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The Hershey Company (NYSE:HSY)

Q2 2008 Earnings Call

July 23, 2008 8:30 am ET

Executives

Mark Pogharian - Director, IR

Dave West - President and CEO

Bert Alfonso - SVP and CFO

Analysts

Christine McCracken - Cleveland Research

Eric Katzman - Deutsche Bank

Robert Moskow - Credit Suisse

Vincent Andrews - Morgan Stanley

David Driscoll - Citi Investments

Terry Bivens - JPMorgan

Ken Zaslow - BMO Capital Markets

Jonathan Feeney - Wachovia

Eric Serotta - Merrill Lynch

Alexia Howard - Sanford Bernstein

Andrew Lazar - Lehman Brothers

Todd Duvick - Banc of America

Operator

Good morning my name is Krystal and I'll be your conference operator today. At this time, I would like to welcome everyone to The Hershey Company second quarter 2008 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session (Operator Instructions) Thank you. Mr. Pogharian, you may begin your conference.

Mark Pogharian

Thank you, Krystal, and good morning ladies and gentlemen. Welcome to The Hershey Company second quarter 2008 conference call. Dave West, President and CEO, Bert Alfonso, Senior Vice President and CFO and I'll represent Hershey on this mornings 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 risks and uncertainties. Actual results may vary materially from those contained in the forward-looking statements because of factors such as those listed in this mornings press release and in our 10-K for 2007 filed with the SEC.

If you have not seen the press release, a copy is posted on our corporate website www.hersheys.com in the Investor Relations section. Included in the press release are consolidated balance sheet and summary of consolidated statements of income prepared in accordance with GAAP as well as our pro forma summary of consolidated statements of income quantitatively reconciled to GAAP. As we'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 a presentation of earnings, excluding certain item, provides additional information to investors to facilitate the comparison of past and present operations.

We will discuss our second quarter 2008 results, excluding net pre-tax charges. The majority of the charges in both 2008 and 2007 are associated with the Global Supply Chain Transformation program announced in February 2007. These net pre-tax charges were $39.3 million in the second quarter of 2008 and $124.4 million in the second quarter of 2007. Our discussion of any future projections will also exclude the impact of net charges related to these business realignment initiatives.

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

Dave West

Thanks, Mark, and good morning everyone. Results for the second quarter were roughly in line with our expectations. Net sales increased 5.1%, reflecting the progress Hershey continues to make in the marketplace. The consumer-driven model we unveiled last month is focusing our efforts on brands and innovation that offer the greatest potential for sustainable sales and earnings growth. Marketplace momentum is building, driven by core brand, such as Reese's, as well as new products, particularly Hershey Bliss and Starbucks chocolates. Continued brand investment should result in further year-over-year improvement in the second half.

In terms of second quarter marketplace performance, the reported IRI and Nielsen data for the period ended June 15 is impacted by the timing of Easter. Therefore, my remarks related to second quarter takeaway and market share will exclude the effect of seasons and be focused on the everyday business. During the quarter, we continued to make significant progress on initiatives that will benefit net sales and earnings throughout the remainder of the year and beyond.

As I stated a few weeks ago in New York, focused investment on our brands is driving retail takeaway. Everyday consumer takeaway for the 12 weeks ending June 15th, and channels that account for over 80% of our retail business increased by 5%. Specifically, the Hershey's and Kit Kat franchises were up above 7%, while the Reese's and 12 of those franchises were up low double digits. These gains were offset by softness in Kisses as we are lapping the 2007, 100th anniversary promotion as well as softness in snacks and refreshment.

As we highlighted last month, market structure and segmentation work is well underway to begin to address the positioning of certain brands, especially Kisses. In the channels measured by syndicated data FDMxC, total Hershey retail takeaway, excluding the Easter effect, increased 3.3%, greater than the total CMG category growth rate of 2.8%, resulting in a modest market share gain of 10 basis points. Clearly, a step in the right direction for our business.

Performance within non-measured customers remains good. Shipments of Back to School and Halloween essentially had no impact in the second quarter, with sales within the quarter down slightly year-over-year on Halloween. We expect an overall solid Halloween, so this is only a timing issue.

Seasonal programming is in place to ensure that we have a good third quarter sell-through. In the second quarter, marketplace performance improved in all classes of trade, especially in C Store and food channels where we have added retail resources.

In the convenience store class-of-trade, the category continues to grow. In the second quarter, the categories were up 4.1%, Hershey takeaway increased 3%, while this resulted in the share loss of 0.3 points, it was an improvement sequentially and year-over-year. In convenience stores, Hershey's chocolate and non-chocolate segments were solid during the quarter, with takeaway up 3.7% and 5.7% respectively. Offsetting this performance was softness within refreshments, particularly mints.

Positive results were driven by additions to resale coverage and increased levels of core brand investment, including advertising, merchandising and unique C Store programs, such as our Reese's co-partnership, as well as cash for gas, where consumers can instantly win free gas when they purchase a Skor or PayDay candy bar. Continued core brand advertising, as well as Reese's Batman Dark Knight, Olympics and NASCAR programming will ensure momentum continues in the third quarter.

Turning now to the food class of trade where everyday retail takeaway increased 2.6% in Q2. Specifically in the May 18 quad market share was flat in the June 15th period we gained 0.9 share points in food. These results were driven by increased retail coverage, merchandising and the success of Hershey's Bliss. The Hershey's Bliss launch benefited the chocolate segment in the food class of trade.

To date, the Hershey's Bliss launch has been highly successful, exceeding all internal targeted sales metrics. Consumer takeaway and trial has been particularly strong, making Hershey's Bliss the number one new brand launch in a chocolate category for 2008. During the quarter, we exceeded our ACV distribution targets, incremental merchandising, and products display activity, combined with strong consumer support, anchored by TV advertising, product sampling and traditional trial vehicles drove takeaway.

As it relates to household penetration, Hershey's Bliss ran significantly above all of our benchmark targets at this point in its launch. Importantly, early repeat repurchases are exceeding our initial estimates. Yet the launch has more than met our expectations and Hershey's Bliss is on track to exceed its year one sales target.

The Starbucks chocolates product launch is also progressing. This is a more focused opportunity and therefore our overall ACV distribution will not near that of Hershey's Bliss, where it is in distribution. Starbucks is doing well, driven by advertising and consumer support programs. We feel among consumers, who have tried the Starbucks line is above expectations and importantly about half the consumers buying Starbucks are making it an incremental purchase to their category shopping. ACV is a bit behind our target, but we have plans in place to close the gaps in the second half.

As we outlined last month, investment in our core brands will continue throughout the year including advertising, merchandizing and consumer promotion. We are on-air with continuity levels on Reese's and we are initiating spots on Hershey’s almond and standard bars. Hershey’s Bliss and Starbucks will continue on-air as well.

So overall, we are pleased with our US market place performance in the second quarter, as we improved in all classes of trade. Price realization, increased retail coverage combined with higher levels of advertising, and in-store activity, is having the desired effect. We are gaining traction and we expect this will continue with year-over-year US market place performance improvement in the second half of the year. Our international businesses continue to deliver on our expectations and we also expect this to continue throughout the remainder of the year.

