The Hershey Company Business Update Call Transcript

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The Hershey Company (NYSE:HSY) Business Update Call June 17, 2008 8:30 AM ET


David J. West - President and Chief Executive Officer

John P. Bilbrey – Senior Vice President, President Hershey North America

Michele G. Buck – Senior Vice President, Global Chief Marketing Officer

Thaddeus J. Jastrzebski – Senior Vice President, President Hershey International


Todd Duvick - Banc of America

Zachary Wydra - Beck, Mack & Oliver

[Paul Bernstein] - Black Diamond

David Palmer – UBS

Terry Bivens – JP Morgan

David Driscoll – Citigroup

Karen Lamark - Federated Investors

Ken Zaslow - BMO

Eric Serotta - Merrill Lynch

Jon Feeney – Wachovia

Gretchen Montgomery - Deutsche Bank

Robert Moskow - Credit Suisse

[Tom Clancy] - Philadelphia Trust Company

Judy Hong - Goldman Sachs

Vincent Andrews - Morgan Stanley

Henry Armstrong – Armstrong Associates

Andrew Lazar - Lehman Brothers

David J. West

I will start by reminding everyone that my presentation may contain forward-looking statements that reflect Hershey’s current views and estimates. Actual results could differ materially from those projected in the forward-looking statements due to factors such as those identified in our annual reports on Form 10-K for 2007.

I will also reference results and projections from our business on the basis of continuing operations. Please see Slides 110 and 111 in your printed materials, or the Investor Relations section of our website, for a reconciliation of our results and projections from operations to GAAP.

Since December, we’ve engaged in a rigorous process to understand and improve every facet of our business. Today I’ll give a brief overview of our company, review our historical performance and the lessons learned, review our new long-term growth model, and then I’ll spend the balance of our time outlining our new approach to growth as we deploy a new consumer-driven framework. We’ll apply this approach in our core business, in innovation and as we expand into new markets.

I’ll finish with a look at how this will impact our 2008 and 2009 financial performance. So let’s get started with a brief look at our business.

Confectionary is a huge global category, $141 billion and growing. We are leaders in the largest and most profitable country. However, growth has been more rapid in other markets. So there is a world of opportunity for us. We’ve made progress in global markets but only 14% of our sales are generated outside of the U.S.

There is much upside. Today, most of our sales are in the attractive U.S. markets. At 40%, confections is the largest segment of the U.S. snack market, a $69 billion universe. Confections are everywhere with over 2 million points of retail availability. As such, we lead in household penetration and impulse purchases. The category is highly responsive to merchandising and it’s profitable with attractive margins for both manufacturers and retailers.

Hershey’s reach is ubiquitous. 43% of our sales are in nontraditional classes of trade, such as drug stores, convenience stores, wholesale clubs and dollar stores, as well as in channels such as vending, food service and concessions. We are also represented in traditional mass and food outlets.

Importantly, we are not dependent on any one channel or any one customer for our growth or profitability. The CMG, or candy, mint and gum category continues to grow at a steady rate of about 3% to 4% annually. The latest 52-week data is consistent with historical trends, up almost 3%. We expect the category to grow at these levels into the future. In fact, we don’t expect the current economic environment to materially impact the category.

This chart from AC Nielsen shows that confectionary performs well during times of economic weakness and this is consistent with the take-away data we have seen year to date. So the category remains advantaged.

Our leadership is marked by powerful brands such as Reese’s, Hershey’s, Kisses, Kit Kat, Twizzlers, and York to name just a few. These power brands have resulted in a strong market share position with in the overall category. Although the Mars-Wrigley deal could impact our ranking, we remain well positioned on many dimensions, especially in chocolate where Hershey is number one with a 43% share of the market.

We are also the leader within the season. Our proprietary seasonal navigator tool helps us work with retailers to maximize category, customer and Hershey growth. This part of the category is dominated by chocolate and sugar confections with gum and mint only minimally represented. 75% of Hershey’s seasonal sales are on our top three brands so scale matters in the season. Hershey also leads in the aisle with a 41% share of take-home chocolates. Overall, we remain confident in our position within the category.

