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Executives

Mark Pogharian – Director, IR

Dave West – President and CEO

Bert Alfonso – SVP and CFO

Analysts

Jonathan Feeney – Janney Montgomery

Terry Bivens – JP Morgan

Alexia Howard – Bernstein

Vincent Andrews – Morgan Stanley

Robert Moskow – Credit Suisse

Ken Zaslow - BMO Capital Markets

Jason English – Goldman Sachs

Andrew Lazar – Barclays Capital

Eric Katzman – Deutsche Bank

David Driscoll – Citi Investments

David Palmer – UBS

Eric Serrano – Wells Fargo Securities

Bryan Spillane – Bank of America

The Hershey Company (HSY) Q3 2010 Earnings Conference Call October 21, 2010 8:30 AM ET

Operator

Good morning! My name is Beth and I will be your conference operator for today. At this time I would like to welcome everyone to The Hershey Company Q3 2010 results. (Operator Instructions). Mr. Mark Pogharian, you may begin your conference.

Mark Pogharian

Thank you, Beth. Good morning, ladies and gentlemen. Welcome to The Hershey Company’s Q3 2010 conference call. Dave West, President and CEO, Bert Alfonso, Senior Vice President and CFO, and I will represent Hershey on this morning’s call. We also 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 10K for 2009 filed with the SEC. If you have not seen the press release a copy is posted on our corporate website, www.hersheys.com, in the investor relations section.

Included in the press release is a consolidated balance sheet and a 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’ve said within the note, a company uses these non-GAAP measures as team efforts 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 Q3 2010 results excluding net pretax charges. The 2010 charges relate to the Project Next Century Program, while the 2009 charges are associated with the global supply chain transformation. These pretax charges were $4.5 million in the Q3 of 2010 and $11 million in the Q3 of 2009. 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 Dave West.

Dave West

Thanks, Mark, and good morning everyone. I am pleased that despite the macroeconomic challenges that persist, Hershey delivered another strong quarter of operating and marketplace results.

During the Q3, and on a year to date basis, the CMG – that’s the Candy, Mint, and Gum category – continues to grow, outpacing salty snacks, cookies, crackers, and bakery snacks. Our business is solid in all classes of trade and our resale partners value the importance of the confectionary category and the leadership that Hershey provides. During these challenging times, retailers are looking for traffic and profitable solutions, and confectionary is one of the answers to both of these objectives.

Hershey’s Q3 net sales reflected continued momentum of our brands. Net sales increased 4.2%, driven primarily by volume gains in both the US and international markets as we continued to invest and execute in the marketplace. Additionally, as we exited the Q3, the timing of some seasonal shipments dampened Q3 net sales by approximately one point. These shipments have already occurred in early October and will be reflected in our Q4 results.

In terms of Hershey’s marketplace performance, preliminary CMG consumer takeaway for the 12 weeks ending October 2nd and the year-to-date periods, for our custom database and channels that account for over 80% of our retail business, was up about 4% and 5% respectively. As a reminder, these channels include food, drug, mass (including Wal-Mart), and convenience stores. In the Q3 I was particularly pleased with the sequential improvement in resale takeaway trends at one of our larger retail customers and in the drugstore channel.

We do want to note that during the Q3 Nielsen Contact and some of their customers, including Hershey, informed them that they are currently reviewing the projection methodology of their C-store universe for syndicated data. This is a C-store channel-specific issue impacting a number of categories of manufacturers, with the impact limited to Q3 data. We believe the data we have been provided, and that we are sharing with you today is directionally correct, and that any potential adjustment will not materially impact our overall reported market share.

We continue to feel very good about our convenience store business. In Atlanta at the NACS Conference – that’s the National Association of Convenience Stores – two weeks ago, we had the opportunity to meet with our C-store customers. The constant theme was that Hershey and the confectionary category remain solid.

Within FDMXC – that’s Food, Drug, Mass, & Convenience (here we’re excluding Wal-Mart) – preliminary Hershey and category growth for the 12 weeks ending October 2 and year-to-date period for our custom database increased relatively in line with the category’s historical growth rate. Hershey’s preliminary US CMG market share is up 0.2 points for the year-to-date period and was flat in the Q3. The category continues to perform well despite the macroeconomic challenges as confectionary is among the highest with respect to household penetration and impulse purchases. This impulsivity continues to translate to merchandising opportunities, and as we move through the balance of the year the category is a seasonal destination, with our banded products remaining available at reasonable price points.

As a result we expect the category to continue to consistently secure key merchandising and programming space and to grow within the historical 3% to 4% range. The category continues to be driven by mainstream, everyday confections, as its trade-up, gifting, and novelty sub-segments remain soft. Year-to-date, premium and trade-up chocolates on an S-basis, is about flat.

As we stated in July, as expected, there were investments by major manufacturers in the category in the form of innovations and trial-inducing programs during the quarter. Activity varied by channel, and despite this Hershey resale takeaway increased in all channels.

In the Q3, food class of trade category growth was +4.2%. Hershey resale takeaway increased 2.5% in the Q3, resulting in a market share decline of 0.5 points in Q3 in the food class of trade. However, Hershey’s Food Channel market share is still up 0.1 points year-to-date. Q3 results were due to the year-over-year timing of innovation, merchandising, and programs. Marketplace activity can and will vary from quarter to quarter, and our programming for the balance of the year in the food class of trade is solid.

This year’s Halloween season is marked by a bit of an unusual calendar. Labor Day was late, September 6th, and October 31 falls on a Sunday. With this pattern we expect consumer purchases to be especially compressed towards the end of the season. To date, customer Halloween orders and resale sell through are tracking in line with our expectations, although we will not have a complete read on sell through for another couple weeks. Halloween-specific seasonal promotions, merchandising and advertising are being executed. We believe we’ve made the necessary investments to ensure solid category sell through and we’ll work closely with key customers over the next 10 days to monitor consumer reaction and shopping behavior.

Turning now to the C-store class of trade, in Q3 Hershey’s preliminary C-store takeaway increased for the 10th consecutive quarter and was up within the historical category growth rate, resulting in a share gain of approximately 0.2 points. On a year-to-date basis in the C-store channel, syndicated data indicates we have gained 0.6 market share points. In Q3 Hershey’s C-store chocolate and non-chocolate performance was solid, driven by volume and mix as both standard loose bars and king-size pack types performed well in the marketplace behind the Reese’s “Double the Love” promotion, a “Two for $2.50” king-size promotion, and a Hershey’s “Pure Happiness” standard bar program. In the Q4 we expect convenience stores to remain on track behind NCAA football tie-ins as well as additional king-size and standard bar programming.

