好時 (HSY) 2011 Q2 法說會逐字稿

Good morning, my name is Angie and I will be your conference operator today.

At this time I would like to welcome everyone to the Hershey Company second-quarter 2011 results conference call.

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

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

(Operator Instructions) Thank you.

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

Sir, you may begin.

Thank you, Angie.

Good morning, ladies and gentlemen, welcome to the Hershey Company second-quarter 2011 conference call.

JP Bilbrey, 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 everybody listening that today's conference call may contain statements which are forward-looking.

These statements are based on current expectation 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 2010 filed with the SEC.

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

Included in the press release is a consolidated balance sheet and summary of consolidated statements of income prepared in accordance with GAAP.

Within the notes section of the press release, we have provided adjusted pro forma reconciliations of select income statement line items quantitatively reconciled to GAAP.

As we have said within the note, 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 results excluding net pre-tax charges.

The 2011 charges were associated with the Project Next Century program and the 2010 charges were associated with this program as well as a non-cash goodwill impairment charge.

In the second quarter of 2011, we recorded a net pre-tax credit of $1.8 million, and in 2010, a pre-tax charge of $86.2 million.

Our discussion of any future projections will also exclude the impact of these net charges.

With that out of the way, let me turn the call over to JP Bilbrey.

Thanks, Mark.

I want to thank all of you on the phone line and webcast for joining us today.

Before we discuss the details of our second-quarter results, I would like to give a brief overview of why I believe the Hershey Company will continue to be successful into the future.

As the eleventh CEO of the Company I believe that there has never been a time to be a part of the Hershey team.

The decisions we made several years ago in the North American business to invest in our consumer, our Brand and organization capabilities has enabled us to provide our retail partners winning consumer and shopper insights.

This approach has provided us with the framework or road map for today's success.

Our business model and strategy is sound and I feel it is being executed by the best people in the industry.

I'm very pleased that we're working as a focused team, and fully integrated Business.

Across the entire Company, we have experienced leaders in-place, who have strong records of success.

Our international business continues to progress ahead of plan, and I'm satisfied with the disciplined approach we're taking to relate it to the investments that we're making in our organization capabilities.

Our businesses in China, Mexico, and Brazil are on plan and we're making progress in India.

We like the growth outlook and prospects in these key markets, which are an integral part of our international footprint.

Sales growth in these focus markets is solid.

And we're optimistic about the potential to accelerate our international presence behind our disciplined approach to organic investments, acquisitions, or joint ventures.

Our insights driven performance initiative, or IDP, is delivering results in North America and will be fundamental to our knowledge-based approach.

This proprietary process is enabling us to engage with select retail partners to determine a solutions-based method to drive growth for the category and for Hershey.

The collaborative approach is unique within the confectionery space and differentiates Hershey from its peers.

We are creating a knowledge-based company based on deep insights.

Our intellectual capital brings us together with our retailers to deliver solutions they need to meet consumer demand.

We're building a global organization that we're equipping with resources and tools to win in the marketplace.

The combined investments in our brands, capabilities, international market growth, and people will ensure that we remain on track to deliver our financial commitments and build shareholder value.

As it relates to the second quarter, I'm pleased with Hershey's strong operating and marketplace results despite the macroeconomic challenges that continue.

Net sales increased 7.5%.

Bert will give you the details, but growth was primarily due to volume gains in both the US and international markets.

New products were also a positive, driven by the solid performance of Reese's Minis and Hershey's Drops.

Consumer demand resulted in accelerated distribution and merchandising in the quarter versus our original expectations.

In the US, volume also benefited from earlier-than-expected shipments to customers due to a change in the timing of their promotional calendars.

This essentially offsets the shift in order patterns discussed last quarter.

Therefore, Hershey's marketplace or take-away performance was relatively in line with shipments or net sales.

However, over the remainder of the year, we expect the category to grow in line with the historical 3% to 4% average due to the predictability of seasonal sales.

Recall we're honoring previously agreed upon non-seasonal merchandising price points through much of the third quarter and we do not expect seasonal net price realization until Easter of 2012.

Therefore, while we realize some net pricing in the second quarter, we would expect it to temper over the remainder of the year.

Following the longer Easter season, which was an opportunity for greater levels of in-store merchandising and program CMG, candy, mint, and gum, category growth has been relatively within the historical 3% to 4% category growth rate.

Specifically for the 8 weeks into July 9, CMG category growth within food, drug, mass, excluding Walmart and convenience stores or FDMXC increased 3.3%.

Over the remainder of the year, US category in Hershey growth is driven by seasonality.

Halloween, holiday, back-to-school, et cetera.

As a result, in the second half of the year, we would expect category growth and Hershey retail take-away to be more representative of the historical averages.

In terms of marketplace performance, the reported IRI in Nielson's second-quarter accounts for the 12 week period ended July 9.

This does not encompass the entire Easter season in both the year ago and current periods.

Therefore, my remarks today will refer to year-to-date marketplace performance for the 28 weeks ended July 9, 2011.

Hershey CMG retail take-away for the 28 weeks ended July 9 for our custom data base and channels that account for over 80% of our retail business.

And as a reminder, these channels include food, drug, mass, including Walmart and convenience stores, increased 8.1%.

Our year-to-date retail take-away in FDMXC, and here this would be excluding Walmart, was up 7.9%.

We're obviously very pleased with this performance.

These results also benefited from a longer Easter season where Hershey is the seasonal market share leader.

Given our solid execution in sell-through, Hershey gained 1 full share point this past Easter season.

We have now won Easter in increased market share for the third consecutive year.

I'm also pleased with the overall category performance.

For the year-to-date period, ended July 9, CMG category growth within FDMXC increased 4.5%.

Greater than the historical category growth rate of 3% to 4%.

As a result of our strong retail performance, Hershey CMG market share within FDMXC increased 0.9 points for year-to-date period ended July 9.

In the food class of trade, CMG category growth again for the 28 weeks ended July 9, was up 4.1%.

Hershey year-to-date food class of trade retail take-away was up 4.5%, resulting in a market share gain of 0.1 points.

Our performance in this channel sequentially improved from the first quarter to the second quarter, reflecting solid in-store merchandising and programming around core brands, Easter, and our new products.

In the C Store class of trade, year-to-date CMG category growth was up 4.3%.

Hershey C Store performance was particularly strong with take-away up 10%.

Resulting in a gain of 1.5 share points.

C Stores, CMG category growth, was driven by chocolate and non-chocolate candy, which were up 7.5%, and 6.9% respectively, in the category.

Hershey C Store chocolate and non-chocolate take-away was up 10.1%, and 15.4%.