Let me now take a quick look back at our historical performance. From 2001 to 2005, the company enjoyed a period of strong, top-line growth, behind closed-in news on new chocolate items as well as unlimited editions. This closed-in pipeline was executed by a redesigned selling organization. Hershey led the category in innovative customer marketing programs and a redesigned trade promotion architecture. This was complemented by enhanced retail capability.

In addition to strong revenue, gross margin improved during this time, benefited by SKU reductions, net price realization, improvements in the supply chain and a manageable input cost environment. At the same time, we closely managed G&A, implementing early retirement programs and further driving EBIT margin expansion. The result was compound annual growth in net sales of over 5% and growth in diluted earnings per share from operations of nearly 14% annually.

Despite these strong results, we did recognize that the business was challenged on several dimensions. Principally, continued reliance on only confections within one country, the U.S. In addition, our confectionary innovation was becoming less incremental and our margins were flattening. Work began to address all of these issues.

We set out to expand our U.S. portfolio into the broader snack market. This direction was challenging on two levels. First, we overestimated our ability to leverage our confectionary scale into adjacent categories and as such, the initial success of snacks was not sustainable. This diverted key resources both financial and human, away from our core at a time when others were ramping up.

To address innovation concerns, we established focus against new platforms. Several of these, such as our approach to wellness, did not succeed. Frankly, we underestimated the untapped power in the core confectionary business, including the emergence of premium and trade-up chocolate. Importantly, we are more convinced than ever that our core U.S. business can grow, and I’ll demonstrate this conviction in a minute.

We also recognize that our margins were flattening. The global supply chain transformation program was initiated and will generate significant savings. Unfortunately, we did not perceive that commodity markets would rise dramatically and consume these benefits.

And finally, our focus on international expansion began in late 2004, but our disciplined approach has taken time to show the positive results we are now enjoying. As a result, over the last several years, our business has not performed to our expectations. Today, I’ll highlight our plans to get back on track.

First, let me outline what we think the business can deliver over the long term. These estimates incorporate key learnings and the realities of today’s input cost environment. We expect top line to grow 3% to 5% annually. We are confident in raising our net sales expectations as we implement our new consumer-demand driven model, enjoy emerging market growth, fully fund our strong core brand and improve our price value proposition.

Long term, EPS growth of 6% to 8% is achievable. Despite the current trend of higher commodities, we will continue to take an aggressive look at our cost structure to help offset rising input costs so we can invest in our business. This approach will lead to a consistent earnings stream and strong cash generation.

The 3% to 5% top-line growth will be driven by a new consumer centric demand model, which I’ll discuss shortly. It will fundamentally change our approach to core brand support as well as new innovation. We’ll also improve our price value proposition. As I stated previously, this is not solely about pricing, rather providing a better value to the consumer while improving price realization.

Our increasing exposure to faster growth, emerging markets will also play an important role in top-line growth. This will result in operating earnings per share growth of 6% to 8% a year. This is what we think the business can generate annually on a long-term basis in a normalized operating environment. I’ll give more detail on 2008 and 2009 later on.

The EPS profile reflects our view that we will continue to aggressively pursue productivity and gain net price realization. We do expect commodity costs to remain volatile, but regardless, we will make the needed investment in our businesses, both in the U.S. and in international markets. This chart gives you a feel for the increase in our input costs.

Our assumption is that commodity costs will remain at elevated levels for the foreseeable future and will not return to the levels we experienced back in 2001 to 2005. In fact, we expect 2009 to be another trying year for us with respect to input costs. The global supply chain transformation program, which we announced in February of 2007, is one of the key levers to improve our cost structure in the face of these rising costs.

While we are executing against this program, we are simultaneously analyzing further supply chain initiatives that will lead to future cost structure improvement. Importantly, this program is on track. It is crucial to our long-term competitiveness as it will enhance our profitability and enable Hershey to invest in growth initiatives. It gives us a more flexible manufacturing footprint and provides the company with the ability to cost effectively and profitably meet the changing needs of consumers and customers.