In the Q3, our business in the drug class of trade improved. For the 12 weeks ended October 2nd, Hershey resale takeaway in this channel increased 3.2%, resulting in a market share gain of 0.6 points. While this is partly a result of easier comps versus the year ago period, we have notably increased our level of investment and focus on this channel, and our markedly improving our results.

As we look to the remainder of the year we have strong initiatives in place during the Q4 across all channels. Some of the core brand merchandising and consumer promotions include the NCAA football promotion, and for the holiday season we’re offering consumers a free, customized soda, calendar and coffee mug in conjunction with SnapFish with the purchase of two participating Hershey candy products. We’re also adding excitement to our traditional holiday and baking programming with a baking share and win promotion, and we are most excited about the December launch of Hershey’s Drops and Reese’s Minis.

In Q4 versus our previous expectations, we’ll accelerate the timing of and begin execution of certain aspects of our strategic plan. Therefore, SG&A spending will rise sharply and be driven by higher levels of incremental investments in the building out of the Insights-Driven Performance Initiative, furthering go-to-market strategies in both the US and other markets around the world as we add selling capability and points of distribution in global markets such as Mexico and China. We’ll increase sampling, supporting new products, especially in the markets where we are adding points of distribution.

Advertising expense will increase, and for the full year it’s now expected to be up 50% to 60%. This is greater than our previous estimate of a 45% to 50% increase. We’ll increase spending on brands in which we’ve initiated activity earlier this year. Reese’s, Mounds, Almond Joy, and York have responded to ad spending and we’ll accelerate towards continuity levels of GRPs on these brands. We will also begin airing copy on Hershey’s Syrup and Payday for the first time since 2001, and we’ll be adding to our consumer spending in Mexico, China and Canada as we implement our demand landscape learning in these geographies.

Over the remainder of the year we expect the macroeconomic challenges facing the consumer to continue. Category growth rates will most likely continue to fluctuate from quad to quad. Importantly, the inherent characteristics of the category I spoke of earlier should endure resulting in a category growing within its historical growth rate of 3% to 4% in 2010 and 2011.

Our plans are in place for the upcoming key seasonal periods. As a result, we reiterate our full year 2010 net sales targeted outlook of about a 7% increase, including an approximate one point benefit from foreign currency exchange rates. For the full year we have good visibility into our cost structure, and while input costs will be higher in the Q4 we expect adjusted gross margin and adjusted EBIDTA margin to expand. Therefore, we’ve increased our full year adjusted earnings per diluted share outlook and expect it to be in the $2.52 to $2.56 range, an increase of mid to high teens on a percentage basis versus 2009, and greater than our previously estimated range of $2.47 to $2.52.

As we plan for 2011 we believe macroeconomic challenges and consumer confidence will continue to be a headwind, however we believe category dynamics similar to those I discussed and continued support of our brand will enable the category and Hershey to grow. In 2011 we expect our advertising expense to increase. However, the year-over-year percentage increase will not be at the rates achieved over the last two years. As a result, our initial expectation for 2011 is for net sales growth within our 3% to 5% long-term objective.

While we do anticipate higher input costs in 2011, productivity and cost saving initiatives are in place to help mitigate the impact. Therefore, based on our current views and expectations for 2011, we expect growth in adjusted earnings per diluted share within our current long-term target of 6% to 8%.

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

Bert Alfonso

Thanks, Dave, and good morning everyone. Hershey posted another quarter of quality results, as Q3 consolidated net sales of $1.547 billion increased 4.2% versus the prior year; and adjusted earnings per diluted share of $0.79 increased 8.2%. Overall year over year results were driven by volume, mix, net price realization, and supply chain savings which more than offset increases in marketing investments and selling capabilities.

The Q3 sales gain of 4.2% was driven primarily by the continued growth of our core brands including new products. As we ended the quarter, the timing of some seasonal shipments lowered our Q3 net sales by about one point, therefore our Q4 seasonal shipments will be greater than the prior year, maintaining our full year net sales outlook of about 7%. In addition, lower levels of customer returns and markdowns as well as the July 2009 carryover pricing in Canada generated net price realization of about one point, while favorable foreign currency rates contributed approximately a half point.

During the Q3, adjusted gross margin increased 290 basis points, driven by favorable supply chain efficiencies including continued higher productivity, favorable sales mix, and lower levels of obsolescence. Input costs were about flat in the quarter and favorable versus our previous estimate as a result of certain commodity strategies executed in Q3. We currently have good visibility into our cost structure for the remainder of the year and expect input costs to be higher in the Q4 versus prior year. Despite this increase, year over year adjusted gross margin is expected to be a bit higher in the Q4 but below the rates we’ve seen in the Q3.

Q3 adjusted EBIDTA margin of 19.7% is up 10 basis points. This is driven primarily by higher adjusted gross margin, offset by higher advertising expense of about 46%, selling expenses as we continue to invest in consumer insights and building billable capabilities, and employee related expenses. As Dave stated earlier, we continue to invest in our core brands and expect full year advertising expense to increase 50% to 60%, greater than our previous estimate of 45% to 50%. So as to last year, and as previously communicated, we are planning additional advertising in the Q4 in both the US and other key markets to enable a strong start to 2011. We expect adjusted EBIDTA margin to expand for the full year, although it will be lower versus the Q4 of last year, and that’s due to lower gross margin expansion as well as business investments, which Dave already described.

Now let me provide and update on our international businesses. Overall, our reported sales outside the US increased low double digits. Our reported and constant currency basis sales increased in our largest international markets, while in Asia we focused on preparing for the upcoming Chinese New Year. During the Q3 strategic investments in brand building and go-to-market strategies were higher, including an advertising increase of 65% outside of North America. As a result our local currency basis operating income increased in Canada but declined in the rest of our emerging market businesses. We are committed to investing in our international businesses and we anticipate that these investments will generate meaningful brand awareness and some more offtake over time.

Moving further down the P&L, for the quarter, interest expense was $22.3 million, consistent with the prior period. In 2010, we now expect interest expense to be down about 1% versus 2009. The tax rate for the Q3 was 35.1%, or 210 basis points less than the prior year due to the impact of interim tax accounting and a favorable income mix among geographies. For the full year we now expect the tax rate to be about 35% to 35.5%, slightly higher than our previous estimate of 35%. In the Q3 of 2010, weighted average shares outstanding on a diluted basis were 230.5 million versus 229.6 million in 2009, leading to adjusted earnings per diluted share of $0.79, up 8.2% versus year ago.