These results were due to king-sized pack type growth and distribution gains, strong in-store merchandising, and some price realization.

In the drug class of trade, year-to-date CMG category growth was up 6.9%.

Hershey drug retail take-away was a solid, up 14.9%, resulting in a share gain of 1.7 points.

Our performance reflects greater retail collaboration and the IDP category management and consumer insights work we've completed over the last year.

In the second half of the year, we would expect growth to temper somewhat as we begin to lap these initiatives.

As we look to the remainder of the year in the US, we have many exciting product, promotions, programs and merchandising in place across all channels.

Such as our Hershey S'Mores program and Almond Joy and Mounds Tropical Escape, where 2 luck winners received a 7-day Caribbean cruise, a convenience store king-size bar program to win free gasoline for the entire summer and the continued launch and rollout of our Hershey's Air Delight.

We are satisfied with our disciplined approach to new products, which entails a detailed and thorough understanding of the consumer and the category.

This process has and will continue to lead to a consumer-based sustainable pipeline.

Our Air Delight products are now available in an instant consumable Hershey's bar and Kisses Chocolate.

The rollout is under way and advertising and a coordinated FSI will run in September.

We're excited about this launch and the potential it has to succeed in the marketplace.

I would now like to spend a moment on our international business.

Outside the US, our international business is on track and performing well.

Year-to-date, our focus markets including Mexico, China, Brazil, and India, are ahead of plan, and forecast to grow a combined 20% to 25% in 2011.

This is greater than what we discussed when I spoke to you at CAGNY.

Over the last few years, we've nurtured these businesses and focused on differentiated product forms and packaging.

We've also invested in distribution and go-to-market capabilities.

In the select geographies we're replicating some of our US strategies relating to the confectionery demand landscape.

We will continue with this disciplined approach to global expansion.

This has worked well in Mexico, a country we've been in for over 40 years.

We have a diversified product line that includes chocolate candy, sugar confections and drinks supported by an on-site R&D facility.

We plan to replicate our success in other geographies, especially in China, our fastest-growing international market.

As such, we're in the process of determining the location, scope and size of an Asia R&D facility that will support our businesses in that region.

We believe this is a logical next step in building out our international footprint.

An R&D center closest to our fastest-growing regions will able us to collaborate with in-country sales, marketing, operations, research universities, all leading to a sustainable core brand growth and innovation relevant to local consumers.

Now, to wrap up, I'm pleased with the way the confectionery category and Hershey continue to perform.

As we look to the remainder of the year, category growth is impacted by seasonality, especially in the third quarter.

Thus, we would not expect much net price realization.

We will continue to monitor consumer behavior, and purchasing patterns, as we work with our retail customers to ensure that the implementation of the price increase is supported with customer trade promotions and merchandising that will continue to grow the category.

As discussed at CAGNY we're on track to increase full-year advertising expense for the total Company mid-single digits on a percentage basis versus last year.

As a result, we expect 2011 net sales, including the impact of foreign currency exchange rates to be greater than the Company's long-term 3% to 5% objective, and increase to about 6%.

Commodity markets will remain volatile.

However, productivity and cost savings initiatives are in place, and at this time we continue to estimate that the full-year 2011 adjusted gross margin will be about the same as last year.

Combined with our strong first half performance, we now expect 2011 earnings per share diluted to be greater than the Company's long-term 6% to 8% objective, and increase to about 10% for the full-year.

Let me end by saying I'm optimistic and excited about our future.

It is a great privilege to lead our Company.

We're focused and know what we need to do to succeed.

We have strong plans in place that enable us to win, wherever we compete.

We're investing in our brands and capabilities, leveraging our intellectual capital, and building a global company.

I will now turn it over to Bert who will provide some additional detail on our financial results.

Thanks, JP.

And good morning, everyone.

I am pleased to report that Hershey posted another quarter of quality results.

As net sales increased greater than our long-term target with a good balance of growth in both the US and other key markets.

Retail take-away and market share gains were strong.

Leverage and some timing of expenses within SM&A resulted in a 130 basis points improvement in adjusted SM&A, excluding advertising.

And we continue to be efficient in deploying brand support to generate top-line growth utilizing a blend of trade and consumer select programs.

The second quarter sales gain of 7.5% was driven by volume increases including new products, and net price realization of 3 points, primarily in the US.

That exceeded expectations.

Foreign currency exchange also added about half a point.

In the US, volume also benefited from earlier-than-expected shipments to customers through a change in the timing of their promotional calendars.

These accelerated in-store programs were greater than expected and also resulted in higher trade promotion as we honored previously agreed promotional price points.

Halloween shipments in Q2 were in line with the prior year.

Over the remainder of the year, US category in Hershey growth is driven by a greater proportion of seasonal sales, which we expect will be within the historical category growth rate of 3% to 4%.

Also note that in the third quarter we will begin to lap the successful launch of Reese's Minis and Hershey's Drops and we do not have a new product launch in that time frame this year.

Turning now to margins, during the second quarter, adjusted gross margin declined 130 basis points.

This is in line with our expectations and we continue to expect full-year gross margin to be about the same as last year.

In the quarter, higher commodity costs were only partially offset by net price realization, supply chain savings and productivity.

Input costs were about $25 million to $30 million unfavorable.

Also in line with expectations.

And there is no change to our full-year inflation outlook.

With respect to gross margin, it is worth noting that we've recognized about $40 million of year-to-date to productivity.

The majority, or about $35 million, has been achieved within the cost of goods while the remainder benefits SM&A.

Our full-year productivity and cost savings targets remain unchanged at $75 million to $95 million, and we expect to achieve savings towards the top end of that range.

As a result, we expect quarterly year-over-year gross margin basis points change to sequentially improve over the remainder of the year.

As we previously stated, commodities will be higher in 2011.

There is no change to our full-year commodity cost outlook versus last quarter, and over the remainder of the year we have visibility into our cost structure and continue to expect 2011 adjusted gross margin to be about the same as last year.

In the second quarter, adjusted earnings before interest and income taxes, or EBIT, increased about 8%.

Resulting in adjusted EBIT margin of 17.1%, in line with last year.

Advertising expense increased about 8% versus the year ago period, in line with mid-single digit percentage increase forecasted for the full-year.

We would expect advertising to increase about the same amount in Q3 and then decline in Q4 as we lap the higher investment that occurred in last year's fourth quarter.

Adjusted SM&A excluding advertising declined 130 basis points as a percentage of sales versus last year.

This is partially due to timing, as we expect costs related to non-advertising brand building and go-to-market capables to be higher in the second half of the year, versus the first.