In 2008, we expect cumulous savings in the program to be in the $80s and $90 million range. Over the three-year life of the project, we are targeting annualized savings of $170 to $190 million. When we get to 2010, we’ll have flexibility to produce the short run, custom products that consumers demand. We couldn’t make them cost effectively in our former infrastructure, so we began using co-manufacturers. A more balanced network both geographically and internally versus externally will now exist.

Going forward, we will re-evaluate this balance. This will be one way we can continue to increase capacity utilization. By 2010, on a seven-day basis, capacity utilization improves by about 16 points. However, the resulting level is still below the industry average, thus leaving room for further improvement.

This slide is very detailed but many of you model these numbers, so I will give you the latest estimates related to costs and capital for the global supply chain program. Our estimate of total pre-tax charges and nonrecurring project implementation cost is $550 to $575 million. Inclusive of project management and start-up costs is $60 million. For 2008, our estimate of total pre-tax charges and nonrecurring project implementation costs is $135 to $145 million. Beyond supply chain initiatives, we’ll also look at G&A best practices.

The changes in our business model and supply chain over the past year, as well as our new approach to innovation and globalization, have created effectiveness and efficiency opportunities. We now have one global IT platform in our business, SAP, and we’ll leverage this to drive significant process redesign, as well as to grow into our international infrastructure. As such, we expect the A component of SM&A to grow at a rate less than of sales over the next several years.

Let me shift gears and tell you about our new consumer-driven demand model. One of our fundamental lessons learned is that we needed to drive growth through better consumer understanding. We set out to re-answer the fundamental questions about our consumers, the who, why, what, where, when and how related to their consumption, shopping and purchasing behavior. This research helped clarify our opportunities.

We are now confident we have the roadmap to deliver incremental, sustainable growth over the coming years. It started with consumer insight. We talked to tens of thousands of consumers to determine who they are, why they buy, why they consume, and when they consume confections.

We use this data to generate new consumer, category and shopper segmentations. We also dove deep to understand intimately how the most frequent users think about our core brands and seasonal occasions. We have identified six core consumer groups, each with a different approach to the category. We know who they are, what they buy, how frequently they purchase, and what drives their purchase decisions.

“Loyal indulgers” are very brand loyal consumers. They tend to be older and are loyal to the brands they’ve known for a long time. While not a large portion of the total population, for some brands they can be as much of a third of category consumption.

Obviously, this has key implications for very targeted spending against some of our more mature yet most profitable brands.

“Engaged exploring munchers” have a serious sweet tooth. Their consumption index and usage is two times their share of the population. They use confections in all facets of their life, they have a broad menu of brands, and importantly, they are the least price sensitive consumer. Importantly, we know who this most profitable group is and we are actively engaged in research and insights to reposition brands to appeal specifically to them.

“Practical value seekers” like confections but have a practical approach. They seek a combination of price and value. They are the largest segment of the category and present an opportunity for us to improve the price value proposition within the business. Importantly, these consumers are not seeking discounting, but rather benefit at a reasonable price. The remaining three segments tend to be less engaged in the category.

The “confection-loving moderators” enjoy confections, but are disciplined in what they eat. “Controllers and detached occasionalists” moderate consumption either due to health concerns or simply lack of interest. These are relatively small segments. So we know the demographics or the who.

At the same time, we’re also capitalizing on macro consumer trends that can shape behavior and help determine the why, the need states of consumers as they enter the category. These need states range from more emotional to more physical and functional. We’ve identified nine key consumer need states, ranging from the “emotional reward me” that you see on the left to the “functional oral care” that you see on the right.

The intersection of the demographics of the consumer segment with the consumer needs state creates the consumer demand landscape that you see here. The new demand landscape will focus our business on key growth opportunities. In the core business, it is already sharpening our brand positioning and our consumer messages. We have redefined our portfolio role to drive resource allocation aimed at increasing incrementality and to improve ROI on our spending.

We’ll also deploy our innovation process in a new way to address areas where we are currently under-shared to tap into existing white space in the category and to identify emerging, unmet consumer needs. This is a games-changing approach for Hershey and how we will win in this category.