Let me provide a quick recap of our year to date results. Net sales increased 7.6%, adjusted gross margin was 43% year to date versus 38.3% last year. Gains were driven primarily by favorable supply chain efficiencies including volume and greater levels of productivity. Favorable mix and low obsolescence also contributed. Adjusted EBIDTA increased 23.5%, resulting in an EBIDTA margin gain of 230 basis points to 18.3% from 16%. Advertising increased 54% on a year to date basis, and adjusted earnings per share diluted for the nine month period increased 26% to $1.94 per share.

Turning to the balance sheet and cash flow, at the end of the Q3 net trading capital was relatively in line with last year. Accounts receivable was up $38 million and remains extremely current and of high quality. We continuously monitor our accounts receivable aging, and despite current macroeconomic conditions we have not seen an impact on our customers’ payment patterns to date. Inventory increased $35 million, driven partially by the previously mentioned timing of the Q3 sales while accounts payable increased by $65 million. We do expect net trading capital to improve in the Q4 as we cycle through the peak seasonal periods of our business.

In terms of other specific cash flow items, capital additions including software were $49 million in the Q3 and $124 million year to date. These amounts included $20 million of Project Next Century capital expenditures. For 2010 we are targeting total capital additions to be in the $190 million to $210 million range. This range includes base ongoing CAPEX of $140 million to $160 million, plus Project Next Century CAPEX of approximately $50 million. Depreciation amortization was $52 million in the period, including accelerated depreciation of approximately $6 million. Year to date reported depreciation amortization was $146 million, and included $7 million of accelerated depreciation related to the Next Century Program. Therefore, adjusted operating depreciation amortization year to date was approximately $139 million. In 2010 we are forecasting total operating depreciation amortization of $175 million to $185 million, while accelerated depreciation amortization related to Project Next Century is expected to be $10 million to $15 million.

Dividends paid during the quarter were $71 million. We did not acquire any stock in the Q3 related to the outstanding repurchase program. There remains $100 million outstanding on the current authorization. Year to date approximately 133 million of our common shares have been repurchased to replace shares issued in conjunction with stock option exercises and option replenishment is about current at quarter end.

Cash on hand at the end of the Q3 was $245 million, up versus the year ago period and relatively in line with 2009 year-end balances. As we exit the Q3 we are well positioned to manage the capital needs of the business as well as higher capital expenditure requirements of Project Next Century.

Now let me provide an update on Project Next Century. I am pleased to confirm that we have begun work on the West Hershey plant expansion. Excavation of the property has begun and we expect to begin receiving manufacturing equipment during the Q3 of 2011. We also anticipate initial production line start up during the Q4 of 2011 with continued rollout and implementation throughout 2012. The forecast for total pretax GAAP charges and non-recurrent project implementation cost remains at $140 million to $170 million.

For 2010, total GAAP charges related to the program are expected to be $75 million to $85 million. By 2014, we can continue to expect annual savings of approximately $60 million to $80 million. In terms of the timing, savings from Project Next Century will not be realized until late 2011, with the majority coming in 2012 and 2013. During the quarter we recorded net pretax charges of $4.5 million for Project Next Century, consisting mostly of accelerated depreciation.

Now let me summarize. We are pleased with our Q3 and year to date results. Our goal for the remainder of the year is to successfully launch new products, including Hershey’s Drops and Reese’s Minis, and to maintain our marketplace momentum as we exit 2010 and enter 2011. To support this objective we plan to increase full year advertising expense by 50% to 60%. In addition we expect to see some shift in 2011 seasonal orders in the Q4 of 2010 into the Q1 of 2011 due to the timing and refinement of shipments. As a result, we reaffirm our full year 2010 net sales outlook of about 7% versus 2009, including an approximate one point benefit from current foreign currency exchange rates.

We have good visibility into our cost structure for the remainder of 2010 and expect input costs to be higher in the Q4. Despite this increase, adjusted gross margin is expected to be a bit higher in the Q4 but not at the rate achieved in Q3, as potentially subject to the volatility of dairy markets. Additionally we do not expect it to be as favorable as it was Q4 of 2009. Given our strong business results, we will make additional Q4 strategic investments in both the US and international markets that we did not initially plan. These investments will benefit Hershey both in the short- and the long-term.

Aside from the aforementioned increases in advertising plans, these include acceleration and increase of insight-driven performance, additional selling and go-to-market strategies in both the US and international markets, and higher sampling to support new products and distribution. Given our continued momentum we have increased our full year adjusted earnings per diluted share outlook and expect to be in the $2.52 to $2.56 range, an increase of mid to high teens on a percentage basis versus 2009, and greater than our previously estimated range of $2.47 to $2.52. As we look to 2011, we’ll continue to focus on our core brands and leverage Hershey’s scale at retail. Advertising expenses are expected to increase in 2011, however the year over year percentage will be lower than the previous two years.

Our current expectation for 2011 is for net sales growth to be within the 3% to 5% long-term target. While we anticipate higher input costs in 2011, productivity and cost savings initiatives are in place to help mitigate the impact. Included in our productivity outlook is a portion of the additional $80 million to $100 million we identified at Cagny. While we achieved more of these savings in the second half of 2010 than we initially estimated, primarily in cost of sales, the majority of these savings will still be attained in 2011 and 2012, although starting next year some of these savings will also flow through the SM&A line. Therefore, while still early, given our current views regarding business investments and cost structure we expect 2011 growth and adjusted earnings per diluted share to be within our long-term target of 6% to 8%.

Let’s now open it up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions.) Your first question comes from Jonathan Feeney from Janney Montgomery. Your line is open.

Jonathan Feeney – Janney Montgomery

Thank you very much, I appreciate it. The only question I had is when you look at the guidance for next year, clearly it’s been a period here of some pretty significant competitive share gain it appears, and you know, what are you sharing in? Are we seeing in that 6% to 8% guidance a thought that maybe some competitive activity would accelerate from Wrigley Master Foods, who seem to have been out of the market in a lot of places? Or what kind of competitive assumptions go into that guidance as you look forward to 2011? And to the extent that you can comment on anything different at the margins.

Dave West

Yeah, I think, Jon, what I would say is the view of the category that we talked about. You know, the category growth rate continues to be in the longer term. This is a 3% to 4% growth category; actually on a year to date basis it’s growing a little better than that 4%. So we would start with a category growth assumption and then within that category growth assumption say we don’t see anything that changes that longer term growth algorithm for 2011, and we would expect to be competitive with respect to programming and share.

So in the Q3 here we were flattish on share. We’re still up on our share this year on a year to date basis, and we would expect that the gives and the takes in the marketplace are such that you start with that 3% or 4% assumption and assume we’re going to be competitive within the share gain. And that’s how you’d start the algorithm. There was a lot of activity in the Q3 which we had talked to you about in July that was around innovation from some of the competitors in gum and in chocolate, and that happened in the Q3. And despite that competitive activity and innovation we still were able to basically hold onto our share in the Q3.