We still expect adjusted SM&A excluding advertising to increase at a rate less than net sales for the full-year.

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

On a reported and constant currency basis, net sales increased meaningfully in Mexico, China, and Brazil.

These investments we've made in these markets are enabling our brands to gain momentum in the marketplace.

We will continue to make disciplined investments in these markets in Q3 and Q4 to drive brand awareness and trial.

As a result, organic net sales in our businesses outside of the US and Canada are on track to increase at least 15% in 2011, putting us on pace to achieve over $1 billion in organic sales by 2015.

Operating income outside of the US and Canada was driven by US export business, as investments in targeted focus markets during the quarter dampened profitability.

Moving further down the P&L, for the quarter, interest expense was in line with expectations.

Coming in at $23.4 million, versus $22.8 million, for the prior period.

For the full-year, we expect interest expense to be around $95 million.

Slightly less than our previously-estimated range of $95 million to $100 million.

The adjusted tax rate for the second quarter was 36.5%.

Slightly lower than a year ago, and in line with the outlook we provided in April.

Excluding tax rate impacts associated with business realignment charges, we continue to expect the full-year tax rate to be about 35%.

In the second quarter of 2011, weighted average shares outstanding on a diluted basis were 230.3 million, consistent with 2010.

Leading to adjusted earnings per share diluted of $0.56, up 10%, versus year ago.

Let me now provide a recap of our year-to-date adjusted results.

Net sales increased 9.4% in the first half.

Adjusted EBIT increased 10.5%.

Resulting in adjusted EBIT margin gain of 10 basis points to 17.7%.

Advertising increased 19% on a year-to-date basis.

Adjusted gross margin was 42.7% year-to-date, versus 43.2% last year, or 50 basis points lower as supply chain cost savings, productivity and net price realization were more than offset by higher commodities.

Adjusted earnings per share diluted in the first half increased 11% to $1.28 per share.

Now turning 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 in-flow of $63 million.

Accounts receivable were down $24 million.

We continuously monitor our accounts receivable aging, which remains extremely current and of high quality.

Inventory increased $55 million, and accounts payable increased $95 million.

In terms of other specific cash flow items, capital additions including software were $98 million in the quarter.

These amounts included Project Next Century capital expenditures of $62 million.

For the full-year we expect Project Next Century capitalization to be in the $190 million to $200 million range.

In 2011, we expect CapEx, excluding Project Next Century to be at the high end of our previously communicated $150 million to $160 million range.

So, our total CapEx estimate for 2011, is $340 million to $360 million.

Note however, that the total CapEx for Project Next Century program remains within our initially communicated range of $250 million to $300 million.

Depreciation and amortization was $52 million in the quarter.

This includes accelerated depreciation related to Project Next Century of approximately $7 million.

Adjusted operating depreciation and amortization was $45 million in the quarter.

In 2011, we were forecasting total operating depreciation and amortization of $185 million.

Dividends paid during the quarter were $76 million.

We did not acquire any stock in the second quarter, replace shares issued in connection with employee exercises of stock options, nor did we acquire any stock related to the current share repurchase program.

There is $250 million outstanding on the current authorization.

As part of our long-term plan, our objective is to acquire all shares related to stock option exercises.

Cash on hand at the end of the second quarter was $790 million, up versus the year ago period and relatively in line with the balance at the end of 2010.

As we exit the second quarter, we are well positioned to manage the seasonal working capital needs of the Business, which peak in the third quarter, as well as the higher capital expenditure requirements of Project Next Century.

Now let me provide an update on Project Next Century program.

We are pleased with the progress we're making on the West Hershey plant expansion, which remains on track.

Major equipment delivery and installation is on schedule and we anticipate initial production line startup during the fourth quarter of 2011, with continued rollout and implementation throughout 2012.

The forecasted total pre-tax GAAP charges and non-recurring project implementation costs related to Project Next Century has been narrowed by $10 million.

This is primarily due to a reduction of our original estimates from employee separation costs.

As a result, total pre-tax non-recurring charges are now expected to be $140 million to $160 million.

Note that this morning's press release appendix was updated to reflect our most current thinking of the expected timing of events.

By 2014, we continue to expect ongoing annual savings of approximately $60 million to $80 million.

Now, to summarize, our goal in the second half of the year is to maintain our marketplace momentum.

As we enter the third quarter, we are well positioned to increase US market share and deliver on our financial objectives for the year.

Over the remainder of the year, growth is more driven by seasonal items.

While consumers will see higher retail price points on our everyday instant consumable and take-home package candy, we do not expect this to materially impact our financial results.

Therefore we expect 2011 net sales, including the impact from foreign exchange to be about an increase of about 6%.

Commodity markets do remain volatile.

However, we have visibility into our cost structure.

While we continue to anticipate higher input costs, there is no change to our full-year inflation outlook.

Productivity and cost savings initiatives are in place, and we expect full-year 2011 adjusted gross margin to be about the same as last year.

As stated earlier in 2011, we expect advertising expense to increase mid-single digits on a percentage basis versus last year.

As a result, we now expect 2011 earnings per share diluted to be greater than the Company's long-term 6% to 8% target to increase around 10%.

Before we go to Q&A, I would like to recap and remind you of some timing and unique items discussed earlier that will impact Q3 and Q4.

So, as you work your models please note the following.

Over the remainder of the year, US category and Hershey growth has driven more by seasonal business and consumers will see higher price points on non-promoted items.

As a result in the second half, we would expect sales growth to be more representative of the historical category growth rate of 3% to 4%.

In Q4, we will be lapping the successful launch of Reese's Minis and Hershey's Drops and do not have a new product launch in that time frame compared to last year.

We will achieve higher levels of productivity at the gross margin line in the second half of the year with sequential gains greater in Q4 than Q3.

Advertising will increase mid-single digits on a percentage basis, in Q3 and then decline in Q4.

The effective tax rate will be 33% to 34% range in Q3 and Q4.

Lower than year-to-date rate, but still in line with our full-year rate of about 35%.

As a result of these moving parts [spanning] quarters, we would expect the increase in adjusted earnings per share diluted in the second half of the year to be driven by fourth quarter growth as we start to generate pricing and achieve higher levels of productivity.

We will now open it up to Q&A.

Terry Bivens, JP Morgan.

JP, welcome to the party, I guess, as CEO.

Thank you.

Just a question here on kind of the calculus between price realization, your volume growth in new products, I guess you're signaling that the second half, you're going to see more of the price realization from your -- obviously from your March pricing action.

As we look through the second half, how do you balance the normal elasticity, the volume hits you will take against the ongoing success of some of your new products like Reese's Minis and Air Delights.