The global supply chain transformation program is progressing. We expect to recognize the majority of the 2008 global supply chain savings in the second half of the year as production in our new facility at Monterrey ramps up. We will have a few more details for you in a moment.

The global supply chain transformation savings combined with price realization and good visibility into our cost structure in the second half of the year will enable us to expand consumer investment, support solid seasonal programming and continue to build our international business.

Therefore for the full year 2008, we continue to expect net sales growth of 3% to 4% and earnings per share diluted from operations of a $1.85 to $1.90 per share. While it's too early to give details of specificity around 2009, we are encouraged with the latest marketplace trends and feel that in 2009 net sales will be within our long term top line growth rate of 3% to 5% driven by further brand investment, the previously announced pricing action, and international growth.

We do expect commodity cost to increase again significantly in 2009 and to remain volatile for the foreseeable future. We continue to focus on productivity and other initiatives to offset higher input costs and consumer investment. We'll continue to invest behind our focused brands and international businesses. Therefore in 2009, we expect earnings per share to grow, but below the long term operating EPS rate of 6% to 8%. Now Bert will provide more detail.

Bert Alfonso

Thank you, Dave and good morning everyone. As already highlighted, Q2 results were in line with our expectations. Consolidated net sales in the second quarter of $1.1 billion increased 5.1% versus the year ago period. Diluted EPS from operations of $0.29 declined 17%, primarily due to higher levels of consumer investments and selling expense. Importantly market place performance is improving, and our 2008 plans are on track to deliver full year net sales growth of 3% to 4%, and EPS diluted from operations of $1.85 to $1.90.

Now for some additional details: net sales performance, up 5.1% in the quarter, was essentially in line with our internal forecast. Net price realization driven by the April 2007 and January 2008 US price increases contributed about three points. Volume was low, about half a point, due to softness in snacks and refreshments. In June, we lap the results from the Godrej acquisition and the two month benefit in the quarter accounted for about 1.5 points of growth. Dave provided details related to our marketplace performance, so I will focus on our review of the P&L and balance sheet starting with growth margin.

During the second quarter, gross margin increased 80 basis points, as favorable price and productivity offset overall input costs that were higher by 20 basis points in the current period, because in the second quarter of 2007, commodity costs were markedly up, mostly driven by the timing of higher dairy costs.

Our full year outlook released commodity has not changed, and as such we still expect our input cost to be up about $100 million year-over-year. Net outsourcing costs were normal rates in the quarter and were slightly favorable year-over-year. Outside the US, the Godrej Hershey business generated lower than company average gross margin and modestly impacted the quarter.

Now that we have the Godrej acquisitions, future quarters will be more comparable. EBIT margin was down 280 basis points, as selling, marketing and administrative costs increased about 24% or 350 basis points as a percentage of sales, versus the prior year. Advertising and consumer promotion was up 34% in the quarter, reporting Hershey's franchises including the launch of Hershey's Bliss, Starbucks, the Reese's Perfect campaign and brand building initiatives in key international markets.

For the year, we expect combined advertising and consumer promotion to be up about 25%. EBIT margin was also affected by a few other factors. These include the cost of added retail coverage that began during the second half of 2007, employee related costs of our international expansions in India and China, and slightly higher corporate administrative cost. We expect our EBIT profiles to improve in the second half, as we lap the standard retail coverage in international infrastructure investments.

Now moving down to income statement. Interest expense for the quarter decreased coming in at $24 million versus $29 million last year. This was driven by a lower short-term rate on our commercial paper of about 300 basis points, and lower average debt balances resulting from working capital improvements.

For the full year 2008, on a percentage basis, we expect interest expense to be down from 15% to 20%. The tax rate for the second quarter was 39%, a bit higher than the prior year due to the timing of state taxes and tax accounting.

For the full year 2008, we are projecting a tax rate of 36%. Note that on a reported tax rate, it is higher than the pro forma rate, due to the effective tax rate applicable to business realignment charges.

Weighted average shares outstanding on a diluted basis for the quarter were $229 million versus $232 million for the second quarter of 2007, leading to an EPS of $0.29 per share diluted from operations down 17% versus year ago.

Let me now provide a quick recap of year-to-date pro forma results. Net sales increased 2.8% in the first half. EBIT from operations declined 22% with EBIT margin down 210 basis points to 12.6% from 16.7%. Advertising and consumer promotion increased 21% on a year-to-date basis. Gross margin was 35.3% year-to-date versus 36% last year due primarily to increased input costs. EPS diluted from operations in the first half declined 23% to $0.66 per share.

Next I'll comment on our balance sheet and cash flows. At the end of the second quarter, net trading capital decreased from the end of last year's first quarter resulting in a cash inflow of $224 million. Accounts receivable were down $75 million and remain extremely current in a high quality. Inventories were lower by $116 million compared to the second quarter last year and accounts payable increased by $33 million. We expect working capital to improve in 2008 primarily driven by inventory reduction and lower account receivable DSO.

During the quarter, capital additions including software were $76 million. For 2008, we continue to target total capitalizations in the range of $300 to $325 million driven by the global supply chain transformation program. Depreciation and amortization $57 million in the quarter, this includes accelerated depreciation related to a global supply chain transformation program of $11 million.

Together, operating, depreciation, and amortization totaled $46 million in the quarter. In 2008 we are forecasting total depreciation and amortization of about $245 to $255 million, including accelerated depreciation and amortization of approximately $55 to $65 million.

Dividends paid during the second quarter were $66 million. During the quarter, we did repurchase $23 million of our common shares in the open market to replace shares issued in connection with employee stock options being exercised. Our goal is to repurchase all such shares. We did not acquire any stock in the second quarter related to the current repurchase program and there is $100 million outstanding on the current authorization that the Board approved in December 2006.

Let me provide an update of the global supply chain transformation program, which we announced back in February of 2007. Construction in Monterrey continues and manufacturing is now underway with a limited amount of products being produced. Relocation of manufacturing equipment in our existing network is largely complete, although installation and commissioning of certain product lines is ongoing. While we are satisfied with our progress to-date, there is still a lot to accomplish in the coming months to complete the project on schedule.

During the quarter, we recorded global supply chain realignment charges of $40 million pre-tax including $15 million of accelerated depreciation in write-offs to cost of sales, and $2 million recorded in SM&A expenses reflecting program management costs and plant closure related costs. These charges reduced earnings per share by $0.11 on a reported basis.

For 2008, our estimate of total pre-tax charges and nonrecurring project implementation costs is $135 to $145 million, and the total three year ongoing savings remain at $170 million to $190 million, with a significant increase in 2008 compared to 2007. We expect cumulative savings to reach roughly $80 million to $90 million in 2008 due to the second half of the year. Our estimated total pre-tax charges and non-recurring implementation costs remains at $550 million to $575 million including project management and startup costs of $60 million.

