The Hershey Company Q2 2009 Earnings Call Transcript

 |  About: The Hershey Company (HSY)
by: SA Transcripts


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. (Operator Instructions) I will now turn the conference over to Mark Pogharian. Please go ahead.

Mark Pogharian

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 in the investor relations section. Included in the press release are consolidated balance sheets and the summary of consolidated statements of income prepared in accordance with GAAP as well as our pro forma summary of consolidated statement of income quantitatively reconciled to GAAP.

As we’ve said in the press release, the company uses these non-GAAP measures as key metrics for evaluating performance internally. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP; rather, the company believes the presentation of earnings excluding certain items provides additional information to investors to facilitate the comparison of past and present operations.

We will discuss our second quarter 2009 results excluding net pre-tax charges. The majority of charges in both 2009 and 2008 are associated with the Global Supply Chain Transformation Program. These pre-tax 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.

David J. 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 brand 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 U.S. market share for the quarter and are pleased with the strength and responsiveness of our brands 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. Bert Alfonso will have further details on this 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 gun -- consumer takeaway for the 12 weeks ended June 14th for 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 Walmart, 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, U.S. 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 FDMX C has increased 0.5 points in both the Q2 and year-to-date timeframes.

Our second quarter results were driven by solid 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 every day, 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 sales Kisses and Kissables were a drag to the overall franchise, which was down.

It you look at year-to-date performance in FDMX C, excluding Walmart the category grew a solid 4.7%. This is also in line with the latest quad, the June14th 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 sub-segments.

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 gifts business will be closed as of July 31st 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 premiums will be a drag on second half net sales growth, detracting a couple of points of sales growth in Q4 versus our original plans.

While premium had slowed, we do believe it will have a roll in the category in the years to come. Our [inaudible] 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 brands, so as consumers return to this sub-segment 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's 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 recent Loves You 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 a 2.5 market share gain in the mint sub-segment.

The convenience store channel continued to be a meaningful contributor to 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 cycle 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 Smores and Kisses Night At the Museum. These two promotions were at new higher promoted price points, with promoted price hikes of over 20%-plus 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 Smores 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. Plus, 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 activities.

As we look to the remainder of the year, our first half strength has created the flexibility to further invest in our brands 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 work in digital marketing, to name a few of the capabilities.

We will also continue to focus on working towards achieving continuity levels of advertising, including seasonal specific ads on Hershey's, Reese’s, Hershey's Bliss, 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 accounted for over 80% of our business, year-to-date 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 June 2008, we are committed to doing the right thing for the business in the short- and long-term. To help consumers 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 U.S. 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 increase 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 and 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 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 a 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 as 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 moments of happiness that Hershey 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 details.

Humberto P. Alfonso

Thank you, David and good morning, everyone. Second quarter results were better than expected with consolidated net sales of $1,171,000, up 5.9% versus the prior year. Adjusted earnings per share dilutive of $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 U.S. pricing action announced in August 2008, partially offset by volume.

In the second quarter, sales gains were driven by U.S. pricing announced in 2008 and partially offset by volume declines driven by pricing elasticity and unfavorable currency exchange of about 2 percentage points. Dave already provided details related to our marketplace performance. Based on that data, I will point out that year over year FDMX CW retail comparison to year-to-date net sales indicate that inventory at our key distributors and retailers are near our desired levels.

Now turning to margins -- during the second quarter, adjusted gross margin increased 300 basis points, driven by a net price realization, supply chain efficiencies related to fixed cost absorption as actual volume was better than expected versus our initial estimates and supply 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 remains 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 Smores 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 U.S. 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 U.S. 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 currency 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 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 operations, 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 CP at attractive rates.

Let me provide an update now on the global supply chain transformation program -- construction of our [Monta Ray] 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 reported 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 start-up, 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 $655 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 brands 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 the sales volume elasticity of last year’s price increase. While we believe we have the right mix of upcoming seasonal and non-seasonal 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 stock 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 will 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 will 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.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Eric Katzman with Deutsche Bank.

Eric Katzman - Deutsche Bank

I guess my first question to Dave is do you -- I mean, 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 kind of recover and go back to a more premium channel, what do you need to do I guess for Hershey to do a better job in that area?

David J. West

Eric, I think there certainly is a sort of a trading down effect 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. You know, they are also gaining some share as well and we think the advertising, the increase in advertising that we have done on those core brands is certainly attracting consumers who want to be in the category and I think we are providing -- you know, we are getting our message out there on the brand, our 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 is 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 that successful. We just didn’t get enough scale in our online Hershey's Gifts business to make it a profitable business. We are 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 sustainable.