You confused me a little bit there by saying that there wasn't -- I know in the fourth quarter you won't have a product launch like you had a year ago, but won't Air Delights essentially be incremental?

Yes, Terry, we believe Air Delight will not only be largely incremental but if you even look back at Minis and Drops, we felt very good about contribution it's made to our overall growth profile this year.

And in fact, as we said, there will be some years where we are going to do a little bit better than others.

We really look at our growth algorithm to have about 1 point of growth coming from innovation.

And what's happened for us that is very very positive is that both Minis and Drops have exceeded our expectations and we want to make sure that even though we have a robust pipeline of innovation, we want to make sure that we're supporting that innovation on a going basis.

And so, carrying that one forward, and the same with Air Delight, we would expect both of those to give us strong performance.

The only thing I would add to that is the comment was around Drops and Minis, was really more reflective of the fourth quarter.

Which is when we launched it last year.

But everything that has been said about Air Delight is absolutely true.

And in terms of the point that you made around price realization, we did mention that it was a little bit higher in the second quarter than we anticipated.

But if you think about our third quarter, which is when we shipped almost all of our Halloween and even some of our Holiday, it had the largest seasonal component.

And so we said in the past that price realization would come more toward the end of the year, a la fourth quarter versus third quarter being so seasonal and then I did mention in my remarks that it was a bit higher in the second than we earlier anticipated.

Okay, and just to finish the point.

Of that 3% to 4% growth you're looking at, how would you characterize that between pricing and volume?

Do you expect volume to be up for the year?

Certainly we expect volume to be up for the year.

The only -- the differentiator that we're making, obviously the first quarter had the Easter and we're all familiar with that.

And volume will be driven all year but we will get the elasticity impact of the price increase.

But for the year we do expect volume to be up.

Okay.

I will pass it along.

Thank you very much.

Judy Hong, Goldman Sachs.

JP, just as a newly appointed CEO, maybe you can share with us your perspective on how you're approaching the international expansion strategy.

I think you talked about you're satisfied with the disciplined approach so far.

But are there any plans to maybe accelerate investment, both organically and from an M&A perspective?

And maybe you can give us also some perspective on what is going on with India, with some of the press comments there.

So just in terms of -- if you can talk about your international strategy.

Sure.

Let me just take a bit of a step back and go through several things that we've said, which I think will continue to be consistent.

But obviously, a strong North American business is fundamental to our success.

It is the engine that makes so many things for us possible.

We really want to continue to expand our geographic footprint outside of the US.

And when we talk about that we're really talking about the most attractive markets for us where we can get growth, where there's what I would call lower cost of entry.

There is not consolidated trade, not necessarily as consolidated.

The competitive set.

And the story is still really in front of us, in terms of overall market growth.

So expanding our geographic footprint outside of North America, we continue to look at Mexico, China, Brazil, India, and then of course Latin America, and Asia, would be the way we would describe those as regions.

The third pillar is to build a consumer relevant portfolio, in both confections and as appropriate adjacency's that can also give us capabilities like distribution and also could include everything from healthy snack bars and convenience all the way through nutritional beverages that might focus on dairy and protein.

So we're also very interested in looking at a broader portfolio.

Innovation continues to be very, very important to us.

And then we're going to look for ways to accelerate that growth both organically, so in China, we continue to expand our organization, today, and then obviously, via acquisition or joint ventures, whichever is appropriate.

So as you make the comment, around accelerating growth, certainly we have that at the top of our mind.

Just commenting briefly on India, first of all, we have a great deal of respect for Adi Godrej and the Godrej family of companies.

We think India is an important market and we will continue to participate in the Indian market.

How we participate there could potentially look different.

But we feel very good about the potential of our businesses in India.

And just in terms of the acquisition potential, both from a -- I guess from a pipeline perspective, and then your decision either to grow organically or through M&A, maybe you can talk about how you're approaching the framework there, one versus the other.

Well, I think that it is really parallel paths.

So we continue to work on our businesses every day, to make good choices, and expand the business model that we think is replicable.

And then we have a very extensive filter that we use to assess companies, and if we believe that there's one that is appropriate, or multiple companies that were appropriate, we will run that through our normal process, and we're always open minded to that.

Okay.

Thank you very much.

David Palmer, UBS.

Good morning, guys.

And congratulations, JP.

It looks like you had 3 big trademark innovations over the last year or so.

With Hershey Drops, Reese's Minis and now Air Delights, and it seems like these new products are trumping the pieces innovation from the year prior.

Do you think that this pace and this sort of pace of new product news is going to be typical of the Hershey Company in the coming years?

Well, I think the thing that I would emphasize, first of all, let me start by saying yes, and the reason I say yes, it is important to reflect on what we've said about being a knowledge-based Company, where we're really going to be consumer insight focused.

Really try to understand where our brands fit within the overall demand landscape.

And so we're not going to be doing what we may at one-time lovingly called stuff, where we just had pretty rapid introduction of things, and then they were falling out as fast as they were going in.

Pieces continues to do very well.

There's certainly interaction with the new -- the introductions that we've made.

But they're doing well.

And I'd also -- there is a couple that you didn't mention, awesome, Jolly Rancher Awesome TwoSomes is doing well and our IB Frost and mints is also doing well.

And I go back to my earlier comment.

We want to really make sure that we're supporting each of these initiatives to make them successful over time.

And in these kind of economic environments, one of the things that is obvious and we've certainly learned is our retailers have precious dollars to spend and we need to make sure that each of these innovations are as productive for them as they are for us.

So churn is certainly not something people are looking for.

But real news around real brands that are sustainable.

Just a sort of related question, the gum category, there was a lot of energy in that category a few years back, innovation at that period, but that category seemed to lose it.

They seemed to lose that energy.

I know you don't have a huge gum and mint business, but do you have an opinion about why that was, why that category sort of lost the magic?

And is there any lessons here?

Well, I think the gum segment had a lot of innovation, a lot of news, and now it's certainly driving the business.

The test for all of us of course is, what the velocity per SKU is, on an ongoing basis.

But we feel good about our mint business.

And we have the number 1 position in mints.

Mint grew very nicely for us, from a share standpoint.

And contributed nicely.

In fact, retail take-away for us in FDMXCW on mints was up over 13%.

So we feel good about the things we're doing there.

There is nice price realization for the retailer and us in that category.

Thanks for your thoughts.

Eric Katzman, Deutsche Bank.

Congratulations, JP.

Good luck.

I guess with your background in international, JP, I guess it is one of the advantages you bring to Hershey, I guess I'm a little bit surprised that there isn't a little bit more disclosure, like of the 4% volume growth in the quarter, how much of that is US versus international, or maybe you could kind of detail that, and then also you're talking -- when you talk about the second half '11 category growth of 3% to 4%, is that units?