Let me close by providing our outlook for the remainder of 2008. For the full year, we continue to anticipate net sales growth of 3% to 4%. Year-over-year, U.S. price utilization, improved U.S. marketplace performance driven by consumer investment and international gains, will drive second half net sales.

We expect that EBIT margin will be lower year-over-year due to higher input costs and increased investment in advertising, consumer promotion, and selling expenses in the U.S. and in selected international markets. As a result, for the full year 2008, our projected EPS diluted from operations remained in the $85 to $90 range. We are encouraged by the latest marketplace trends and feel confident that 2009 net sales will be within our long-term top-line growth rate of 3% to 5%, driven by focused brand investment, previously announced price increases and international growth.

We continue to expect commodity costs to rise again in 2009 and to remain volatile for the foreseeable future. I'm sure that all of you are aware that the majority of these commodities are up significantly since the beginning of the year. With this in mind, we continually assess our margin structure and are keeping all drivers for opportunity.

As we recently communicated in June, due to the increased penny against key growth initiatives and the difficult cost environment, we anticipate that in 2009 earnings per share from operations will increase, but not within the stated long-term operating EPS growth rate of 6% to 8%.

With that, I'll close and we'll now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Christine McCracken with Cleveland Research.

Christine McCracken - Cleveland Research

Hi, good morning.

Bert Alfonso

Hi, Christine, how are you?

Christine McCracken - Cleveland Research

I am well. Thank you. Just in terms of your 2009 guidance, it was a little disappointing relative to your expectations. Is there anything specific that you would call out aside from the obvious cost inflation, challenging environment that was driving that?

Dave West

I think we said it in the June Analyst meeting as well, there is a lot of volatility in the commodity markets, the complex pretty much across the board is up. We expect it is probably be another difficult year, from a commodity standpoint. We know we need to continue to make the investments in the business, both in the U.S. and internationally. So as we do that, while we see growth next year at this point from an earnings per share standpoint, it is just too early for us, given the cost environment to commit anything other than, then again we do not believe we will get into that longer-term range.

Christine McCracken - Cleveland Research

That is not a function of not being able to get sufficient pricing to offset that commodity cost. There is no push back from the retailers that may be making you less confident in your outlook.

Dave West

Right now, we did get good price realization in the second quarter and we are pretty much on track from elasticity modeling standpoint, from what we would have expected right now. So that is about all comment on pricing.

Christine McCracken - Cleveland Research

All right. I leave it there. Thanks.

Bert Alfonso

Thanks, Christine.

Operator

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

Eric Katzman - Deutsche Bank

Good morning, everybody.

Dave West

Hi, Eric.

Eric Katzman - Deutsche Bank

My question is going to revolve around the gross margin and then also working capital. I just do not understand how there could be such a change from the last four or five quarters when it seems like most input costs other than dry powdered milk have gone up. Most of the companies in the industry are reporting higher working capital usage due to the flow through of the inputs, and you said inventories were down 117 million. So can you just walk through some of the gives and takes on the gross margin line and what is happening and how that is influencing working capital?

Bert Alfonso

Sure, I can give you some further details. We do not, as you know, provide outlook guidance on gross margin. In terms of the commodity impact this year, we’ve been pretty consistent saying that we believe that is about the same order of magnitude as last year about 100 million. We do have Global Supply Chain Transformation savings, which do help us quite a bit in the back half, not so much in the first half.

In terms of the quarters and gross margin, you are quite right, the second quarter last year had a pretty significant dairy spike and until this year obviously from the dairy perspective, things are better than they were last year, than other commodities are not. So there is some balance when it goes on there.

I would say that in the second half of the year, we expect that the commodity impact to be more comparable to 2007, with respect to gross margin, with again as I mentioned gains from the supply chain perspective.

In terms of working capital, there are couple of drivers, simply one is the consolidation work facilities as part of the Global Supply Chain Transformation and we’ve as well done some outsourcing of certain components of our supply chain.

The receivables is really just the function of a smoother sales pattern, I would say in the quarter and we’ve been aggressive as most companies had been, I think on their accounts payable and getting the maximum that we can get from that part of working capital. So those are the things that are combining to help us both on gross margin basis as well as working capital.

We have good working capital gains last year. We expect them this year. Obviously, we do not expect to continue that level of improvement, as we get into next year perhaps. In terms of the second quarter, there was obviously that ketchup from last year with respect to with dairy.

Eric Katzman - Deutsche Bank

Okay. Then just a follow-up on that same line. Your PepsiCo this morning highlighted a $0.02 mark-to-market gain from hedging. General Mills has adopted that and their swings as a result of that accounting adoption are much more significant. Why are you not adopting that accounting principle and maybe explain why not?

Bert Alfonso

While to the extent that there are mark-to-market adjustments that would reflect that, while there is hedging in practice, there is not hedging from an accounting perspective. The accounting that we employs GAAP accounting same as everyone else hedges and to the extent that they are passing the effectiveness testing on the underlying commodity. There should be no mark-to-market.

Eric Katzman - Deutsche Bank

Joe, okay, let me just, you still keep it in, what you call the --

Dave West

The other comprehensive income?

Eric Katzman - Deutsche Bank

Yes, the other comprehensive income as opposed to on the balance sheet, as opposed to putting it on the income statement basis.

Bert Alfonso

Yes again, it is really a matter of the matching of the underlying and the effectiveness testing. So you can have hedging that qualifies a hedge for accounting and hedging that does not. Ours by and large pretty much do in its entirety.

Eric Katzman - Deutsche Bank

Okay, all right, I pass it on, thank you

Dave West

Okay, thanks Eric.

Operator

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

Robert Moskow - Credit Suisse

Hi Good morning

Dave West

Hey Rob, how are you?

Robert Moskow - Credit Suisse

I am Okay. I am going to follow up on Eric Katzman's question, because it is not even just the inventories that are a lot lower and receivables are a lot lower higher the past two years, but it is also the payables that are lot higher, and so that is helping our working capital numbers too. Are you actively trying to slow down the pace of your payables?

Dave West

Well, I mean, actively within the terms that we agreed to with our supplies, I would not say we are doing anything draconian or trying to muscle the market. Having said that, we did not compare favorably to our peers more than two years ago, and it is an area of emphasis for us, and we had good gains last year and we continue to have those gains. As I already mentioned, we do not see that level of gains going on indefinitely, but working capital and cash flow will continue to be a high priority may be a little bit higher than it has been in the past. I cannot comment on that and as we negotiate our contracts, we are getting better terms and that is part of our strategy. Yes.

Robert Moskow - Credit Suisse

Okay. Then, one quick follow up on the back half of the year. It looks like EPS will have to grow probably be about flat in order to get to the mid point of your guidance. You were down about in the low 20% range in the first half. Can you give us a sense of what the drivers are to get you back to a flat pattern in the second half of the year, how much of that is the savings that you said is back half loaded and how much of that is other items?