So I think what we have done, as I mentioned today, we have several insight, consumer insight and category insight projects going on underway right now. We are focused more on our [Sharpenberger] and [Togoba] 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.

Eric Katzman - Deutsche Bank

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, kind of 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?

David J. West

Yeah, we can. 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 [inaudible] sales, we had a couple of 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 Hauten] 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 fall-off and I think the modeling would tell us in the second quarter on a take-home package candy and the smores 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 U.S. business and that’s -- again, it’s a little bit of a different consumer and a different occasion and that’s what we are also starting to look at now in terms of how the business will respond.

Eric Katzman - Deutsche Bank

Okay. Thank you. I’ll pass it on.


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

Jonathan Feeney - Janney Montgomery Scott

Good morning. Thank you. 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?

David J. West

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 happens 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 will see kind of 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 pricing we get in 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 holidays may be as long as seven or eight years since they’ve 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 fall-off -- again, I think it will 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 certainly was top line a couple of points in the fourth quarter.

Jonathan Feeney - Janney Montgomery Scott

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 will be? I mean, can you give us any commentary about -- you had some, you mentioned it in the release that you will be monitoring sort of 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 holiday?

David J. West

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

You know, what we’ve done to make sure that the consumer kind of 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 are making sure that we have the right kind of merchandising out of the seasons. We really very much focused on the consumer aspects of this and I think that that is appropriate for us. That is what we did at Easter, for example, and at Easter we had a very successful season.

So we are kind of 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 the right lineup to make sure that the consumer kind of gets adjusted to the new price points and I think that’s the right strategy. If we see anything unusual out there, I mean, you are always going to see in certain places, in certain parts of the categories, those things happen but widespread we think we have the right programming in place and we think that -- you know, we feel pretty good about what we’ve done.

Jonathan Feeney - Janney Montgomery Scott

Okay. Thank you very much.


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

Bryan Spillane - Bank of America

Good morning. Just a question on the increase in advertising expense -- I think it makes sense that you are going to increase, especially in front of the higher price points but I guess the question would be is this now sort of a re-basing of your advertising expense and so as we sort of 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 sort of give some support to the price increases?

David J. West

I think a couple of things. You know, when we came into the year, we already were modeling a 20% to 25% increase 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 are modeling and watching our ROIs and our lifts on a monthly basis. Importantly on the Reese brand where we got the continuity sooner, we actually continue to see improved ROIs and lifts from the advertising.

So given the responsiveness that we had seen, we are 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 are going to run some seasonal specific advertising again in 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 monthly basis, continue to look at the ROI and the returns on it and we are not at any kind of 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.

Bryan Spillane - Bank of America

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 --

David J. West

Well I think if the spending -- anytime we’re doing, any spend we are doing, if we spend it’s going to stay -- it becomes part of the base. Right now, we are 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. I mean, that’s the same with anything we spend on. We are looking at our return on retail investment by class and trade. We are looking at trade promotion ROI so it’s not just the advertising spend -- it’s all of the leverage that we are pulling on and we are going to dial our dollars to the right spots.

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

Bryan Spillane - Bank of America

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 any 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 kind of looking at the category, the shelf space. Are they actually allocating more to mainstream going into the back half?

David J. West

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 are seeing also is in a lot of instances double facings 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.

Bryan Spillane - Bank of America

Okay, great. Thank you, guys.


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

Andrew Laza- Barclays Capital

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

David J. West

It’s a good question. For the second quarter, it’s the smallest quarter and it’s largely mix towards instant consumable, 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 picked 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.

Andrew Laza- Barclays Capital

Got it, and then as you look forward to the second half, obviously the seasonality, the business changes and the product mix, would you assume there would be a little bit more of the netting off of the gross price, you know, 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.

David J. West

I think the -- well, 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 -- you know, pick up a little bit more in the gross to net area but obviously we are not getting the full list anymore, so I -- part of what we are doing is obviously hopefully as we move our prices up that we are getting a lot of that pass through at retail -- [inaudible] obviously the retailers, to what they run but we are trying to get a little trade promotion efficiency in the back part of the year.

Andrew Laza- Barclays Capital

Got it -- last thing 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 include some more of the sort of the feet on the street that you were doing over the last year in sort of 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 it’s just some thoughts around that would be helpful.

