and then the reality good response to the amount of pricing you put through in the past year and a half?

Ed, I guess I'm not quite sure I'm following the question.

I think what happens as the year go along is pricing becomes less of a part of the algorithm because we're lapping the increase when it went in on August 15th of the year ago.

Right, but longer term then, I'm just wondering if your experience over the last year and a half has made you think of pricing as a bigger lever than you would have previously for the long-term growth of Hershey's top line.

I think, Ed -- as I said, I think the most important thing for us right now is to evaluate as we go through the back half of the year here how the seasonal pricing affects the consumers and the category and we have to learn about that.

I think the most important thing for us is that we need to continue to provide a good product, good brand to the consumer at a value that's acceptable to them.

It appears that we're still doing that based on the results to date.

We think we'll do that in the second half of the year, but we have to learn about that, But we still provide a product at a good value and that value perception is what we'll learn about in the back half of the year.

To project anything forward other than that, until we really learn how the second half goes here would be really, really premature.

Okay.

And one follow up if I could.

Are there any brand equities that you could circle back on that have some latent potential that could be exploited?

For example, like a Take Five or something like that, which has generally been, I think, dismissed as being on a declining arc, but could those be revived a little bit after being off the air for a while?

And I'm not talking about on air or off air or anything else, but I think one of the things we have found is that we've got some great brands out there.

We've got Mounds, Almond Joy, York, Heath, Score, Payday, just to name a couple.

And what we're finding is, as we have refocused our portfolio more towards the core and stop limited edition proliferation, those brands are growing very nicely because those brands really have become the variety offering in the category versus the multiple flavor variance that we were putting out there.

So those brands -- those secondary brands that even if they're not getting TV advertising, they're getting focus with our retail people.

When we get into convenience stores we're them getting them into distribution.

A lot of them are getting back into distribution in areas where we might have had limited edition or something else on the shelf.

So we're getting nice growth on those brands just by getting focused on the core.

We're very pleased with them and we'll continue to think about programming for them in the future, but right now we're pretty pleased with how they're growing just with the good merchandising and retail focus from our folks.

Thank you.

Thank you.

At this time, there are no questions.

Okay.

Thank you very much for joining us on today's conference call.

If you have any follow-up questions Mona Fern and myself will be available.

Thank you.

Thank you.

This concludes today's conference call.

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