Dave West

Well, if you look at the underlying top line in the second quarter and take out the overlap of the Godrej acquisition, which was incremental. You look at the top line growth rate on an organic basis of 3.5% in the second quarter, so we are starting to see better traction in the top line, and we would expect that to continue as we look out into the second half, we are starting to get some traction there. So you will have better top line throughout the second half. We certainly did not get that kind of traction in the first quarter, although we did in the second and then we do start to get the global supply chain transformational savings, which are significantly back end loaded, and we also have our international and U.S. selling ramp up really started to occur in the later part of last year. So, as we get out into the later part of this year, those SG&A component comparisons become a little easier.

Robert Moskow - Credit Suisse

Okay. Do you expect sales to accelerate beyond organic growth of 3.5%?

Dave West

We are not going to comment and give you anything specifically, but we are starting to get, we are getting underline take away at 5%. If you look at the marketplace everyday in the last quarter, and even if you look at the last eight weeks, it is even a little bit better than that, where you have got eight weeks of non-seasonal. So, we are starting to see some pretty good traction there. I do not want to give you a projection, although you can do the math, or we continue to stay 3% to 4% for the year, and we are up 2.8% for the first half, you can expect to see a better second from us.

Robert Moskow - Credit Suisse

Okay. Thank you very much.

Dave West

Thanks, Rob. Take care.

Operator

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

Vincent Andrews - Morgan Stanley

Good morning everyone.

Dave West

Good morning.

Bert Alfonso

Morning.

Vincent Andrews - Morgan Stanley

Dave, you started your comments off by saying that the quarter was roughly in line with your expectation, so I just wanted to get a better understanding. It sounds me like, a couple of things must not have clicked vis-à-vis what you are hoping for. Can you just outline what those were?

Dave West

Yes. I think roughly in line, I think we were probably a little bit better on the top line than we would have thought going in, but you know we expected to see this kind of momentum coming in the marketplace, but it was probably a little bit better than we would have expected. Obviously there is some puts and takes within the cost environment, but overall as we exist, the business here throughout the first half, we are pretty much where we thought we would be. What we are really encouraged by is the marketplace performances that we are starting to get some traction and you see it in our share and in our take-away particularly in that US business.

Vincent Andres- Morgan Stanley

Okay. Then, if I can just clarify your initial comments on 2009, if I am correct they are not any different from what you said at the analyst meeting a month ago. Is that correct?

Dave West

That is correct.

Vincent Andrews - Morgan Stanley

Okay. Then, finally if I am correct, you have raised your spending expectation from 20% to 25% for the full year and you spend higher in the quarter. You spend, assuming you said 34% this quarter, was that spending above your expectations for the quarter? Did something happen during the quarter that cause you nudge that up or why are we going from 20% to 25%?

Dave West

Well, there is a little bit of timing there. I think, we always knew we have the Bliss and Starbucks launches coming in the second quarter and so clearly we always knew that second quarter was going to have a heavier spend and there were some timing issues.

We were little late on some of the timing of the spending in the first quarter, which fell into the second. So, and as I said we committed to increasing Hershey's spend behind the core Hershey and Hershey Almond you started to see Hispanic advertising running in the second quarter. So, probably a little bit more spending in the second quarter then what we originally expected, but not much.

Vincent Andrews - Morgan Stanley

Then so in other words the back half of the year you are still spending according to your previous plan in the higher numbers, just a flow through of what you did in the second quarter?

Dave West

Pretty much.

Vincent Andrews - Morgan Stanley

Okay. Let me just last question is just on your pleasure with the market share performance that is based on your original spending expectations. In other words, the market share performance that you exhibited during the quarter is what you expected based on what you expected to spend not on what you spent ahead of that?

Bert Alfonso

Well, let's just to be clear. We are not satisfied with where we are? However, we are pleased that we are starting to get some traction. The resell coverage and the selling efforts had really helped us in food and convenience, so you are starting to see that. We’ve got the Hershey's Bliss launch opted to the point, where we like it to be.

The core brand spending on Reese is working. We were much more focused on the core versus prior year, where we would have been focused on a lot of other smaller, some smaller innovation in the rest of the portfolio.

So, the focus is working. Listen, we are certainly not in anyway say performance declaring victory or anything like that. We are still not gaining share but we’ve seen it flatten out pretty much we thought we would start to see that after Easter and it is important for us to continue to prove to ourselves until to the market that we are going to do what we said we were going to do. So this quarter is really for us starting to become much more predictable and seeing consistency from our performance.

Vincent Andrews - Morgan Stanley

Okay. The last question and that is just that, I believe that you are anticipating another acceleration in spending next year. So, I just can not help but wonder, if we are going to get there a little earlier maybe that the spending is going to go about trend above your expectation in the back half of the year, is that an unreasonable thought?

Dave West

No, we’ve no change at this point in time to what we’ve already communicated and we do not anticipate anything like that.

Vincent Andrews - Morgan Stanley

Okay. Then Bert if I could just ask you to remind me or remind us, you still have some room in existing share repurchase program and just why you are not being aggressive on share buybacks at this point?

Bert Alfonso

Yes. I mean, we said it before value added share buybacks they are on for consideration as we look at our capital structure. Today, we’ve a couple of different priorities perhaps and given the credit market, we are valuing more on solid investment ratings. However, we do have elevated capital expenses as part of the supply chain transformation. We continue to look for opportunities for either acquisitions or joint ventures that are bolt-on in the international side. So, we are maintaining more financial flexibility.

Vincent Andrews - Morgan Stanley

Okay, thank you very much.

Operator

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

David Driscoll - Citi Investments

Great. Thank you. Good morning everyone.

Dave West

Hi, David, how are you?

Bert Alfonso

Good morning.

David Driscoll - Citi Investments

Very well. Bert just to clarify, I might have missed this, did you just say flat out that gross profit margins would be higher in the back half of the year?

Bert Alfonso

No, I did not. What I stated was that we do not give outlook guidance. What I try to do is put into prospective the different components that might shape gross margin such as the effect of commodities are more comparable versus '07 in the back half and there we do get the majority of our supply chain savings in the back half.

David Driscoll - Citi Investments

However, the way I interpret that is the comparable commodity costs is a more of a favorable issues versus the front half of the year, which was a real negative variance in commodity costs and then the supply chain savings is obviously good, is that correct?

Bert Alfonso

You have to look at the commodities a little bit differently. We had a pretty big impact in Q1. We’ve had less of an impact in Q2 simply because there was such a big impact of the dairy impact in Q2 '07. The only thing I mean by more comparable is that those anomalies do not affect us in the back half.

David Driscoll - Citi Investments

Okay. On trade promotion I believe that in 2006 and 2007, it was up both years and I think '07 was a record year for Hershey. Dave, do you see this number flattening out or coming down over the course of time. How does trade promotions fit into the ongoing strategy?

Dave West

Yes. It is really, if we’ve to think of trade promotion, as part of the price realization because price realization was a real contributor to our top line in the second quarter and also to our margins. You have to because so much of our category is such a merchandising intensive category. While, list pricing is important, the actual net promoted prices is probably more important because it is really what the consumer is use to seeing.