Jonathan Feeney – Janney Montgomery

Okay, thank you.

Dave West

You’re welcome.

Operator

Your next question comes from Terry Bivens, JP Morgan. Your line is now open.

Terry Bivens – JP Morgan

Good morning, everyone.

Dave West

Hi, Terry.

Bert Alfonso

Good morning, Terry.

Terry Bivens – JP Morgan

Hi. Just a couple of quick things and then a more general question. In Q4 do you expect kind of the inflow you’ve identified from the Q3 to roughly equate to the outflow you’ve talked about for Q1?

Bert Alfonso

Yeah, I think that’s the way to think about it, Terry. I think when we talked to you at the end of the Q2 call we were still looking at some Valentine’s and Easter shifting out of the Q4 and into the Q1 of next year. That shift still happens but it’s now offset in the Q4 by a little bit of Halloween that moved out of September into October. So I think what you’re seeing is that those two things now offset each other in the Q4 number.

Terry Bivens – JP Morgan

Okay. And Dave, we have a source that’s occasionally right on C-stores, not always. So we were looking at roughly around 6% growth in the C-store channel during Q3. Is that close to what you guys saw?

Dave West

Our growth was not quite that, Terry. We gained some share in the quarter. I think on a year to date basis we’re still feeling that the C-store is outperforming most of the other classes of trade, but we didn’t see that kind of 6% number.

Terry Bivens – JP Morgan

Okay. And then just more generally, and I guess this question always comes up, the cash flow of course looks very good here. I guess you guys do have a bond that expires this year and maybe a note next year. But could you just give us your general thoughts on allotment of cash flow here?

Bert Alfonso

Yeah. We’re obviously pleased with our cash flow, and we have cash on the balance sheet now which wouldn’t have been true last year where we were still in the commercial paper market. We actually do, in terms of our bond maturity we do have a bond maturing next year and that’s in 2011. And so obviously we’re already thinking about that given that it’s already moved from long-term to short-term position on the balance sheet. Cash flow continues to be good. I already mentioned we’re about current on our share repurchase program with respect to replenishment of stock options.

The question that always comes up obviously is around buyback and that may be what you’re insinuating – it’s a discussion that we could potentially have with the board and we continue to have that. And we have other options in terms of cash use. So we’re pleased with where we are from a cash flow perspective, working capital and otherwise, and a strong gross margin growth, and we’ll take the appropriate actions going forward.

Terry Bivens – JP Morgan

Okay, thank you very much.

Dave West

Thanks, Terry.

Operator

Your next question – Alexia Howard, Bernstein.

Alexia Howard – Bernstein

Good morning, Alexia Howard from Bernstein here. I’d like to hear a little bit more about China and India. I know that you talked a little bit about it earlier on. Are you actually able to comment on what percentage of sales those two markets are expected to contribute in 2010? And what kind of lift are you getting on the quarterly numbers in terms of how much they’re contributing to sales growth year on year? And maybe just more broadly or qualitatively, what lessons have you learned and what do you see as the biggest opportunities in those two markets?

Dave West

Yeah, I think we have made some investments outside of the US pretty broadly – Asia is a place where we are and have got things. We’ve invested in some go-to-market capabilities with respect to the way we’re distributing and selling in both India and China. I think that the international growth rates added, let’s call it 100 basis points of the growth in the quarter to our growth rates. Again, that’s across the board. The Q3 in China particularly is a seasonally light quarter because we ramp up for the Chinese New Year which is in the early part of next year, and that ramp up really starts in September on. So there’s not a lot of activity sales-wise in China in the Q3. We spent some time building out distribution and we’ll support our brands in China in the Q4. When I talked about the incremental advertising spending that we’re having in the Q4, China is one of the places where we are certainly adding some sampling and some support behind our brands.

And as you think about our plans for 2011 on a go forward basis, we would expect that the non-US businesses would be added to the top line growth rates for next year as well.

Alexia Howard – Bernstein

Great, thanks very much. I’ll pass it on.

Operator

Your next question – Vincent Andrews, Morgan Stanley. Your line is now open.

Vincent Andrews – Morgan Stanley

Thanks, and good morning everyone. Just a couple of quick ones and I apologize if you covered some of this; I had to hop off during your prepared remarks. Just on sort of your initial outlook for 2011… You’re going to have very tough comps against 2010 on the top line, so what is it in particular that’s giving you the confidence that you can still sustain what’s going to be pretty robust top line growth next year? Is it the advertising levels, the promotion, or the work you’re doing around some of the Mounds and Almond Joy-type brands? What is it that’s driving that?

Dave West

A combination of things in the US in particular. Our innovation, we’ve launched Pieces earlier this year and that has done very well, but remember we have the Hershey’s Drops and the Reese’s Minis that will ship in December, and so that innovation becomes additive for us next year. And we have other innovation in our pipeline for 2011 that we feel very good about, and so that will be an added component on us for next year. We are advertising and added some GRPs across a number of brands this year. We are in the Q4 increasing the GRP levels on Mounds and Almond Joy and York, and then we’re adding some advertising support across Payday and Hershey’s Syrup for the first time since 2001. So that will add to, we think the impression of the brand.

And then we are also continuing to look at better sales force execution and we’re gaining some distribution points in the convenience class of trade as we’ve brought on the extra resources this year. So we have a number of additive levers that we’ve invested in this year, and we’ll start to test insights-driven performance which we are investing in here pretty significantly in the back half of the year. It’ll be more in a pilot form next year; we think it’ll help us as we get set up for the latter part of ‘11 and into 2012.

Vincent Andrews – Morgan Stanley

Okay, you actually answered my other question in that. I appreciate it, I’ll pass it along.

Operator

Your next question comes from the line of Robert Moskow, Credit Suisse. Your line is open.

Robert Moskow – Credit Suisse

Hi, just a couple questions. You talk about the investments in the international business – is there any chance you could give us just a little bit on how dilutive you think investment in international is going to be for the next couple of years? And then also your market share gains are great this year but they are slowing, and yet you’re dialing up advertising, and you have a huge increase this year in advertising. Why wouldn’t these gains be more sustainable? Or do you just think the competition is having a good at it in Q3 and now you’re going to launch your new products and that will kind of reverse it the other way again as we head into the next couple of quarters?

Dave West

Those are good questions, Rob. Let me just give you some perspective. On a year to date basis, FDMXCW – so that’s that kind of 80% of the universe. So I’m talking year to date, our takeaway is up 4.7%. So that’s a fairly solid nine months or through Q2 takeaway. And if you look at the Q3 takeaway, we were up roughly 3.5%. So our FDMXCW takeaway was 3.5% and we held share within that 3.5%. So we still are seeing 3.5%, pick a number – 3.5%, 4.5% category or takeaway growth, so good numbers.