David J. West

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 all I will tell you is that across [inaudible] of the 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 up-selling and merchandising we are getting done at retail there and we think the distribution gains have been pretty significant for us. So we’re pleased with that.

We are 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 look at it as one of the things that we are investing in.

Andrew Laza- Barclays Capital

Thanks very much.


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

Vincent Andrews - Morgan Stanley

I would like to just follow up on the ad spend question -- your ad spend you are saying is up, you know, 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?

David J. West

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

Vincent Andrews - Morgan Stanley

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? How profitable of a business was that relative to the average margins?

David J. West

Basically as I said, I think it’s going to take -- between that and the premium discontinuations, it’s a couple of points of top line but really no impact on the bottom line. We just didn’t get to scale with the business so it really wasn’t profitable.

Vincent Andrews - Morgan Stanley

Okay, and then lastly I guess, if we look at what your new sales guidance implies for the back half of the year, you know, at 3% it would be 50 basis points [of growth] [inaudible], 5% -- it would be 4% growth so -- and you are lapping 6.4% in 3Q and 2.6% in 4Q and I understand what is coming out of the online and so forth but does that reflect a conservative stance or an expectation of increased promotional spending? Or it just seems -- that just seems pretty achievable relative to where you are in the year. How should we think about that?

David J. West

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 U.S. 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 -- you know, the consumer is going to see significantly higher price points.

And in the second quarter, we ran our Smores 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 is 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 models 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 are 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 will see is better sell-through, which is good from a profit standpoint but not necessarily a chance to accelerate the top line.

Vincent Andrews - Morgan Stanley

Okay, understood. Thank you, that’s very helpful and it 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?

Humberto P. Alfonso

At this point, we are 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 expenditure side as well as profitability.

So we are pleased with the cash flow at this stage. It’s a discussion at the board level that we have and we’ve got an upcoming meeting there, so that’s something that we certainly will discuss in terms of how we might -- you know, serve the shareholder, so I would just stay tuned. It is a board decision. It’s one that we discuss pretty frequently.

Vincent Andrews - Morgan Stanley

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

Humberto P. Alfonso

Well, I wouldn’t want to give you a definite timing or a key gating point. You know, what I would tell you is we are encouraged by our cash flow increase, we are encouraged by the performance of the business and all those things certainly help in the conversation.

Vincent Andrews - Morgan Stanley

Okay. Thank you and congratulations on the very nice results.


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

David Driscoll – Citi

I just want to say congratulations on the results. Dave, you and the team have done a fantastic job here over a multi-year period, preparing the advertising budget, increasing the sales coverage on the firm -- this has been critical for Hershey and I just compliment you on the multi-year effort.

Looking at -- I really have kind of two specific areas that I wanted to ask about -- again, it is -- the 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 kind of maximum advertising as a percentage of sales that you could see this go to? And in the backdrop, when I look at the numbers, you know, 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?

David J. West

A couple of things -- we don’t have a -- we don’t think of it in a specific advertising to net sales ratio for the company and I think comparing us to some of the other companies out there, depending on who you are comparing us to, if you feel we are -- we have much more of our sales concentrated in the U.S. 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 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, Hershey Bliss then Hershey Kisses. Now we are 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 have seen now, as you exit 2009 on Reese’s, Hershey's Kiss, on Blisses 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 and we will 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 investment -- is it heavy up with certain times of year or copy or -- you know, as we continue to dial up the advertising, do we continue to see good ROIs? And so far on the Reese brand, which is the one that’s the furthest along, we continue to see that. So as long as we continue to see good ROI, 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.

So 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 then Twizzler and Kit-Kat will get there in 2010.

David Driscoll – Citi

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 price increases? And specifically, I get just a ton of questions, Dave, about retailers pushing back on the manufacturers to actually bring down prices, given a 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 am 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 would really rather here you talk about it.

David J. West

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 have 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, 7, and 8, our margins had 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.

And in this year, as you look at it on a year-to-date basis, the category, FBMX CW, 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 the 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 are still at affordable price points with really good brands.

David Driscoll – Citi

Outstanding results. Thanks a lot.


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

Ken Zaslow – BMO Capital Markets

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

David J. West

I think on Cacao Reserve, when we launched Cacao Reserve into the trade-up space, that was our first entry really into trade-up and the Hershey's Cacao Reserve business. It really 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 make sense for us anymore, so that’s kind of the way we thought through 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 a bad timing. We learned an awful lot 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 are much more focused on the core solid Kisses. We are focused on the silver solid milk chocolate Kisses, on Dark Kisses, on the Hugs, and on the Kisses with almond.