So, the reason, whey you taking price increases you tend to protect some of those price points that you like to promote at and so therefore as you start to take list price increases to a certain extent your trade promotion rates is going to go up because we’ve chosen to deal back in some cases to hold promoted price points. So that is why you are seeing an increase in trade promotion rates. However, on an absolute basis, which you have got to look at it on a net basis, we did start to see a gain.

Over time, we’ve got to work our way out of certain price points, because we’ve got to cover the commodity cost increases that are out there. We are starting to work our way out of some of those price points and you saw in the marketplace in the second quarter. When we look at the market takeaway, we saw both new increases in volume as well as price per unit, so that is a good mix for us. So if you go forward, you hope to be able to find a way to flatten out the increase in the trade promotion rate.

David Driscoll - Citi Investments

That is real helpful. However, was all of the $60 million in increase in SG&A year-on-year in the second quarter related to advertising and consumer promotion?

Dave West

No, not of all it. We did have a pretty big portion that was there. If you remember the selling expense, we started to increase the sales force in the second half of last year. So you did have a bigger impact. There was the impact of the international infrastructure that we put in place with China and India, that again was started around the back half, the second half and in fact this much more last year. So you have some year-over-year impact there. Then we had some slight increases in just normal salary administrative costs.

David Driscoll - Citi Investments

May be, Dave, if I could just get in one more question. Bliss is pretty exciting. Is there any way you give us any numbers here on consumer trial rates or ACV or the repeat rates, any numbers here? How does this compare to some of the other major Hershey product launches of the past, sometime those comparisons are also helpful?

Dave West

I would prefer to not give you any specific numbers for competitive reason, but I will tell you with respect to Hershey's Bliss is it is tracking well ahead of most of the benchmarks of our own historical database. The reality of that is, we would expect it to because with this particular new product it launch, we expected this to be more incremental, much more focused and targeted in the marketplace. The good news is right now as we look at it, we are seeing that to be the case.

So as we talked on in the June Analyst Meeting in New York City, with respect to this launch, we are getting from that we hoped which is a very focused targeted launch. We are getting ACV distribution builds that we expected. Right now, if you look at IRI, you will the ACV of Hershey's Blitz is already in the mid- 80's.

So that is pretty good and short of period of launch where we really started shipping this in March. We are already in the mid-80's on it from an ACV stand point and the important thing is this is something that we are going to support as aggressively in the year two as we are in year one.

David Driscoll - Citi Investments

It is a nice product. Congratulations on it. Thank you.

Dave West

Thank you, David. We appreciate it.

Operator

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

Terry Bivens - JPMorgan

Good morning, everyone.

Dave West

Hi, Terry.

Terry Bivens - JPMorgan

Couple of things. Dave, as you look at C Store performance, it was a little better than I though it might be in the second quarter. I know it is tough to predict gas prices etcetera. However, at least one of the trade magazines for that category is dramatically lowering what they think non-gasoline sales may turn out to be in the second half. So, the question would be, do you feel that the C Store performance you saw in the June quarter is sustainable?

Dave West

That would be good question. I think if you look back historically, if you look at '06 and '07 category growth rates for total confectionary category in C Stores, there were around 3.5 % to 4% for those '06 and '07. What we saw in the second quarter for the category was around 4%, so that is fairly consisting with what historical growth rates would be. Our takeaway in the second quarter, for example our chocolate takeaway in the second quarter was up 3.7%, our non-chocolate was up 5.7%.

We were not nearly as good as in refreshment as we needed to be. However, I mean that is the trend that up from us because we were pretty much flat in the first quarter on takeaway. So, we are not seeing a slowdown. Now what you are seeing is a change in the mix between pricing in units and you are also starting to see a mix change between standard and King as people are trying to digest the value equation.

Right now, the categories have historically done reasonably well. We are cautiously optimistic that we put good programming in place and added a lot of retail coverage there to keep our trend rate going on forward. However, we are very intimately involved with the (inaudible) Industry Association and we are helpful as part of the thought leadership where the industry is going. So over very careful to make sure that this is such an important challenge for us that we are doing a right thing from a programming standpoint. However, so far, we are pleased with our takeaway, even the categories still continue to be pretty good.

Terry Bivens - JPMorgan

Okay. Clearly the deal has closed yet. However, you are looking at some pretty formidable competition, what is in the event that Wrigley and Marsh combined. Can you give us a sense what the early planning is at Hershey for how to do deal with this?

Dave West

Actually I will not.

Terry Bivens - JPMorgan

I am utterly flowered with.

Dave West

I am not going to surprise you by not giving you specifics Terry. However, as I said, we’ve a respect for Mars as a competitor. We’ve respect for Wrigley as a competitor. So we will certainly have respect for Mars and Wrigley together. There are number of things within the category where we still continue to feel very good about our business. Obviously, we’ve got great brands and they combined we still got great brand. So, we will obviously watch what they do closely, but we continue to be very pleased with our business in terms of the brands. Our presence in the IO, our seasonal presence and some of those things that we think are competitive advantages thus including our retail sales force. So, we are going to focus on who we are and what we do well and continue to do that. We believe that we’ve some advantages that we will continue to take to the market.

Terry Bivens – JPMorgan

Okay. Just one last quick thing. These obsolescent costs, we’ve had these for a while, how much longer do you think these will be mentioned?

Dave West

Obsolescence has improved year-on-year. To some extent, as we focused more on core and some of the limited addition products has made its way through the market. We believe that it is an improving trend for us and one that we’ve a lot of focus on these days.

Terry Bivens - JPMorgan

I mean, is it still out there in the inventory, Bert is that the problem.

Bert Alfonso

Well not necessarily from that perspective. My point is we are much more focused on making improvements in all aspects of our business given our cost pressures. So we’ve resources that are put against making sure that obsolescence as low as candy. We are pleased with our year-on-year improvement in obsolescence, and we think we continue to make gains there.

Terry Bivens - JPMorgan

Okay. Thank you very much.

Bert Alfonso

Thanks, Terry.

Operator

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

Ken Zaslow - BMO Capital Markets

Good morning.

Dave West

Hi, Ken.

Ken Zaslow - BMO Capital Markets

I have two questions. One is, how far long you in the pace of increasing your retail coverage, and where do you think that can go and where are the major gaps that you still have?

Dave West

Yes, Ken good. We hired the associates really starting like late third quarter and the fourth quarter last year. So, they are on board. The third quarter again will be incrementally year-over-year from a cost standpoint for the large part, and from our stand point we are starting to get very good productivity from them, as there training is, it starts to be large will complete by now. You see it in our food share, which continues to get better. You are starting to see it in our traction and convenience stores as well. So, we are feeling that we are getting the bank or the buck that we’ve made the investment in. There is always the opportunities to continue to find tune coverage models.

We continue to look at that and one of the advantages of our sales forces is that we can dynamically route to the extent that we’ve promotional changes and opportunities at certain accounts that will not change. As you know, we do not cover drug stores right now and one of the other things that we are really doing right now is we’ve a new technology platform that we are just rolling out, which will allow us to have upgraded handheld units for the sales force. They are getting them right now and that will improve not only their productivity, but also their ability to sell at retail. Our sales force is always sold very actively at retail and they will continue to do so and we actually given them even better tools to do that going forward.