We will no longer push variety into the market. We’ll optimize our portfolio brands against the biggest opportunities that maximize incrementality. We have confidence that we’ll be able to execute this as we better understand the demand and behavior of the most profitable consumers. Let me show you how we have begun to do this in our core business with promising early results.

To reignite our core, we’ve dramatically increased levels of consumer support. Behind much sharper portfolio role and better brand positioning. We also increased investments in selling capabilities. In 2008, total advertising will be up over 20% to the $155 to $160 million level.

In 2009, advertising will increase another 20% plus. From 2006 to 2009, we will have a 55% compound annual growth rate on core U.S. brand spending. In 2006, we were spending on cookies, smart zones and other new brands, such as Take 5. Our spending is now clearly on the core. Results already show the impact of our spending increase.

As trends are improving across all classes of trades, sequential improvement in FDMxC has occurred and we expect these trends to continue as we make our way through the year. Increased levels of retail coverage are augmenting brand investments.

In total, feet on the street have increased by 30% with new full-time associates in the food class of trade and part-time sales representatives in convenience stores. These additional resources are in the store selling in our merchandising efforts and gaining traction as they come up the learning curve.

The hiring effort began last fall and as you can see from this chart, where we have invested, specifically on this chart in food and convenience stores, we are beginning to see improvement in retail take-away. Our latest take-away in food and C-stores, up 4%, is clearly encouraging.

Our confidence in our prospect is best demonstrated by work on our Reese’s brand where we have clearly lined up all of the elements of our new strategy. Our success over the past year on Reese’s shows our new approach. It starts with understanding the consumer.

Reese’s is our biggest brand and is played across the entire category, but mostly in the largest need states and consumer segments. Focused against 50% of category consumers in a $4 billion portion of the category landscape. Obviously, a brand of this size has broad marketplace awareness and therefore it can be extended. Our new innovation leverages the Reese’s franchise but importantly targets new users and new occasions with unique benefits.

The two Xs that you see here on the chart show where new entries are positioned. For example, Reese’s Whipps, a product lower in fat, targets moderators and controllers who are watching consumption. Reese’s Clusters is highly indulgent, available only in a bag format, therefore sourcing new occasions and reaching out to a female consumer for the brand by delivering an indulgent taste experience. This is much different than our historical approach where we simply offered close-in variety to the same user in the same need state thus cannibalizing our base sales.

With a brand as large as Reese’s, advertising certainly is a must. We’ve increased Reese’s spend 20% this year and it will be up double digits again next year. Clearly, Reese’s responds to advertising. Last year, we began running a new Reese’s campaign called Perfect. As you can see from this chart, velocity post the spending was up sharply. Here you see the before and after velocities showing immediate response on the core post the advertising.

Part of the success is in targeting and positioning. While everyone knows the Reese’s brand, our objective is to connect with the loyal, core user. After extensive consumer research with this consumer, we learned the specific emotional and product benefits that the Reese’s Peanut Butter Cups deliver.

Loyal core users tell us that there is nothing else like a Reese’s because it is perfect. The perfect fusion of chocolate and peanut butter. Our advertising creative is designed to capture these insights. The Peanut Butter Cup image is a trigger to emotional benefits and a critical creative element.

The ads center around topical events with a slightly irreverent attitude that connects with the 18 to 34-year-old young adult target. These ads have scored extremely well and have received great press in the advertising community. The campaign has continuous exposure across multiple media that reach our core.

Importantly, they’re easy to adapt to any occasion, such as these print ads tailored specifically, one to Rolling Stone magazine ”The Perfect Supergroup” or to ESPN ”The Backup is as Good as the Starter”. The clear reference to having the second great cup after the first. Let’s look at some of the TV copy now.

(Video Clip)

Importantly, the advertising is coordinated with in store advertising around promotional opportunities which cue to the younger male target, including NASCAR, the Olympics and movie tie-ins like Batman.

This investment is paying out with Reese’s take-away up nearly 6% this year despite a much shorter Easter selling season. So, you have seen examples of how the demand landscape shapes our core brand propositions. We are working rapidly to repeat the Reese’s success on our other brands with Hershey’s next in line.