Is that dollars?

Are you including international in that?

Or are you just focused on the US?

It is a little bit -- I'm not exactly understanding what happened in the quarter with international so strong, versus the US market, and a little bit of kind of how we should think about the second half, with these various swing factors.

Let me first talk a little bit about the international businesses.

As you know, we don't break those businesses out separately.

But if I refer back to the remarks I made earlier, at CAGNY we were saying that in order to get to $1 billion in business, we were going to need to grow at about a 15% rate and we have really been growing really closer to 20% to 25%.

So we feel very good about that.

Every one of our markets contributed to that growth, and they were an important part of the growth of the overall Company, within the quarter.

So we were very satisfied with the position of the businesses we have.

I can tell you I am very committed.

With a number of my other colleagues, uniquely I'm the first CEO in the Company that started by running the international businesses at Hershey.

I had a chance to run North America.

So I've got a lot of sweat, like a lot of other people in those markets.

And I'm excited to see what we're doing organically, but I'm not satisfied that that's going to be enough for us.

So we are going to try to accelerate our growth there through a number of different efforts.

As you look at the back half of the year, and of course, the US business is a significant percentage of our business, we have a good understanding of what we've sold in -- given the nature of the seasonality of the business, you have Halloween, you have Holidays significantly in there.

And the other thing that may not be as obvious is the category slowed a little bit, over the last 4 and 8 weeks, and so on some level, I think it is important none of us get out over our skis, there as well.

So the second half profile simply very different than the first half.

It is far more predictable.

Price points have been protected.

And seasonal, two-thirds of the seasonal business occurs in the second half.

And that is not affected by pricing, so you won't have the price realization affecting the dollar sales there.

So those would be a couple of comments I would make around the profile of the Business.

And then I would just tell you that our international businesses, we hope continue to contribute at greater and greater levels.

Let me just follow up on this.

If I take your CAGNY presentation, and I look at the growth targets of that $1 billion, I think the math works out, given how much international you have, it adds about, over time, like 1% to your consolidated top-line growth.

Is that -- so again, when you are talking about the 3% to 4% category, you're just talking US, and we should view anything international consolidated on top of that?

No, Eric, that's not the way to think about it.

Let me give you kind of a macro view and then more pertinent to the second half.

So when we talk about the second half, we are talking about the total Company.

And the seasonal component, while we do have Chinese New Year, certainly is far, far bigger in the US.

If you think about on more macro, within the 3% to 5% that we talk about on a long-term net sales, we do think about being able to grow certainly at the 3% to 4% category rate.

And grow some share in the US but at that 3% to 4% rate.

And we do hope that we continue to get that 1 point that gets us closer to the 5% within that 3% to 5% range from the international business.

All right.

That's helpful.

And just one last follow-up.

I will pass it on.

Is it -- Bert, is it reasonable to look at the pricing, because I thought Dave and you last quarter did a very good job of kind of laying out how pricing is going to flow through, over the next couple of quarters.

So basically, is it fair to summarize that the second quarter pricing was greater than you expected, and that kind of stole from the third quarter, but the fourth quarter is in line with what you were talking about, when you kind of talked about the situation last quarter?

Yes, I think that is the right way to think about it.

We did have more price realization in the second and we did -- certainly did expect it at the instant consumable level, C Store, where it tends to change faster, where we saw more price realization, than we expected probably was in other pack types.

And as you know, there has been an awful lot of pricing across a number of categories so retailers perhaps are being a little more aggressive on those things.

But the third quarter is very seasonable and JP already mentioned price protected.

So we expect a lull there not like the second and the third and then as we get into the fourth quarter, you will start to see more price realization.

There is less -- while the Holiday does sell in the fourth we do ship some in the third and so we do expect a little bit of a rebound in the fourth on price realization.

Okay.

I will pass it on.

Thank you.

Ken Zaslow, BMO Capital Markets.

Congrats, JP.

Just on the price elasticity, just what was your expectation on the price elasticity?

And it sounds like the volume was the degradation, or the volume impact was less than expected.

Why would you think that would change going forward?

In terms of the elasticity, I would say that while it might have been a little bit better, it was not that different than our expectations.

We did have in the quarter, the volume more or less as we anticipated.

And it was a good mix of US and non-US growth.

It is a little early to have real confirmation around what our model projections are, only because again it is early in the price increase.

And you see it more on the instant consumable side.

I already said that we saw a little bit more on packaged candy.

But I think we're tracking more or less the way we expected and by the time we get to the end of the year and you get past the seasonal price-protected component, then we will start to get a much better idea if we're tracking well against the model.

But right now, we're not terribly different than what we thought.

My next question is, JP.

I guess if you think about how you expect your -- is there any difference between how you think Dave managed the Business and how you will?

Is there any point that you can say hey, maybe I will go in this direction?

I know this is a very general direction but is there any way you can give us any sort of a directional change?

I assume you can give us some representation of how you look at it going forward?

Well, let me make a couple of comments here.

First, Dave was a great boss, and he was certainly a great friend.

He did a great job of leading the Company.

So in a number of ways, I hope there is some similarities or at least if I'm smart, I should claim some.

But there is really probably a couple of things to think about.

First of all Dave and I worked really closely together in many ways, because of the way he was so collaborative, we were co-architects of a number of the things that we're doing.

But there is really a couple of different areas where we might be different.

And first, if you look at my background, after a foundation of kind of classical training at Procter & Gamble for 22 years, I spent a significant portion of my career working and living outside of North America, and mostly in developing and emerging markets.

So that certainly is one way we're different.

And so I probably think about those things differently than some people.

And the second, real difference is that we grew -- I grew up in the business in commercial roles, and I began my career in sales.

And both of us had a chance, I think, over the years to touch most parts of the business through a number of different roles so we both had really broad-based experience in the business.

So while we had slightly different paths, I would say that we both have broad experiences in operating roles.

Certainly I'm probably by default more focused on some of the commercial and brand building initiatives that we have and I kind of like to describe myself pretty much as a general business man.

And I love the international businesses and the roles they can play in creating balance for the Business.

So I'm very committed to seeing the Company.

If I look back on what I hope to be able to leave as a legacy, is that we've got the right international footprint and portfolio for the next areas of growth and that's how I'm going to spend a lot of my time.

Any chance we will actually see a break out of international profits any time?

I probably ought to let Bert say that but I assume that if we get the right level of scale, certainly that is where it would take us.

Yes I wouldn't make any comment beyond that.