Ken Zaslow - BMO Capital Markets

Okay. The second question is, in terms of the refreshment side of the business, I know, you are focusing a lot on the chocolate. Can you just talk about what are the initiatives you are looking to do on that side or are you putting the refreshment side really on the backburner?

Dave West

No, we actually have some news on refreshment coming out in the back part of the year. We’ve the Ice Cubes, whitening gum coming out in the back part of the year. We’ve many some mini Mint tins from an Ice Breakers standpoint coming out in the back part of the year and some BreathSavers some new work on the BreathSavers brand. So we are working against that. Right now given the focus that we put, we’ve really focused our first and foremost on our core chocolate businesses. They are biggest brand. So, we think about it is Reese's and Hershey's brand as well as, as working on Kisses and Hershey's Bliss.

Those we think are the opportunities that have the biggest return in the biggest bang for the buck for us this year. What we are doing within refreshment is where we think we’ve advantage, which is likely more in Zylatol based gum, like the Ice Cubes products, as well as in mints, where we think we had a leadership position. We will focus our resources more there, but we are not going play as broadly across the entire gum category against some of that competition.

Ken Zaslow - BMO Capital Markets

Is it fair that you are trying to resize the refreshment categories within Hershey, are you looking to stabilize the brand share or that is what I am to trying to figure out?

Dave West

Yes, I think it is actually a very valid question and what we’ve said is as we go, we are going to refocus, I think much more of our attention towards mint and little bit less on gum as we go towards 2009. We need to be a lot smarter about the way the category dynamics for that sub-segment work, it tends to be a much more pull driven rather than a push driven and as the number three competitor, you need to be a lot more nimble, because you just can not afford the investment and pull that the other guys can. So, we are re-looking at the way we approach that business model and that is about where I would like to leave it.

Ken Zaslow - BMO Capital Markets

Great, I appreciate it. Good luck.

Dave West

Thank you.

Operator

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

Jonathan Feeney - Wachovia

Good morning.

Dave West

Good morning

Bert Alfonso

Good morning.

Jonathan Feeney - Wachovia

I wanted to ask about the brand building investment. For the full year, I am hearing a couple of things you increased brand building very nicely but there is also ton of new products out there that are (inaudible) themselves pretty nicely too. Could you, if it is possible maybe Bert could you give us a sense of X new products? What consumer brand building investment increase would be purely against the core, if you just took the core for or however you would like to slice that?

Bert Alfonso

Yes. I mean, we do not really breakout support against the different components of the portfolio. What I would tell you is that we are very focused on few new products frankly certainly, Bliss, certainly Starbucks, Dave already mentioned some of the selected opportunities we are looking at on the gum side.

There is no doubt that when you look at the increases that we’ve made particularly on the advertising side, which were more brand specific that they are against Hershey's REESE and KISSES and Hershey within that franchise I include Bliss and Starbucks which he have talked about.

We also do not makeup a lot of noise around what we do internationally but certainly we are very focused on key brands in some of our international market such as Mexico and Brazil and more recently in India and China and those tend to follow either a very similar pattern, they are either part of the Hershey brand core type of investment or like there was specific product like PELON PELO RICO in Mexico, which is a big product in Mexico itself.

So, it is pretty targeted the increases in terms of where we are replacing our best. Then things like the sales force obviously cover the entire portfolio, although obviously they also and from a placement perspective key on core brand.

Jonathan Feeney - Wachovia

I guess, but would it be fair to say that you are spending against core brands would be up?

Dave West

Definitely, yes.

Jonathan Feeney - Wachovia

Okay.

Bert Alfonso

Absolutely.

Dave West

Absolutely is. The numbers that we’ve quoted on advertising the 20% and 25% depending on the quarters that you are talking about are very much focused on those core brands.

Bert Alfonso

Rick, the continuity levels of advertising on the REESE'S brand for the first time in a number of years.

Jonathan Feeney - Wachovia

Sure.

Bert Alfonso

As I said we are running the Hershey's Pure campaign that I think some of you saw that will start up on the Hershey brand. We’ve very targeted and focused radio programs on certain other brands such as KIT KAT. So, we absolutely focused on the core as well as on the new items.

Jonathan Feeney - Wachovia

Just one follow-up Dave. You just mentioned historically new advertisings not kept up with the pace of sales. When you go back there has been a, if you look say five years ago advertising as a percent of sales was substantially higher. Do you think, you have a number in mind or an area in mind, where you think the right level of advertising level is for Hershey?

Bert Alfonso

I think that the things that you got out you have got to look at specifically few years ago we were spending on some things that just frankly were not core. We had a lot of spending on snacks particularly on cookies. We were spending on some brands and businesses that frankly did not really work well. So…

Jonathan Feeney - Wachovia

I guess Dave I was thinking about long before that even just in the history you the company?

Dave West

Yes. I think we are not going to certainly give an external target of what we think the ultimate right answer is. We are increasing it pretty substantially this year. We are increasing it fairly substantially next year. I think when you run that through the algorithm it starts to look very comparable to where we would have been back in 2001, 2002 timeframe.

Jonathan Feeney - Wachovia

Good.

Dave West

On a percentage basis.

Jonathan Feeney - Wachovia

Great. Well, thank you very much.

Dave West

Thank you.

Operator

Your next question comes from the line of Eric Serotta with Merrill Lynch.

Eric Serotta - Merrill Lynch

Good morning.

Dave West

Hi, Eric.

Bert Alfonso

Good morning, Eric.

Eric Serotta - Merrill Lynch

Couple of questions about components of top line growth I think you said that the net price realization was 3.5% and volume was down a half a point I believe that would imply that mix was favorable half point. Can you just elaborate on mix a bit I know there is a lot of moving pieces here considering you have some negative mix factors like you mentioned and consumers being a bit more value conscious and going for standard size versus king size what was driving the overall mix improvement?

Dave West

Actually Eric from a mix standpoint, mix is pretty much neutral. I think, what you are mixing and matching is the price and volume I think that Bert quoted included the international business.

Eric Serotta - Merrill Lynch

Okay.

Dave West

So, when you look at the underlying U.S. business, we had price up and volume down slightly and a little bit of mix was pretty much neutral within the quarter. So and this is the second quarter is the quarter that has the least amount of seasons in it. So, it tends to be much more skewed towards the instant consumable part of the business, which is where we’ve got some pricing. So, the U.S. volume declines were really in the snacks and the mix part of the business and core confectionary volume in the quarter was flattish. So, most of the U.S. gains in the second quarter were price related and mix is almost not a factor.

Eric Serotta - Merrill Lynch

Okay. Along the lines that you mentioned in terms of seasons and the like, I know that seasons were on a major factor in the second quarter. However, going back to June clearly there was much more of a focus in your presentation on seasons and packaged candy versus instant consumables I realized lot of your innovation this year is surrounding package candy or things like Bliss. It does mark a bit of a change in focus from the past few years. Could you talk a little bit about how you see that impacting mix going forward and the strategic rationale for this the somewhat changed focus?