Importantly, we’ve done the same in-depth research with Hershey’s and it is well positioned in different need states than Reese’s. While the brand will always have broad appeal, the core consumer target for Hershey’s is younger women who look to chocolate as a source of simple happiness and comfort. Importantly, they’re developing their own chocolate eating traditions and building Hershey connection with this target enables them to pass along their traditions from one generation to the next.

You’ll be seeing heavy support behind a new campaign, Hershey’s Pure. It clearly connects with the younger female target as our advertisement research shows it is scoring at twice the average with this group. We believe the Pure campaign is extendible to many sites and promotions and events starting with S’mores and what we’re calling Pure Summer. You’ll see these merchandising vehicles everywhere throughout the summer months. Let’s take a look at some of the new copy, including some Hispanic advertising.

(Video Clip)

David J. West

Let’s look at how our consumer up sights will be used in the store as we enhance the shopping experience. 58% of candy purchases are made by shoppers who go into the store knowing they want to purchase candy. About one-third of these consumers don’t go into the store with any conviction about what they might purchase.

Combined with the 42% of sales, which are unplanned on impulse, the result is over 60% of purchase decisions being made in the store, and that decision is made quickly. On average, less than 1 minute is spent in the aisle making the purchase decision. And if consumers can’t find what they’re looking for, they will simply walk away. In fact, 25% of consumers walk away without purchasing. This is a huge opportunity for us to capture and one we find very exciting.

There are very few categories that have 25% more business sitting around with consumers who are already in the store wanting to buy the products. Reinventing the aisle has huge potential. We have a number of control learning tests in market. The one you see here on the slide focuses on creating a shelf set that arranges the product according to purchasing occasions and it is complemented by simple signage such as gifting, candy dish, movie candy, etc.

We are seeing double-digit increases in take-away behind this particular test which helps consumers quickly find what they are looking for. Beyond aisle architecture, we’re planning on making the packaging work at the shelf. We’re working on many options to improve appearance and shopability and functionality.

For competitive reasons, we won’t get into specific details today, but we do believe the opportunity is significant. Needless to say we’re looking across our entire chocolate package candy portfolio to improve the price value equation.

The Cello bags you see on the screen here have been in use for a very long time. Simply changing to cartons on a few non-core brands, as you see on the screen here, provided resealability, portability and improved value perception as well as shelf top. This has driven double-digit growth on Whoppers and Milk Duds with essentially no other consumer support. So we have talked about the demand landscape with respect to the core brand as well as retail. Let me now talk about innovation.

We will begin utilizing our deepened consumer and category understanding to drive innovation. Importantly, in the past, our innovation was simply about products. We are evolving to now include packaging, services and business model innovation as well. This approach is anchored in a new, internal strategic process designed to lead a more robust and balanced pipeline of incremental and sustainable innovation. The process starts with the demand landscape and addresses areas where we are undershared or where no one is currently meeting consumer needs.

A recent example is our approach to premium and trade-up. This subcategory continues to grow accounting for about 60% of total chocolate category growth in 2007. We expect that it will be up over 10% a year for the next four to five years. Our research indicates that consumers are primarily trading up as a way of self-reward. Our existing brands were not speaking specifically to women in the “Reward Me” need state. Hershey’s Bliss is that “Reward Me” product.

Our approach to Hershey’s Bliss was both thoughtful and rigorous all the way from consumer concept to final products. This resulted in a launch that has more than met consumer and customer expectations. Our launch campaign aggressively funds the initiative and has been embraced by retailers and consumers. Bliss is the blueprint we will follow in the future on new products.

We combined our strong R&D technology and our in-depth understanding of the demand landscape to deliver the ultimate in personal indulgence. This is the most clearly defined brand target we ever had. We met thousands of these consumers and are reaching the 25 to 49-year-old woman who leads a busy, active life and finds balance from an indulgent chocolate product that enhances the time she has for herself. But unlike consumers of competitive products, this moment isn’t necessarily spent alone.