It is really more of an accounting question, and certainly, as that business becomes bigger, we will provide more information.

Great.

Thanks a lot.

Andrew Lazar, Barclay's Capital.

First question, just around the gross margin I wanted to make sure I heard you right on the commodities side.

I think you had said that commodities were unfavorable by $25 million to $30 million.

Was that absolute or a net of pricing and productivity and things?

Because if it is absolute, one would think that your 3% price realization at a quarter could easily have covered that?

Maybe a little charity on clarity on that would be helpful.

That's an absolute number on commodities.

Now, there is another component of what I will think of as supply chain cost, which include what we think of as co-manufacturing.

We do some packaging and some things outside, which also have some commodity implication, which is a bit separate.

But the margin itself, in the quarter, was more or less within expectation.

It is a little lumpy in the year.

And we continue to expect that the full-year will be about the same as last year.

Productivity is a little different.

In terms of the profile.

I did mention that we had about $40 million in the first half.

And that our outlook range being $75 million to $95 million, and we think we will be toward the upper end of that.

So it gives you a sense that productivity will be higher in the back half, and that is how we will sequentially get back to more or less equal to last year.

But the margin number was not that much different than we thought it would be.

Was the productivity more first quarter weighted?

I'm just trying to get a sense of the gross margin shift year-over-year.

I know it was against a very tough comp last year certainly.

Yes, we had a little bit more in the first quarter than in the second quarter and within that $40 million that we talked about for the half.

And just a follow-up on elasticity, I know so far, it is early but more or less in line with what your models have said.

Do the models assume though that elasticity should be more reasonable, sort of this time around?

Versus the price increase a couple of years ago?

Just because obviously you've done a lot around your brand, since then, around reinvestment, innovation, a step-up in the sales force in various channel, so I assume that elasticity -- the models might suggest something different by the way you're planning it.

Or maybe not.

But I am just curious on that.

Yes.

I think that is a good observation, Andrew.

And while the methodology is fairly similar, right, we do look at it by brand and by channel and pack types and such.

You're quite right.

Versus the 2008 price increase, our Business is certainly better supported than it was at that time.

In terms of advertising levels and the like.

The economy, I think, is the wild card, Frankly.

That while in 2008 we were sort of in the midst of the financial crisis, we're still a little cautious on the consumer perhaps, given unemployment levels, but the model does reflect those differences in the support of the Business, so that is a good observation.

And then just last thing, I think you will probably say it is just too early for this.

But as we think out to 2012, at this stage, are there a couple of things, even preliminarily, or directionally, that you kind of know will be sort of change factors one way or the other?

In other words, we know you've got a fuller slate of the pricing coming in next year?

So we kind of factor that in.

Is there any way to get a sense of broadly of your full basket of commodities, is there going to be a huge step-up one way or the other, or are there other things that we might not be able to see at this stage?

Yes, this is not the time of the year, as you know, that we talk a lot about 2012.

And we will, as things develop.

You already mentioned the pricing, and you're right, the lion share of realization does come next year.

And we're certainly -- we expect that commodities will continue to be a headwind next year.

That's the way we think about it.

The cost basket, we will give more detail as we get further into the year.

But having said that, we're not thinking any differently about our long-term targets as we get into '12.

Thanks so much for your help.

Chris Growe, Stifel Nicolaus.

I just have two questions for you.

One was a bit of follow-up to Andrew's question on the gross margin which is, is there any change to your cost inflation in the second half of the year?

Something that could be different there that could affect our view of the gross margin there?

No.

I mentioned that the outlook really hasn't changed much from Q1, when we last spoke.

Productivity, obviously a little bit more back-end skewed, but we expect sequential improvement based on that, and to end up the year what we've been saying all along, which is more or less with a gross margin ratio similar to last year.

Okay.

And just a question for you on the second quarter, the one just completed.

You had your Air Delight shipments, that went in part in the quarter here, you had a -- there was a comment about a change in promotional timing, and of course you also had international growth, that looked quite strong across the various markets.

So if you really dug down underneath that, I'm just curious, is the underlying volume growth rate in the US maybe a little softer than you expected but you had a couple of things that helped lift that?

Or is there a little more detail that you can give on those factors that helped the second quarter?

Yes.

What we mentioned in some promotional activity, that came into the second, probably would have occurred in the third, really if you go back, it kind of offset what we talked about between the first an the second.

As well, we got a little bit of that.

So it was a little bit neutral to the quarter.

But what comes out of the back half.

In terms of the underlying business, while certainly there has been a strong contribution to the US business from the now products, because Minis and Drops continue to perform well, and we did have the pipeline and the launch around Air Delight, the underlying core business continues to be where we expect it to be.

Okay.

And was there a benefit from Air Delight?

Is that a large benefit or a quantifiable benefit for the second quarter?

Well, you do get -- you do get some of the pipeline filled.

And obviously without a lot of the take-away yet.

So yes, there is some for sure.

Is that a point of growth though or something less than that?

We're not really going to comment on the amount that it impacted the quarter.

All right.

Thank you.

David Driscoll, Citi Group.

JP, congratulations on the promotion to CEO.

Well deserved.

Want to follow up on the second quarter and third quarter commentary.

So just to make sure, Bert, second quarter it had a 1.5 volume shift into the first quarter and you told us about that last time, and that was supposed to be a negative headwind on the second quarter.

Then you had an offsetting impact of third quarter volumes shifting into second quarter of an equal amount.

I think -- so far, if I'm saying that right, then it sounds to me like the third quarter revenue growth, that's the place where the negative is going to show up.

We're going to see lower revenue growth in Q3 versus pretty much any of the quarters in the year.

Is that right?

No, I don't think I would think about it exactly that way, David.

But first, let me talk about the first comment that you made.

The shift first to second, third to -- second to first, third to second, if you will, they're approximately equal.

Not exactly.

But approximately equal and really what that was is we had a couple of large customers decided that they wanted to run some price protected programs sooner.

And we worked with them to be able to have them do that.

The third quarter, although there is a little bit of shift there, is very much a quarter that has a large seasonal component.

Because we ship almost all of our Halloween, which is a large season and we also ship some of our Holiday, and so I wouldn't read that necessarily that, that really puts all of the paint on the third quarter versus the rest of the year.

But the shifts were approximately equal.

And then the final comment on the pattern issue is that you said advertising spending up 8% in the third quarter, and that suggests some EPS pressure in the third quarter, and I think that is the reason why you said most of the growth is fourth quarter?

Well, two things.

We said -- I think advertising was higher in the first, because we had some new brands, we had Syrup and I think Payday being advertised.

As well we started to advertise Minis and Drops, so the first quarter had a higher than mid-single digit rate.