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 done an awful lot of limited edition and customer specific flavors -- you know, 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 are mostly out of those. They are unfortunately in the base and as we go forward, they will kind of fall out of the cycling. But those are the big things in the portfolio that we are looking at right now.

Ken Zaslow – BMO Capital Markets

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 are not taking up numbers for the back half and in fact, you are being -- are you being appropriately conservative in terms of if I take the numbers and parse them out into the first half versus second half, relative to your expectations -- can you talk about why the conservatism, or am I missing something?

David J. West

I think -- 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 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 and 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 Smores program, where we saw volume elasticity kind of in line with our model. And I think the other thing that, as I said, when you talk about the seasonal business, you kind of know what you are 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, you know, the top line is somewhat governed by the amount of stuff that you sell in, if you will.

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

Ken Zaslow – BMO Capital Markets

And my last question -- is there anything that would prevent you, now that you seem to have your advertising online, you’ve got 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?

David J. West

As I said, we’re focused on getting the [sector] 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’ve got a lot of 2009 left in front of us.

We are pleased with the momentum that we have in the business right now. We’ve made some choices. I think we are 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 are pleased that we’ve been able to accelerate ourselves to get back into what looks more like our long-term growth algorithm and I think 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 is 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.

Ken Zaslow – BMO Capital Markets

Great. I appreciate it.


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

Eric Serotta – Consumer Edge Research

Most of my questions have been answered but a couple of areas I would like to explore. First of all, in terms of -- could you give us some insight into the timing of the ramp-up of supply chain savings? Give us some sort of 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 are expecting in terms of the ramp in the second half.

David J. West

Sure, Eric. If you’ll 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 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 Redding plant, which closed earlier this year so obviously you get some of the fixed cost benefits of that. And then by next year, we really are toward the final stages of it, so I would say that we will be three quarters of the way, if not a little bit more, through that initial projection of 170 to 190. We expect to be able to achieve those projections and slightly more back-half oriented for 2009.

Eric Serotta – Consumer Edge Research

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 -- can 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 every day of a similar kind of magnitude for the past couple of quarters. On the other hand, you’ve been ramping up your advertising behind the core brands and it seems like in the past quarter you definitely accelerated that. So what surprised you or what were the reasons for the surprise on the everyday takeaway volumes in the quarter?

David J. West

Let me just make sure I am clear -- 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 we -- was 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 more bought on impulse and more for self-consumption. So I think what we learned there is we are still at a very affordable price point. We are under a dollar 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 are 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 are 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 that’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 will probably model more like what happened in the second quarter than certainly what the instant consumable was because it’s a purchase occasion and a usage occasion that’s similar to everyday in the aisle but again, it’s still a bit unique and it’s a big part of the business and that’s what we are learning about, Eric.

So I hope that gives you some flavor for how we are kind of learning as we go along here.

Eric Serotta – Consumer Edge Research

I was really focusing on the instant consumables but --

David J. West

The absolute price point there, Eric, I think is still at attractive absolute price point with a good brand of consumers still resonates.

Eric Serotta – Consumer Edge Research

Okay, and then lastly, could you just comment on what you are expecting for the premium category as the economy recovers? You know, it seems to me and to some others that that category became over-SKU’d, 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 -- you know, had an element of there was a bit of a fad in it?

David J. West

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 is going to be willing in the future to pay I think is going to be for differentiation and 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 if and when, and I think it will grow again, the premium segment will grow, I think it will be a much slower build this time because I think consumers are going to be much more selective about it 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 are working towards, as I said, in terms of understanding the category and the consumer insights.

Eric Serotta – Consumer Edge Research

Great. Thanks again, I’ll pass it on.


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

Alexia Howard – Sanford Bernstein

Good morning. I wanted to dig into the overseas sales. I think you mentioned that Brazil and Mexico were probably down I think this quarter a little in a 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? I mean, I know collectively those four countries, are they somewhere between the mid-single-digits, high-single-digits percent of sales overall? How does 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 it is 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?

David J. West

I think on a constant currency basis, when you take the FX out, the business pretty much didn’t add or detract for the quarter and we are growing in local currency, our Canadian business has always been a very good business. It’s a sizeable business and we are 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 are the most pleased about there is our spicy sugar confection area, under the [Pale Entelerico] business in Mexico has rebounded after a little bit of a period of doldrums, so we were pleased about that but there was a couple of other spots of softness.