The last component is key because it’s that subtle differentiator that keeps Bliss from being a ‘me too’ entry. Clearly we found the target, but she is demanding and the product must deliver. We utilized a new proprietary technique that tested targeted consumers responses to various prototypes that our R&D group developed. The result is a battle-tested product that was validated to beat our key competitor as well as trade-up in products in blind taste tests. So while the product taste clearly delivers, the product form and package seal the deal.

Attention to detail is part of the entire process; the uniquely shaped piece is designed to deliver preferred melt points and textural properties. The laydown metallic bag conveys an image of quality and includes a color scheme that appeals to the target consumer and is our first use of new state-of-the-art printing techniques.

The Hershey’s Bliss launch plan also incorporates strong consumer support throughout the entire year and importantly we will support it even more in 2009. Introductory merchandising and display activity is driving initial take-away. Hershey’s Bliss advertising began airing March 31 and accelerated as we reached ATV distribution targets.

We reached consumers with innovative trade and sampling programs such as Bliss house parties. The launch has more than met our expectations and Hershey’s Bliss is on track to exceed its year one sales targets. If you haven’t seen the ad copy, now is your chance. Let’s take a look.

(Video Clip)

David J. West

Our approach to premium in Starbucks is driven out of the demand landscape. Here we’re targeting loyalists who love the taste of coffee. So while our point of sale material may I have it started with a simple dream, it actually started with consumer research grounded in the premiumization and trading up mega trends combined with the emergence of coffee as part of our culture.

We did extensive research with loyal coffee consumers, who by the way, have a high degree of overlap with chocolate lovers and set out to fill their unmet needs, why can’t I get the two things I love together? That led us to a very clear vision.

Coffee house inspired flavors brought to life in an Artisan-style chocolate. We clearly recognize that this is a small core group, but they’re loyal, price insensitive and very frequent purchasers and we previously had no brand that would meet their premium profile. We are bringing this idea to life through a powerful partnership between the leading companies in the respective categories.

Importantly, the development of this initiative represents a new, open approach to product development for us at Hershey. We were open to new flavor approaches as well as new cocoa sourcing protocols. We then worked directly with Starbucks to develop a range of products. This was actually a three-company effort as Barry Callebaut, one of our suppliers and R&D partners, was also part of the process.

At the same time, a coordinated effort was being established by the marketing and sales team to ensure that the launch would have the appropriate brand support. A combination of advertising, sampling, dedicated merchandising fixtures and in-aisle shelf attachments has occurred. We clearly brought our scale and leadership to the premium sub segment of the category driving our other premium brands as parts of the process.

Let’s take a look at the Starbucks advertising and you’ll note it plays off of the familiar chalkboard which greets consumers when they enter a Starbucks cafe.

(Video Clip)

As I mentioned earlier in the past our innovation was about product variety. We are broadening our approach around innovation. Packaging, marketing, consumer experiences and go-to market strategies are linked throughout the entire process. The organization is energized and aligned with this approach. Innovation will be an end-to-end activity throughout our company. Let me try to bring this to life for you.

This chart shows a range of confectionary product technology and business model solutions. They’re arrayed here on the spectrum from close to existing all the way to new. In the past, the majority of our confectionary innovation was in the lower left box, existing technology and existing business models. Therefore, it sat on top of existing items and was highly cannibalistic. We will always have close-in innovation as it brings variety and news to the category.

Given our category size and our share opportunity, there’s still room to grow here. However, it has to be balanced with bolder, break-through confectionary innovation as it’s in new technology where we’ll likely capture latent and emerging demand in the category.

For example, new technologies may present a solution for better for you confections. A new business model may reach consumers who purchase candy outside of our traditional channels. We are consciously pursuing projects in all four of the boxes on this chart deliberately pushing our boundaries to find new, unmet, incremental demand.

Let me elaborate with one example in the emerging direct-to-consumer channel, which represents a new business model for us. Nearly $1 billion of chocolate is purchased on-line with most given as gifts. At, we recently started offering custom Kisses with about a half a dozen customized messages such as “I Love You”, “Congratulations” or “Just Married”. As we build our capabilities here, we’ll look to give consumers additional customization options.