And then the second quarter was in the mid-single digits.

So we expect to finish out the year.

I did mention though that SM&A was lower by 130 basis points in the quarter, and that some of that was timing.

It is not advertising related but it is other programs that will be in the third quarter.

All right.

That's clear.

JP, then back to international, I want to pick up on Judy's comments on Godrej in India.

There's press reports that specifically state that this thing is going to get dissolved.

Your press release today didn't actually say that.

It just said that you took a write-off on it.

I'm confused.

Is it dissolved?

Are you still -- is the JV ongoing?

Is it going to remain ongoing?

How is that business going?

I don't think that you have launched a number of the Hershey brands on that joint venture and I'm just kind of curious as to understand kind of why and what is the strategy.

First, what I would say is that the write-off for impairment you're talking about actually was in a previous period, not this period.

And I want to make sure that I'm not making too many comments around our joint venture relationships.

It's just a matter of policy.

We frankly don't do that.

Certainly, we've done our share of learning in India.

But we think that the brands and the positions that the joint venture offers us certainly is a good starting point.

So I'm not going to make comments to predict about -- predict anything about that particular relationship.

But what I would come back to you and say is, is that we continue to believe India is a great market.

It is a market we want to participate in.

And I think the story in India is a longer one than say compared to a China.

So I think patience is going to certainly be a virtue there, getting it right.

Many of our brands there, are co-branded, between Godrej and Hershey.

And one of our largest brands there, Maha Lacto, which is a chocolate sugar confectionery type brand, is one that we've probably made some positioning errors, I would say, in changing size and some things that didn't work to our advantage, when we were in an increasing sugar cost environment.

We've reversed those.

We had a very good second quarter.

The business had a lot of traction.

We felt good about that.

Those are just a couple of comments I would make there around the Indian business.

But we like the market, certainly.

Did Hershey bid on the -- and I don't know if I'm going to say this right -- Hsu Fu Chi that's the business that Nestle just bought with a 60% stake in.

Were you guys involved in the bidding or was the CEO transition, JP, did in any way did that prevent you guys from getting in on the bidding process there?

As a matter of Company policy we don't comment on M&A or acquisitions.

By others, certainly we were aware of Hsu Fu Chi.

And we are very excited about our potential in China.

And 1 acquisition by another company certainly doesn't change our outlook on the market.

And as you know that company had a number of different pieces to it.

So what I would tell you is that we continue to have our head down in China, looking for opportunities, and we're growing nicely there.

Really appreciate it.

Thank you very much.

Rob Moskow, Credit Suisse.

Hi, thank you.

And congrats, JP.

I noticed you made a little side comment about the end of the second quarter.

You thought that you saw the last 4 weeks, the category slowing a little bit.

Can you give us an order of magnitude about what your data is seeing?

I didn't see much of a slowdown.

And then secondly, can you also comment on the price realization at the shelf, the data I saw indicated that retailers were keeping prices pretty high, or maybe even raising prices higher than what you were charging them.

I saw price realization up around 8%.

Is there any risk that retailers go ahead and raise price ahead of the fact that -- even though that you're price protecting them?

Thanks.

Well, let me just kind of give you an FDMXC view on what we're seeing in terms of the category.

If you look at the 4 weeks ending in June 11, we saw the category was up about 2.3%.

It bumped up a little bit higher than that.

At the end of July 9.

And if you really do a weighted average of the last 8 weeks, it is about plus 3.3% and the category had been running a little bit higher, above 4%, prior to that period of time.

So we're just seeing a little bit of moderation there.

Yes Rob.

Your point on price realization, I think what I had mentioned was we certainly were expecting it, on the instant consumable business, a lot of that being C Store related.

We did see more price realization on other pack types and that was the part that was a bit above our expectations.

Retailers set their own prices, certainly, with respect to how they manage their businesses.

With or without our price protection.

We protect prices as we've agreed on certain merchandising events that have a demand curve behind them.

And those are agreed upon before, before pricing.

So they certainly can set their prices different than whatever is price-protected.

Do you see that happening in the marketplace right now, that they're actually raising the prices?

I think we've seen a little bit about that.

But again there has been a lot of pricing in a lot of categories, so perhaps retailers are moving in that direction a little sooner than they might have done in the past.

Okay.

Well, thank you very much.

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

And congratulations, JP.

Just wanted to ask you, JP, you opened your comments this morning with a reference to the Insights Driven Performance program.

I'm just trying to get a handle on how much more meat there is from programs like that.

It seems that strengthening of relationships through improving category management practices has been a theme of Hershey for the past several years.

Perhaps you could tell us a little bit about what is different about the new program, maybe some examples of the kinds of insights that are you able to generate that you weren't able to before and kind of how many innings through this process are we, particularly now that I think you said that you've picked up the category captains via the large US retailer relatively recently.

Yes.

First of all, as you know, the Hershey Company has been active in the category captain's role for a number of our retailers for a long period of time, and IDP is one element of the next generation of category management but it is really even broader than that.

And what would really be great is if sometime when we're all together we can talk in more depth around IDP because it is going to be a fundamental piece of our Business going forward for a long time.

So we could do it justice in that environment probably more so than the call.

But what it really does is it establishes a different kind of relationship where we're talking far more, from a longer-term strategic standpoint, about how we create and yield demand opportunities between shoppers and consumers.

It really links retailer strategies with our category strategies.

And then it enables us to invest in research that is mutually beneficial to all of us, based on some of the insights that we have.

So a lot of the spend we have, rather than going off ourselves and saying we are going to go learn about consumers and then go tell somebody about it and then there is a transaction.

This is really a collaborative approach where we really make decisions around those investment dollars together.

We decide what the research looks like.

And it is a far more harmonized and strategic relationship, and it is longer-term.

Where some of the things that we agree to do we're doing over time.

So that by the time you get to the point of the items you're going to sell, the innovations you're going to make, they're well understood by everyone, and it is less about a transaction, and it is more about a next logical step in solutions you're providing to both consumers and also to shoppers.

So it has really been a powerful tool for us because it has changed the dialogue we're having with a number of customers, and it has changed our role in the store, in some instances, and to go even beyond our category, certainly benefiting our category as well.

So we're excited about it.

It is a way we run the Company.

And it is part of us creating scale around intellectual capital and being a knowledge-based organization.

Great.

Thank you very much.

That's very helpful.

I will pass it on.

Bryan Spillane, Banc of America.

Just a quick follow-up on some of the comments you've made about gross margins in the second quarter.

I just want to make sure that I'm understanding it correctly.

Cost inflation, or input cost inflation came in roughly in line with what you were expecting.