In the India business particularly, the sugar confectionary business in India continues to do well. We are pleased with our partnership there with [Goddridge] and that business is moving along. And seasonally, China in the second quarter, you’re right on the back end of Chinese New Year as you get into the second quarter and there is very minimal business in China. It’s not a real impact during the quarter.

Alexia Howard – Sanford Bernstein

Okay, great. Thank you very much. I’ll pass it on.


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

Christine McCracken - Cleveland Research

On Halloween sales, I think you mentioned in your prepared comments that there was a slight delay, shifting the sales into the third quarter but that things had gotten back on track. I’m wondering, was there anything specific behind the sales slow down or a delay in orders?

David J. West

Actually, Christine, it was just a couple of million dollars shifted out of -- you know, 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. I mean, all that is is essentially one customer who probably backed a shipment up a week.

Christine McCracken - Cleveland Research

Great. And then just in terms of how you are 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?

David J. West

We really have not made adjustments in sizes. We have -- what we have done is really made the adjustments in programming. We’ve added seasonal specific advertising the same way we did at Easter, which proved to be very successful. At Halloween, you will see a lot of the Reese’s and you’ll see the familiar Hershey Kisses bells commercial at the holiday time, as well as the base advertising on both 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 will do a very good job merchandising.

So we’ve added some things programmatically to help the consumer kind of process the higher price point but we haven’t changed bag sizes or anything like that. It really is the same basic put-up from last year at a higher price point, given our price increase but we are going to try and help selectively with the consumer to get used to that with the advertising and the couponing.

Christine McCracken - Cleveland Research

And then just -- fine, I’ll leave it there. Thanks.


Your next question comes from the line of Terry Bivens with JP Morgan. Terry Bivens, your line is open. That question has been withdrawn. Your next question is from Robert Moskow from Credit Suisse.

Robert Moskow – Credit Suisse

Thanks. David, I just wanted to know if you had been tracking your competition’s advertising spend -- do you think that they are raising their spend this year or have they cut?

David J. West

We are tracking it and I think what I would say is given our increase that our share of voice is probably higher than it was last year at this time.

Robert Moskow – Credit Suisse

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

David J. West

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

Robert Moskow – Credit Suisse

Okay. Thank you.


Your next question comes from the line of David Leibowitz from Horizon.

David Leibowitz - 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 are talking about?

David J. West

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.

You know, 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 are going to make sure that one of the good things about the couponing is it also helps us to ensure that we get appropriate merchandising when we put a coupon out.

So it was a little bit higher -- I think that’s true for all categories.

David Leibowitz - Horizon

And just one brief add-on -- historically the larger the dollar amount or 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?

David J. West

No, I think we are going to be pretty consistent with the value of the coupons.

David Leibowitz - Horizon

Thank you very much.


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

Ed Roesch - Soleil Securities

I wanted to ask you, reflecting on the past year or so, why would price not factor in your expectations as a large component of 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 really good response to the amount of pricing you put through in the past year-and-a-half?

David J. West

Ed, I guess I’m not quite sure I’m following the question. I think what happens as the year goes along is pricing becomes less of a part of the algorithm because we are lapping the increase when it went in on August 15th, almost a year ago.

Ed Roesch - Soleil Securities

Right but longer term, Dave, I’m just wondering if your experience over the past 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.

David J. West

I think, Ed, as I said 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 in 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 are still doing that based on the results to date. We think we will 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 will learn about here 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.

Ed Roesch - Soleil Securities

Okay, and one follow-up, if I could -- are there any kind of 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 kind of being on a declining arc, but could those be revived a little bit after being off air for a while?

David J. West

Ed, I’m not talking about on air or off air or anything else but I think one of the things that we have found is that we’ve got some great brands out there. We’ve got Mounds, Almond Joy, York, Heath, Skor, Payday, just to name a couple. And what we are finding is as we have refocused our portfolio more toward the core and stopped 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 kind of secondary brands that even if they are not getting TV advertising, they are getting focus with our retail people. When we get into convenience stores, we are getting them into distribution. A lot of them we’re getting back into distribution in areas where we might have had a limited edition or something else on the shelf, so we’re getting nice growth on those brands just by getting focused on the core.

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

Ed Roesch - Soleil Securities

Thank you.


At this time, there are no questions.

Mark Pogharian

Okay. Thank you very much for joining us on today’s conference call. If you have any follow-up questions, [Monafern] and myself will be available. Thank you.


Thank you. This concludes today’s conference call. You may now disconnect.

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