Dave West

I do not think we’ve changed our focus at all. I think what we still recognize the instant consumable part of our portfolio is a large part of the business and very profitable. We’ve had our challenges in the convenience class of trades, but in the second quarter we started to see a better takeaway out for us. We still trial the category a little bit but that was largely because of the softness that we had in our refreshment business the takeaway on core chocolate and non- chocolate was pretty t good in convenience.

I think what we’ve talked about is the focus for us seasonally. The season still continues to attract the largest breath of users across the category most consumers are in the category during the season. It is an important part of the business and when we got to find the right balance going forward in terms of providing profitable solutions for us in retailers.

Then with respect to where the category has grown over the last couple of years is grown in premium and trade up and that premium and trade up has tended to be in take-home packages and not in instant consumable. So, as we’ve looked to make sure that we are growing in the segments of the category that are growing, our launches this year are much more focused in those areas.

So, I do not think it is a shifting of our focus overall. We know how important that instant consumable business continues to be for us. It just happens to be in this year, where we were a little behind in our approach Hershey's Bliss, the REESE'S select items that are coming out and some programming that we’ve on our extra dark launch in the back half of the year. You will see us focused on that package candy like component. However, that is only because those are the segments that we were not competing as effectively in.

Eric Serotta - Merrill Lynch

Okay. Thanks for the help there. Just one quick follow-up question. I think you or Bert mentioned that some of the price realization this quarter was driven by the January price increase. It would seem that the price protection you are offering or the promotional price point protection that you are offering to your customers a lot less than in the previous year. I think it took almost a year for last years price increase to be felt at retail. Am I reading that correctly that your price protection is less that you are offering your customers is less than it has been in previous years and what should we expect going forward in terms of the pace of realization of the January price increase?

Dave West

No, we did not specifically comment on what a level of price protection was not versus the prior year, I think what you really saw in the second quarter was largely the carryover impact from last year. So, last year, we did price protect particularly on the standard bar part of the portfolio and overtime you pull that, you like to pull that "price protection" which is really not classically price protection from an accounting. I will say, we protect and promoted price points.

Eric Serotta - Merrill Lynch

Sure.

Dave West

As we go into 2008 versus 2007 we start to cycle that in the second quarter largely, which you saw come through was the effect of the list pricing from last year without nearly as much protection with some of those promoted prices. So it is really I would not call out as a reflective of what you would necessarily see going forward with respect to the 2008 pricing yet.

The reason is you saw good price realization in the second quarter. It tends to have the less the least amount of seasons in it and the items that we did take the most price on were the instant consumable. So, in the second quarter you would expect us to get a good amount of price and we did fortunately.

Eric Serotta - Merrill Lynch

Okay. However, you did say some impact of the January price increase?

Dave West

I have to yes I mean

Eric Serotta - Merrill Lynch

This quarter?

Dave West

Yes that is the bad portion of the units that would sell on a non-promoted basis would go at full list price. So, you will have to see some.

Eric Serotta - Merrill Lynch

Okay, great. Thanks a lot for your help.

Dave West

Thank, Eric.

Operator

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

Alexia Howard - Sanford Bernstein

Hi everyone.

Dave West

Good morning.

Alexia Howard - Sanford Bernstein

Some international expansion plans; I know you mentioned earlier that you keep things a little bit flexible right now. Could you talk about how you think about the prioritization between fixing the core U.S. business versus trying to get a little bit more of an international geographic footprint?

Dave West

They are both critically important. Obviously we are starting to see some traction within that fixing the core U.S business. Importantly, internally we do not believe, we are resource constrained and that we can do both and we’ve the investment to do both and the people to do both and we are currently as you note from the standpoint in the last several years here, we are very pleased with our progress in India and China.

For example and continuing to roll REESE'S out for example as a global brand in the Mexico this year. So, we are making good progress. We’ve the Bauducco JV in Brazil. So, we’ve been able to help expand and strengthen our business internationally at the same time start to get some traction in the U.S. So, we do not view them as mutually exclusive activities.

Alexia Howard - Sanford Bernstein

In terms of the joint ventures particularly the more recent ones that are established in India and China over the last couple of years. Are you seeing accelerating sales momentum there or might we expect to see an expansion of distribution coverage during 2009 and might we see anymore of those kinds of joint ventures being setup either in Asia or Latin America or Eastern Europe?

Bert Alfonso

Yes. I will not comment going forward on any M&A activities. What I will tell you is that we are particularly pleased for example with the Bauducco joint venture. They have proven to be a very strong partner for us and really have helped us in the market getting our products into right places at the right prices.

Within China, last year was our first season as we go to the Chinese New Year season and that really will start up in the fall. We will continue to look at our distribution base versus last year and make sure that we’ve the products in the right places focused on the right cities. Within India, the Godrej partnership has been very good for us. We already had good distribution, given the fact that we bought some local, some gums, the Nutrine brand and Mahalacto. We are looking at our sales force coverage there and we believe that we will to expand that going forward.

Alexia Howard - Sanford Bernstein

Right. A quick follow-up on the pension expense for this year. It seems as though couple of years ago 2006 that was a fairly major expense items last year it looks as though it was a moderate positive. What is the outlook for that this year and what is driving those kinds of swings?

Dave West

Couple of things first I would say that we are very well funded in terms of pension and so from that perspective we do not anticipate there to be a funding requirement. If what you are getting out of the, the market downward movement in the markets clearly that does have an impact and we are watching that closely. It is early to tell exactly the impact because you have got another half a year to play out. So, it is not a funding issue for us. We do have gains from prior years that have helped us. So, right now it is something that potentially could be a non-cash expense next year.

Alexia Howard - Sanford Bernstein

Okay, thank you very much. I will pass it on.

Dave West

Thank you.

Operator

You have a follow-up question from the line of Robert Moskow with Credit Suisse.

Robert Moskow - Credit Suisse

Hi. Just very quickly, just to reiterate, you are increasing compared to your prior plan how much advertising and promotion you want to spend. How much of that increase is going to be promotion versus advertising?

Bert Alfonso

Yes, Rob. I just want to make sure to be clear, advertising in 2008 is going to be up over 20%. So, we are not really saying that we are increasing our commitment to that and I think it was….

Dave West

I think, if you back to the June 17th presentation I believe we said advertising would be up a bit over 20% and I think Bert just put a range on it now when he said about around 25.

Bert Alfonso

Yes.

Dave West

So, there is really no change from the thought process in June.

Bert Alfonso

Yes. There was a tier as we’ve talked about there is a little a bit of timing issue. It is a little stronger in the second quarter Rob than we would expected, but that is just timing out of the first and third. So, we haven't changed the investment profile here at all for the year.

Robert Moskow - Credit Suisse

Okay, so no changes in terms of couponing profile or trade spending profile for the year?

Dave West

No.

Robert Moskow - Credit Suisse

Okay, great. Thank you.

Dave West

Thank you.

Operator

Your next question comes from the line of Andrew Lazar with Lehman Brothers.