And net price realization was a little bit better than you thought.

But I guess the difference, and cost savings were where you thought, but the reason why gross margins were still sort of in line with what were you budgeting was because the mix was a little bit negative?

Is that right?

Well, not so much the mix.

If you think about the quarter, Brian, we certainly would have expected some volume impact between gross and net in terms of higher trade promotion, that works its way down to the gross margin line.

And so in our case, it is more around some of the seasonality, around productivity, which I talked about, and in the back half of the year, we expect to have a bit more of that, where we will get some sequential growth.

So it really was not so much about mix.

In fact, the instant consumable business, which is our higher margin business, and you see that in sort of the take-away numbers and C Store was actually pretty good.

Okay.

Thanks.

Jon Feeney, Janney.

I just wanted to dig in a little bit, following up on elasticity.

When you talk about your elasticity models, the one area -- obviously it has been great.

And the architecture and the category attributes are great.

If there is a concern over the next 12 months, it is that the category level elasticity maybe start to bump into salty snacks and other things in the store where I don't know how to think about that inter-play.

Because clearly confectionery has been realizing price better than others and actually that runs into adjacent categories and if Hershey ever had problems in the past, in my view, that's kind of been it.

So I specifically want to ask does your elasticity model capture first of all the relative performance of the confectionary category versus other categories as far as pricing goes to the consumer?

And secondly, does this time around, your Hershey specific elasticity model sort of capture that Masterfoods is already out there with announced pricing, the way they weren't the last time around?

Jon, we do some -- some of the modeling does take into account obviously how the products interact with other categories.

Packaged foods.

But I would tell you that the majority of the emphasis really is on a brand-by-brand, channel-by-channel and pack type analysis.

We do obviously take into consideration, we've already talked about it a little bit earlier, the support behind the Business that we have today, versus where we might have modeled it previously, and what we learned about the actual elasticity versus modeling and the previous increase.

But not nearly I think at the level of emphasis the way you tried to explain it versus the other categories.

Jon, there is a couple of interesting things that might get to a bit of your question.

But interestingly, both chocolate and non-chocolate over the last quarter have seen increases in household penetration.

So non-chocolates had a 1.1 point increase in household penetration.

Chocolate has been about the same.

If you look at the balance of the snacking categories without calling out anything specific, those 2 would certainly be at the top.

The other thing that is interesting is that we're seeing is that trips-for-buyer in dollars spent also in our category, is doing quite well.

And then also in terms of the total dollars spend, we're seeing that being the same actually, and so with increased frequency, that's one of the things that is really helping us.

You'll probably see that more within convenience early than any place else.

But in terms of again the robustness of the category, it really puts us in a pretty advantaged place.

And some of that data is quite encouraging.

Great.

Thank you.

That's very helpful.

Eric Serotta, Wells Fargo.

Thanks.

Most of my questions have been answered at this point but wanted to revisit the second quarter gross margin question.

It looks like your gross margins were -- you commented that your gross margins were down pretty much in line with expectations.

Could you sort of help us bridge what some of the drivers were of the gross margin decline, other than the input cost inflation which you quantified?

Yes, not really, Eric, in terms of trying to give you something that was a bigger driver, it really -- it really does come down to we had volume and some price realization, and we did have some productivity, which more of it comes in the back half than the first.

But simply the cost impact in the quarter, in terms of commodity inflation, which was not dramatically different than the first, was greater than what we were able to offset it with our productivity programs.

So for the most part, it really is that, it may feel a little bit lumpy during the year but as we get greater productivity in the back half, we expect that to sequential improvement, and end up the year just as we have been saying all along.

So they really are the same drivers that you've talked about.

I guess what I'm getting at is were you at all disappointed that the slightly better-than-expected volume, and maybe earlier-than-expected price realization that you saw during the quarter didn't translate into perhaps some better gross margin performance, and some better EPS upside than what you actually ended up posting?

No, I wouldn't say so.

I think while we would all like it to be a lot smoother, it wasn't a lot different than we anticipated before the quarter began.

And our view was that we would get that sequential improvement in the back half.

Okay.

And then as we look to the back half, is it fair to say that you're expecting more fixed costs leverage, even though volumes are going -- even though you're going to feel some elasticity impact, you're going to have some greater productivity savings than you did -- or productivity savings are going to ramp?

I would say on balance, I think that is true.

Certainly we've already mentioned the productivity has a bit of skew in the back, and the volumes around the back half of the year are a bit more predictable.

There being a higher seasonal component.

So I think that would be the case.

Okay.

Thanks.

I will pass it on.

John Baumgartner, Telsey Advisory Group.

JP, two questions.

First, I think internationally in emerging markets, given the investment needed in those emerging markets and I guess the time required, and your experience for that ROI, is there any sort of time horizon you may have for when we might start seeing material profitability out of those investments?

Are we 3 years away, 5 years away, 10 years away?

Just trying to get a feel for that.

And then secondly, for the US, just curious, any thoughts there on the premium chocolate segment?

I know a few years ago there was quite a bit of focus behind the Starbucks and the Scharffen Berger and the Bliss and I guess since then it has really kind of fallen off as a talking point.

Is that no longer a relevant area of focus for you?

Is it just still a victim of tired discretionary spending here in the food economy?

Well let me take the first question.

We don't put a specific timeline around what those businesses would look like.

What we're really focused in is having the right business model in place, investing in the brands, and ensuring that we're committed.

So there has been some times in the past we've had forays into some markets but I would say that our commitment level hasn't been as high as it should.

And then of course how you do it is important as well.

Whether you're doing it organically.

Whether have you an acquisition that is attractive.

From the very beginning.

Or sometimes joint ventures offer some of those benefits as well.

So it would really be almost impossible to talk about it in terms of timing.

I really think about it in terms of making the profitable investment.

Making the appropriate investments in brand building, and we talk a lot about a disciplined approach, and don't read that as a timid approach but read it as a very thoughtful and balanced approach to ensuring that we're building a solid portfolio for our Business.

The second point around premium is the premium segment is about 6% of the total chocolate business.

We think it is important to participate in premium, as premium is looking as though it is starting to grow a little bit again.

But recall a trade-up in premium, it is about flat.

90% of the volume is really for the category in the midst of our wheel house, and we've continued to really ensure that we've made investments that are sustaining on those brands first.

But going forward, we continue to think about the importance of premium.

And we will participate there.

Thank you.

6% of the chocolate category.

At this time, there are no further questions.

Gentlemen, do you have any closing remarks?

Thank you for joining us for today's conference call.

Matt Miller and I will be available the rest of the day for any follow-up questions that you may have.

Thank you.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.