Within the Q3 we were sequentially much better in the drug class of trade for the first time in a number of quarters. We actually gained share in drug – we talked about 3.2% takeaway and a 60 basis point gain in share in drug. We were very pleased with the sequential improvement in the mass retailers, and in convenience we held and gained a little bit of share as well in the quarter. Where we lost share, the one area which I talked about was we lost a half of a share point in food off of a 2.5% takeaway gross, and that’s really where we lost the merchandising in the Q3. We had talked about some new items that some of the other chocolate competitors were coming within the Q3. We lost the merchandising in food and we also moved away from a promoted price point on one of our pack types that we didn’t like, particularly much in food – that wasn’t as profitable for us.

So when I think about the business overall, in the Q3 still good category growth rates, although a little bit more of a share skirmish. And remember, our innovation comes in the Q4 in the form of Reese’s Minis and Hershey’s Drops. So overall the category is still growing very well, we feel very good about it. We’ve got volume returned in this category and I think the growth rates are pretty good. So the advertising, it’s working on the brands we’re putting it on, and then we’ve significantly added some advertising spending.

We’ve been fortunate to be performing pretty well here the last few years within the US business, and as that US business has performed well we’ve taken advantage of the opportunity to go off and take the demand landscape learning that worked so well for us in the US, and we’ve used that learning in Canada, Mexico, China, for example – and what we’re now doing is accelerating our investment in go-to-market capabilities as well as in brand building in those markets.

So we’ve absorbed that type of ramp up in spending in the international markets in our results over the last two years, and when we talk about next year we also see similar kinds of investments in international within the long-term 6% to 8% number that we gave you. So we’re able to continue to grow our earnings base and still do those international investments.

Robert Moskow – Credit Suisse

You don’t want to give us a number on the dilution effect.

Dave West

Well just to be clear, and in our prepared remarks we said it, that operating income, the only market outside the US where we saw operating income growth was Canada. We had operating income declines in the rest of the markets. So it clearly has a dilutive effect for us but as I said we’ve been able to absorb that in our core businesses in the US and particularly in Canada with the invested levels, and we see ourselves able to do that again next year and into the long-term, as we talked about that 6% to 8%.

Robert Moskow – Credit Suisse

Well, thank you very much.

Dave West

Thank you.

Operator

Your next question comes from Ken Zaslow, BMO Capital Markets. Your line is open.

Kenneth Zaslow – BMO Capital Markets

Good morning, everyone.

Dave West

Good morning.

Kenneth Zaslow – BMO Capital Markets

Can you talk about the timing between advertising spending and the incremental sales growth? What I’m trying to get a sense of is, when Hershey spends a dollar on advertising how do you assess or how do you expect to get the incremental sales growth? And just the timing of how that works, because you are spending a lot of advertising and I would expect it to kind of have an implication for 2011. So if you could just bridge that a little bit, that would be helpful.

Bert Alfonso

Yeah. I would say, and I think we’ve mentioned it before – we take a pretty disciplined approach in terms of our ad spending, and so we keep a keen eye on how we think about ROI. Clearly brands with scale are the ones that will give you the better ROI. So you’re right – there’s certainly a lag effect in terms of advertising spent today and brand building in consumers’ minds and purchases in the future. So as we think about Q4 spend in particular, we do expect them and we have our own internal calculations about how that impacts the first couple of quarters of next year, and certainly there’s a positive correlation.

We look at those ROI numbers on a brand basis, on a monthly basis as well, so it’s not something that we do at long intervals – we keep a constant review of what that ad spend is. When Dave mentioned Syrup and Payday, which we haven’t had on air since 2001, certainly there was a lot of analytical and work done around that, done beyond that to determine whether those were the right two brands to put on air and at what levels. So the only other thing I would add to that which is a different dynamic is in international markets ROIs certainly are lower, and that goes back to the scale comment I made earlier – the larger the brand, the greater lift you’re going to get simply based on that scale. And so the international markets are more about long-term brand building, but in the US the payouts are much more immediate and they normally, as we think of it, come in the next couple of quarters.

Kenneth Zaslow – BMO Capital Markets

How many more brands, and I know you won’t tell me which ones, but how many more brands do you have that have significant underinvestment, similar to like a Payday or the Syrup? It sounds like, are you coming to the end of that and then you’re going to move on to the internationals? Or is there still some runway in terms of the non-chocolate confectionary side.

Dave West

We never think we’re coming to the end. That sounds like a… Let me rephrase that. We’ve gotten good investment on the majority of the brands that we would expect to see good lifts. We’ve been able to accelerate some of them. We certainly were able to do Mounds, Almond Joy and York earlier this year based on the successes that we had back in 2009, and we’re able to do Payday and Hershey’s Syrup a little bit earlier than we would have expected. So maybe another brand or so, and with respect to international in the last two years we’ve already made those investments. I think Bert mentioned a number of about 65% or so increase in ad spending in the international markets outside the US in the Q3.

So that’s already in our numbers, and so when you see the increases in advertising as we kind of roll through the year, what we are doing is really accelerating some of the strategic plan work that we were doing with respect to the demand landscape work that we’ve shared with you to get to some of the brands that we think we can activate pretty smartly, because they have some unique characteristics. And then in the international markets I think we’re applying some of the really good learnings from the US and doing it a little quicker than I think we expected we would have gotten to it.

Kenneth Zaslow – BMO Capital Markets

Great. I really appreciate it, thanks.

Dave West

Thank you.

Operator

Your next question comes from Judy Hong, Goldman Sachs. Your line is open.

Jason English – Goldman Sachs

Hey, good morning, guys. Jason English here. First, I just wanted to say that I think some degree of congratulations is in order for pretty solid results in this quarter and year to date, particularly in light of what we’re seeing across food land. But now my questions do turn to some of the outlook and how you keep the momentum going. Inflation’s obviously a concern. I think you guys are calling it out in your press release; you mention it as a potential headwind for next year. As you lay out guidance this year, what degree of inflation are you guys contemplating within that?

Bert Alfonso

Yeah, in terms of our cost basket and you’re right – we’re certainly anticipating, just based on our internal estimates and the visibility we have for next year already – we certainly expect that commodities, as an example, will be ramping up next year in terms of cost. We’ve got an awful lot of productivity programs behind providing offset there, and in terms of gross margin we don’t expect to repeat the type of performance that we had this year in a more benign commodity environment. So we’re continuously looking for ways to offset that inflation within the manufacturing space, but there’s no doubt that inflation is a headwind next year compared to this year. We have it built into how we think about the top line and bottom line and we still believe we have leverage in the P&L to be able to achieve within that 6% to 8%, but the composition of next year’s cost basket is certainly more inflated than this year.