Andrew Lazar - Lehman Brothers

Good morning.

Dave West

Hi, Andrew, how are you?

Andrew Lazar - Lehman Brothers

Good. Thank you. Just a quick one. I remember one distributor last year I think feared their inventories were a reaction to higher carrying costs. I am just curious what the positioning or inventory starts at the retailers are right now. You are seeing distributors potentially responding once again, as prices perhaps they continue to go up?

Dave West

Yes, I would say that a lot that adjustment did happened last year as the credit markets started to change and while we continued to see some work in terms of working capital from distributors. It has not been as impactful as it was last year, when the credit markets were started to put some pressure on folks and we are right now, we think, we believe we’ve very healthy inventory levels at our key customers.

Bert Alfonso

Andrew they worked on really the latter part of last year and we haven't seen much of a reduction this year although there still has been a little bit but that is more conscious effort on our part as we focused much more about portfolio and got rid of some of the tails we just have less inventory

Andrew Lazar - Lehman Brothers

Okay, thanks. Then, last going into back of the year given the merchandising plans you have also the expectation for more pricing to come through. Would you expect the top-line to play out largely like you have this quarter for a more pricing oriented and given the elasticity is trapping I think as you said coming in line with your expectations providing to be flattish or down a bit or given what is your plan, would you expect both pricing and volume to contribute in the back half?

Dave West

I think the mixed shift in the back half; the second quarter is as I said the smallest quarter. It is also the most focused on instant consumables and the programming is around Smores and some other things, which are going to be more instant consumable oriented. The Halloween and Holiday programming again tends to be more pounce and we did not have nearly as much as list pricing increase in those parts of the portfolio.

So, I think this was probably from the price realization standpoint the most listed price you will see we will obviously continue to work it down. So, I think you will see a better balance as you go forward between pricing and volumes in the U.S. business. However, as I said I think we feel pretty good going forward the 3.5% top-line ex the Godrej acquisition in the second quarter is a good number for us given where we’ve been historically last couple of years and we continue to expect that we will do well in the second half, but probably a little less price realization and a little more volume because of the seasonal mix.

Andrew Lazar - Lehman Brothers

Okay. Thanks very much.

Dave West

Thank you, Andrew.

Operator

Your next question comes from the line of Todd Duvick with Banc of America.

Todd Duvick - Banc of America

Yes. Good morning.

Dave West

Good morning.

Todd Duvick - Banc of America

A very quick question for you on the balance sheet you have got very modest short-term debt balance of $460 million and but a low of cash balance. I am just curious in terms of your funding, do you plan to keep that in short-term debt I assume that is commercial paper or do you have plans of trimming out a portion of that?

Dave West

Yes. Our short-term debt you are quite right is commercial paper and the change that you are seeing there are couple of things really too big drivers if you will. One was we did issued $250 million of long-term debt either at the end of Q1 or beginning of Q2. So, there was a direct conversion there between commercial paper and long-term debt and while we’ve enjoyed continued receptivity for our commercial paper.

We just felt there was a little bit less exposure there in terms of the credit markets was the smart thing to do. The other driver clearly is the working capital benefits that we are seeing in the business, so it is keeping our debt levels relatively flat to down. Capital structure in particular is a Board decision. So, any changes that we make there are clearly discussed and agreed to at the Board level.

Todd Duvick - Banc of America

Okay. So, it sounds like at this juncture anyway no plans to term out additional short-term debt in the capital markets?

Dave West

Well, again, we are not saying yes or no. It is something that we would have to discuss with the Board and that is the way we approach it.

Todd Duvick - Banc of America

Okay, fair enough. Thank you.

Operator

You have a follow-up question from Eric Katzman with Deutsche Bank.

Eric Katzman - Deutsche Bank

Good take. A follow-up, I think you talk to reference the market share and the consumer off taken 5% for both yourselves and the category. I assume if that was dollar terms. Can you say what it was on a unit or volume basis?

Dave West

Yes that was, again that is FDMxC and including Wal-Mart so that is the (inaudible) and that was an everyday number and just to make sure, if they took the seasonal [steal out] that is a 12 week number. Within those 12 weeks just to make sure I characterize it appropriately within the 12 weeks, it is a little hard to call that out because of the Easters SKU in the four weeks. So, with Easter being in March and not in April this year, there will be a huge unit fall off it is almost a relative number to give you.

Let me give you eight weeks of numbers. Let me give you FDMxC now here this is measured FDMxC for the related eight weeks the category grew and pounds were up as well. So, the category pounds over the last eight weeks FDMxC were up around 3%. So there was a unit take off as well as a little bit of pricing in that eight week number. So, try to stripe that out and out and give you the numbers on an underlying basis there is volume growth in the category.

Eric Katzman - Deutsche Bank

Did you keep up within, did you keep share in volume terms or did you loose share in volume?

Dave West

The category was up around 3%, we were up 2.9 so pretty much with the category. So, as you look at the second quarter, you look at the everyday basis that we gave you the 12 weeks of everyday basis we were up basically 10 basis points a share on that basis, if you look at the volume trends related to eight weeks basically flat with the category.

So, the trend improvement is there and no matter how you slice the data and it is a tough quarter to do it in that is why we’ve as I said we’ve got some traction in the quarter which we feel good about no matter how you look at the data, when you look at it by class of trade we’ve got traction.

So, we are pretty much held our own C story were down as I said 30 basis points during the quarter and again that was mostly in refreshment. So, overall no matter how you slice it in basis what I would leave you with a takeaway that we pretty much held our own in the category.

Eric Katzman - Deutsche Bank

Okay thank you.

Dave West

Thank you.

Operator

Your last question is a follow up from Terry Bivens with JP Morgan.

Terry Bivens - JP Morgan

Hi fellows, just one another quick one that occurred to me. To what extent is that new ABM cocoa processing plant in PA helping you out with the cocoa inflation?

Dave West

Again I do not, I will not go into a whole lot of specifics but we’ve done some outsourcing with some suppliers, Barry Callebaut is the one that we talk to most broadly about with respectful to chocolate liquor and some of our cocoa processing. You will see it as a -- particularly as a help in inventory, I think more than anything Terry because we do not, we are not holding nearly as much raw material in terms of cocoa beans as we would have in the past. From a cost standpoint, we tend to look at those as towing agreements because we still continue to win above the beans ourselves because we think that we do a pretty good job of that.

Terry Bivens - JP Morgan

Okay. That would impart and explain the way inventories behaved over the past several quarters, would it not?

Dave West

Yes, it would, Terry.

Terry Bivens - JP Morgan

Okay, thanks a lot.

Dave West

Thanks Terry, take care.

Terry Bivens - JP Morgan

Okay, bye, bye.

Operator

There are no more questions.

Dave West

Thank you for joining us today. Mark Pogharian and I will be available to take any follow up calls that any of you may have. Thank you.

Bert Alfonso

Thank you.

Operator

This concludes today's Hershey conference call. You may now disconnect.

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Source: The Hershey Company Q2 2008 Earnings Call Transcript
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