Jason English – Goldman Sachs

Well, thank you for that. Is it possible for you guys to quantify what you’re thinking in terms of range? And you mentioned that you’re also thinking about the impact on top line. Can I interpret that to mean you’re contemplating some pricing moves to help you mitigate this?

Dave West

We’re not going to comment on pricing at all. I think Bert’s comments were really around the input costs in terms of inflation, and our cost basket is frankly a bit different than some of the other folks in the food space. We’re bigger buyers of cocoa and sugar and dairy than, and we’re not in the grain complex nearly as much as always, so I’m not sure our inflation assumptions would be translatable for you. And for competitive reasons we’re not going to get into kind of a blow-by-blow, commodity-by-commodity. We do expect that our basket will be higher overall but we do have very good productivities in place to offset some of that. So that’s how we’re planning our business for 2011.

Jason English – Goldman Sachs

Very good, one more question and I’ll pass it on. I think through the first half of the year you mentioned that your trade spend was running below initial expectations. Has that changed and do you see a need to bring more trade spend to market?

Bert Alfonso

The rate in the Q3 was about flat versus the prior year’s rate. In the first half of the year we had actually been a little bit favorable on a rate basis, and when we had gotten, in the Q2 call we had said that that would have likely abated when we got in the back half. So the rate is roughly in line with what it was a year ago. And again, I think when you see retailers will choose what price points they want to run particularly the seasonal events at. So far what we’ve seen year over year at Halloween in the marketplace is the price is roughly equivalent on a promoted basis to what it was a year ago.

Dave West

I mean the back half is always a little more, if you want to call it, intensive simply because it does have a hard seasonal component, but we’re not seeing anything that’s a lot different than what we anticipated.

Jason English – Goldman Sachs

Cool, thanks guys.

Dave West

Thank you.

Bert Alfonso

Thanks

Operator

Your next question comes from the line of Andrew Lazar, Barclays Capital. Your line is open.

Andrew Lazar – Barclays Capital

Good morning, everyone.

Dave West

Hi, Andrew.

Bert Alfonso

Hi, Andrew.

Andrew Lazar – Barclays Capital

Just a quick follow-up, a little bit from the one you just had. Some food companies, when they think about their long-term sort of top and bottom line growth algorithms, they’ll say “Our attempt over time is to either offset inflation through pricing such that we have our productivity and whatnot to fund and drive the top line,” or “We attempt to offset inflation through a combination of pricing and cost saves,” what have you. And I don’t know – I can’t, maybe, I apologize if I just can’t remember. Have you gotten that granular around your long-term growth algorithm and ultimately how you anticipate handling inflation over time?

Bert Alfonso

We actually have not given out that level of specificity, and I think one of the reasons we’re a little more conscious about giving that level of detail is where the only ones in the confections space who are giving certainly a public announcement, and competitively we’d like to keep our, particularly our commodity strategies a little bit more close to the vest.

I think in principal, Andrew, what you’re saying is absolutely correct – over time you would like to offset and pass on the appropriate increases in your cost basket. We have been particularly aggressive I think within our supply chain, obviously with the global supply chain transformation project that we completed, where we closed seven facilities and built a new one in Monterey, Mexico. We have what we’re calling Project Next Century where we’re working very hard to continue to improve the efficiencies of our plant here in Hershey, we’re building a new facility here and we’re going to invest a couple hundred million dollars here in our home market.

So we look at those productivity programs as well as just better efficiency in the business by focusing on the core to have given us the flexibility to meet the issues within our cost basket as well as our investment needs. But on a go forward basis I think in principle I would say we’d like to be able to deal with input pressures and eventually be able to pass those along to the consumers as appropriate. But I think the other thing that’s somewhat unique about our category is that it is so promotionally intensive and so much of it moves on merchandising – it’s really less about list pricing and how consumers think about promoted price points over time. And those are a little harder to move; they tend to move in bigger increments than simple list prices.

So there’s an algorithm for us that may be a little bit more difficult to implement because of the significant portion of our business which is seasonal and merchandised in that way. So we have historically as a category tended to move in bigger increments in promoted prices than you maybe would see in other categories, but we do over time expect that we’d like to pass on those kinds of costs.

Andrew Lazar – Barclays Capital

That’s helpful and I appreciate that. I mean I do recall that in the last one that you took a while back, you did move the promoted price point, and the move in that one was much more dramatic, whatever it was – a 20% to 25% kind of move.

Bert Alfonso

Yeah, 20% to 25% is correct.

Andrew Lazar – Barclays Capital

Okay, that’s helpful. Thanks very much.

Dave West

You’re welcome.

Operator

Your next question comes from the line of Eric Katzman, Deutsche Bank. Your line is now open.

Eric Katzman – Deutsche Bank

Hi, good morning everybody.

Dave West

Good morning, Eric.

Eric Katzman – Deutsche Bank

Okay, a couple of questions, I guess, just to keep on that same theme but not to beat a dead horse. You know, the last time the category raised prices so aggressively I would say there was more elasticity than I would say was initially expected. And I think Dave, you suggested that the premium end of the category is still kind of flatish or not keeping up with the mass part of the business. So does that kind of suggest to you that putting through a price increase would be pretty, would be met by a fair amount of elasticity given what you see from the consumer segments within confection?

Dave West

I think, Eric, let me just clarify my point. Premium and trade-up, when you look at it in aggregate is about, roughly flat for the year. Those two segments are not contributing, on a combined basis they’re not really contributing to category growth. It really still is very much a mainstream story. I think when we did take our pricing action that we announced in August of ‘08 and implemented really in ‘09, and it spilled over a little bit into early 2010, we did see volumes return a little more quickly than we would have expected from our modeling. So we were very encouraged by that. What we all have to continue to monitor is consumer behavior and where consumers are today, and how they’re thinking about value. One of the beautiful things about our category is it is an approachable luxury and/or indulgence at a time when consumers are looking for that.

So the category dynamics right now, as I said we’ve got good growth in the category. It’s a very volume-oriented category and people are playing the innovation approach right now in the category. We feel very good about that. So we think the category growth rates are strong where they are. I don’t want to talk very much about forward pricing. I think one of the other factors you take when you look at pricing is what’s happening around you in the entire rest of the basket? And I think there seems to be some inflationary pressure retailers are talking about, and it looks like some other folks are also in other categories are going to need to do some things.

So that’s also a big factor. Are prices in any category moving up by themselves or are they moving up in context to the entire basket? So all of those things I think would impact the way the modeling works for us. You know, we clearly model it out constantly, and I think what I would say right now is we’re pretty comfortable with where our business is and that we’ve got volume returning, and beyond that I don’t think I’ll comment any further on anything that’s happened in the market.

Eric Katzman – Deutsche Bank

Okay, I appreciate those comments. Just moving to, I think it was Ken’s question, but I think the last time I heard Hershey talk about getting more aggressive with Payday it was kind of towards the end of the growth story. I think you tried to position that as a sports kind of bar or something along those lines, and that didn’t work. And so I guess I just point that out in that you do have the new drops and bit-sized stuff that seems to be working. I mean is the next move kind of an enrobed product which you don’t really have in your, let’s say quiver? Because as I said before I think the drops and stuff is kind of like a bite-sized M&M’s type product and the one thing that you really haven’t been successful at is putting out something that competes with a Snicker’s or a Milky Way, or something along those lines.

Dave West

I think the reference you make to positioning Payday as an energy bar, we had a product that we marketed as Payday Pro which had higher levels and more grams of protein in it. That’s not the product we’re talking about. What we are talking about here is supporting the Payday bar itself. We haven’t had advertising on that on air since 2001, and we think Payday is uniquely positioned in the demand landscape work that we have in our portfolio, that it doesn’t really interact with much else that we have in the portfolio. So we think it’ll be pretty incremental for us.

We do think that the Minis and the Drops launches – the Hershey’s Drops and the Reese’s Minis launches – will be good launches for us. We’re excited about them and we will support them with advertising unique to those items. And we have other innovation that’s planned for 2011 which we’re not at this point in time going to reveal to you, but again, we are very anchored in the demand landscape in terms of what’s incremental to the portfolio and where white space is in the category. And I think we’ll share some more of that when we get into the early part of the year, probably at Cagney.

Eric Katzman – Deutsche Bank

Okay, and if I could just ask one last one, and this is a bit difficult to ask but I’ll go for it anyway. You moved and created a new facility in Monterey, and all you hear about of that city is pretty tough conditions. Is that something to be concerned about? Like is that a facility that you use for the export market or does that come back in here? Or do you have the capacity utilization to meet demand if things get worse there as opposed to better?

Dave West

The facility in Monterey, Mexico, it is producing product for the US market. We have embarked, I think like many of the companies in the Fortune 500 and beyond on a pretty robust enterprise risk management or ERM program. Supply and sourcing is one of those things that’s in that, so this is something that we continuously look at – source of supply, not just in Monterey but throughout our network. We have experienced no issues in Monterey with respect to our manufacturing facility and we haven’t experienced any issues bringing product across the border, etc. As a matter of fact, that project went very well for us. It achieved its milestones. The productivity that we got from that back in ‘09 and closed out this year is very strong.

So we’re pleased with how that’s gone. You know, it’s no different than any other supply situation. You continue to monitor your inventory levels but it is something, as far as an ERM program you’d look at. But we are pleased with where we are.

Eric Katzman – Deutsche Bank

Okay, thank you. I’ll pass it on.

Operator

Your next question comes from the line of David Driscoll, Citi Investments. Your line is open.

David Driscoll – Citi Investments

Okay, thanks a lot. Good morning, everyone.

Dave West

Hi, David.

David Driscoll – Citi Investments

Most of the questions have been asked, just a couple of follow-ups. On commodity inflation for 2011, Bert, can you just comment on whether or not you feel good about your visibility into the cost structure for 2011 at this juncture?

Bert Alfonso

Yeah, David. What we said towards the end, or at least what I tried to communicate towards the end of my prepared remarks were that there certainly is more commodity inflation. We haven’t experienced as much this year as we thought; in the Q3 we’d thought we’d have some higher commodities. I mentioned that, and it was really kind of flat. We think that changes starting in the Q4, it starts to move up and we see some of that continuing. Certainly at this time of the year we start to get some regional visibility in terms of next year.

We’re very focused on being able to say more about that later on, and also very focused against the productivity programs, of which right now… You know, we’ve mentioned the Cagney program – that starts to deliver even more next year, not just on cost of goods but also below that. So at the moment we feel pretty balanced despite the fact that we expect certainly commodity prices to be higher for next year, and just to put it in perspective the only comment I made was that this year our gross margin as we all know as really been terrific. We don’t expect to see that next year but right now we have reasonable visibility, we have good visibility not just on the cost factor but also on the savings.

So we don’t provide an inflation number, and we will provide more color on that the next time we get together. But we’re pretty pleased with where we are right now.

David Driscoll – Citi Investments

On the productivity savings, you have a number of different programs, and frankly I don’t think you guys ever just give us a summation of it. But when I do it I think it’s about 3% of cost of sales for 2011. Is that about the right number when you add up all the different productivity programs you have going on?

Bert Alfonso

Yeah, we have a couple of things as you’ve mentioned that are out there. And when we think of continuous improvement, it’s a year in and year out program – it’s not a special program. And that’s intended to, I think as we referred to earlier, it’s intended to approximately offset our inflation. The program that we unveiled at Cagney which focuses more on non-manufacturing productivity and cost savings through procurement is separate from that, and it’s intended to be – at least in 2011 and 2012 – 2x the normal productivity.

So if you think about our continuous improvement being an attempt to offset inflation, and we think we can do approximately 2x that, you would assume that ‘11 and ‘12 has a higher level of productivity if you exclude obviously Next Century, which doesn’t provide a whole lot of savings in 2011 – those savings really come into ‘12 and ‘13.

David Driscoll – Citi Investments

That’s very, very helpful. Last question is for Dave. Dave, when you talk about the international markets, I’ve always had the expectation that one of the things you could do to really enhance your growth there would be to gain some distribution through some acquisitions. Can you comment at all on the visibility you have on the pipeline of deals that are out there? Some of the other companies, like TreeHouse and so forth, they really have some color. They don’t comment on timing or where it is, because I know that’s something you want to keep close to the vest, but can you give us any general parameters? Is it reasonable for us to expect that you will be out there in the acquisition market, trying to add on to those international franchises that you do have?

Dave West

You’re right – I won’t give you any additional parameters. I think we’ve been pretty clear that the Latin American and the Asian markets are where we’re focused. We have good cash flows – that’s one of the ways we would look to redeploy those cash flows, and we’re going to do a disciplined look at what’s out there. And beyond that I wouldn’t comment. We continue to be very encouraged about the organic growth of our international businesses in those markets around the world, and if you can find something that bolts on and makes sense we certainly are interested. But you know, I wouldn’t give you anything in terms of timing or any of those other things because you know, those things are always so opportunistic.

David Driscoll – Citi Investments

Great, thank you so much.

Dave West

Thank you, David.

Operator

Your next question comes from the line of David Palmer, UBS. Your line is open.

David Palmer – UBS

Thanks. Hi, guys.

Dave West

How are you?

David Palmer – UBS

I’m wondering how you’re thinking about the impact to price per volume from innovation. Obviously we have Drops and Minis coming, and you’re going to be pushing in certain channels, packaging, price points; in addition I’m guessing there’s going to be some promotion spending up front that might ease through 2011. So any color that you can offer about how this might impact your mix in the coming quarters would be great.

Dave West

Yeah, I think if you think about what we did when we did the Pieces launch… We have done a very good job, our sales force executes very well in terms of getting those items to market. We had the Pieces, and some of the newer items but really Pieces in the Q1 of this year really added almost two points of growth for us into the top line. And that’s been more like a point of growth from there on, and when you get to something like you know, Minis and Drops, they’ll build meaningfully volume as you build pipeline here in December and into the Q1, and then they’ll continue forward.

In terms of mix, the Reese’s Minis and the Hershey’s Drops will be in both take home stand-up bags as well as in king-size formats on the front end, so I think from a mix standpoint it probably looks similar to what the rest of the portfolio would look like, although we are very excited about the ability to get some hand-them-out activity on our biggest brands, Hershey’s and Reese’s, which we haven’t had. So we hope that it’ll become a very good instant consumable item in convenience and front ends of the stores.

I think as I said, in the Q3 innovation was additives for some other folks in the category who came with their bigger brands and did some innovation. Ours happens to come in the Q4 and the early part of next year.

David Palmer – UBS

And separately, your net debt is dropping to less than one turn of EBIDTA. The old Hershey, I think particularly after a nice move in the stock would show up with a big repurchase of a slug of trust shares, and that seems like a million years ago. But my gut is at this point, strategic investments, acquisitions are at the top of the menu. Any comments now that we’re getting to these levels on net debt about how you’re thinking about investments going forward?

Bert Alfonso

Yeah, I wouldn’t give any more color than we’ve already given. I think Dave’s right – M&A is certainly high on our list. It is opportunistic. We’re fortunate to be in a balance sheet situation where we have those alternatives, and we’re looking at all of them and considering them going forward. So certainly we want to put our balance sheet to work and I really wouldn’t comment more than that.

David Palmer – UBS

Thanks, guys.

Dave West

Thank you.

Operator

Your next question comes from the line of Eric Seranno, Wells Fargo Securities. Your line is open.

Eric Serrano – Wells Fargo Securities

Morning.

Dave West

Hi, Eric. How are you?

Eric Serrano – Wells Fargo Securities

Not bad. Most of my questions have been answered, but one area I wanted to follow up on was you commented on the sequential improvement in one of your large mass customers. To what do you attribute that improvement? Was it things going on with the customer that we’re largely familiar with? Or was it something Hershey-specific? And did you actually pick up any incremental display space with that customer?

Dave West

I think I’d probably rather not comment specifically on anything other than as we’ve gotten into the September/October timeframe in most places, and as we get into Back to School/Halloween, we’ve done a very nice job of executing and getting into that season with good merchandising programs. And I think it’s across the board with the exception I think of the food class of trade where we didn’t get that kind of merchandising in the quarter but we got it everywhere else. So I think it’s really a factor of Back to School, Halloween and some decent traffic. And I’d leave it at that.

Eric Serrano – Wells Fargo Securities

Okay. And then just to follow up, Bert, on your comment for gross margin 2011. I was a little bit unclear when you said something to the effect of it wouldn’t be quite as strong as 2010. Were you commenting that gross margin would be directionally down or that we just wouldn’t see the massive gross margin improvement that we saw in 2010?

Bert Alfonso

It’s the latter. We really haven’t commented on the direction for gross margin but it’s certainly what I was trying to imply, that it wouldn’t be, you wouldn’t expect the same types of increases and gains that we’ve had this year. We’ll provide more color as we get a little bit further down in the year in terms of how we see that gross margin.

Eric Serrano – Wells Fargo Securities

Okay, the rest of my questions have been answered. I’ll pass it on.

Dave West

Thanks, Eric.

Operator

Your next question comes from the line of Bryan Spillane, Bank of America. Your line is open.

Bryan Spillane – Bank of America

Hi, good morning guys.

Dave West

Good morning, Bryan.

Bert Alfonso

Good morning.

Bryan Spillane – Bank of America

Just a question on phasing for next year, just want to make sure I’ve got a few of the things are that Easter I guess will be later. So just I guess if you could comment on how that will impact things, just having the Easter season be longer. Is that maybe a positive lift for sales in the Q2? And then also in terms of, just as raw material increases, go through next year – is there anything we should think about in terms of timing? Is it any more of less of an impact in a certain time of the year? And then also in terms of the way that you’re expecting to manage the flow of cost savings – again, is there anything there that we should think about on a year on year basis?

Dave West

I’ll make the comment on Easter. Most of the Easter, the products are, the majority for all intents and purposes are shipped in the Q1. It is a longer Easter season and therefore you would expect us to probably have more Easter shipments than we would, but as we talked about Valentine’s and Easter moving out of the Q4 and into the Q1, one of the reasons is because Easter’s a little bit later.

I think what you would expect though is to see some, it’s really an anomaly, an aberration in takeaway. Because as Easter gets later into April when you look at Q1 data and Q1 market share, the category might look a little slower than normal because the stuff feels later; Easter is large component of what happens in that March/April timeframe. So I think market share and takeaway might be more affected by the later Easter, but I think shipments will still fall within the first quarter.

With respect to productivity, if you’ll remember we got the last slug of global supply chain transformation productivity in the Q1 of this year, and then we don’t see the Next Century Productivity until the Q4 of 2011. So those are the two big buckets. Other than that we are on a standard cost system, so essentially the cost increases that Bert talked about would get spread largely across the year based on as volume flows out. So you kind of come up with an average projected price for yourself on a standard basis and it just flows throughout the year. So for the most part most of that commodity gets absorbed, and the commodity increases Bert talked about would just get absorbed across the year with a couple of caveats around the supply chain stuff.

Bryan Spillane – Bank of America

Okay, and then just anything else notable in terms of phasing that we should think about in terms of the quarter?

Dave West

No, I don’t think so. At this point I think we’ll give a little more clarity on that as we kind of close out this year and get into next year and January.

Bryan Spillane – Bank of America

Okay, great. Thanks, guys.

Dave West

Thanks, Bill. Take care.

Operator

There are no further questions at the present time, sir.

Mark Pogharian

Alright, thank you for joining us for today’s conference call. Matt Miller and myself will be available for any follow-up questions that any of you may have. Thank you very much.

Dave West

Thank you.

Operator

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

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