We are also expanding our catalog business. This initiative is in its infancy but it is highly incremental and profitable and just one example of our new approach to innovation.

As I said, we have a renewed focus and approach to innovation. It encompasses our entire business leveraging our brand trademark and our R&D capabilities to deliver a robust and balanced pipeline. One that addresses close-in current demand and longer term demand for confections. These actions will deliver incremental, consistent and sustainable growth over the long term.

Now I will give you an update on our international business. Over the years, our international business has grown both organically and via acquisition and joint venture. Business outside of the U.S. represents nearly 14% of the company’s sales. Importantly, we’re focused on our efforts in Asia and Latin America, where GDP and confectionary growth is very strong.

We have done extensive research on emerging markets as represented on this chart. You see, the circles apply to buy growth on one axis and market attractiveness on the other based on political risks, size, market concentration and other factors. The green circles or bubbles represent markets where we are aggressively growing our business on the ground with our own teams or with business partners. These markets include India, China, the Philippines, Mexico and Brazil.

The yellow bubbles are markets where we are investing in our brand but are utilizing a distributor in markets, such as our number two position in Korea. The remaining markets, the remaining circles that are blank is where we have little or no presence, likely export model only. And since I know some will ask later, the largest circle there is Russia, which is a big opportunity. We’re evaluating entry into many of these markets and we see a huge opportunity in the future.

Our goal in new markets will be to achieve the success we’ve enjoyed in Mexico where we have built a very strong business, both organically and via a bolt on acquisition. Sales continue to grow. It’s a balanced portfolio that includes global chocolate brands, spicy sugar confectionary and aseptic drink boxes.

In 2008, we’ll test two varieties of Reese’s in Mexico, traditional peanut and hazelnut. As we look to expand this brand globally, Mexico is a logical place to start. We have similar confidence in the prospects for our other team markets starting with India. In April 2007, we entered into a joint venture with Godrej.

Godrej Hershey’s Ltd. produces and markets hard candy and beverages. Importantly, Godrej is a well-known Indian icon with an advantage route to market and an established sales and distribution team. In 2008, we launched Hershey’s Milk Mix in India. We’ll continue to enhance our relevance in India as we extend our reach and distribution. We’re expanding go-to-market capabilities in both the modern and traditional trade.

We expanded in China via manufacturing joint venture with Lotte. This enabled to us launch on shelf in China in Q4 of last year. In 2008, we’ll continue to invest in this business, promotional efforts, sampling and advertising will enable us to build brand equity and consumer awareness. Additionally, we’re working with our distribution partner to improve our access within the modern and traditional trade.

Back in 2001, the company purchased a small business in Brazil. Our limited scale, reach and distribution led to a disadvantaged position and unfavorable margin structure. Increasing distribution throughout the country is an essential element to improving the competitive profile.

So we entered into a joint venture agreement with Bauducco, a leading baked goods manufacturer. We will be responsible for manufacturing and the creation of the marketing plans related to Hershey products. Bauducco will be responsible for selling and distribution of Hershey brands throughout Brazil. This JV is off to the fast start.

After that trip around the world, I will now give you a financial update. Recall that our new expectation of long-term growth for net sales is 3% to 5% annually, generating EPS from operations of 6% to 8%. Our business is on track and performing as expected throughout the first half of the year.

In the U.S., new products, advertising and retail coverage plans are working and the business is gaining momentum. Our international businesses are also gaining traction. Our take-away in shipments in the second quarter reinforce our confidence that net sales will grow 3% to 4% in 2008.

While commodity and stock prices remain volatile, we have good visibility into our input cost basket for the remainder of 2008. Therefore, for the year, we continue to expect earnings per share diluted from operations of $1.85 to $1 .90 per share. As we think about 2009, we expect net sales will be within the range of the new long-term outlook of 3% to 5%.

The top line will continue to improve benefiting from sustained and consistent levels of consumer investment. In the U.S., core brands will grow meaningfully. However, a portion of these gains will be offset by lower snack sales and a refocus within the refreshment business from gum to mint.

From an earnings perspective, our biggest challenge in 2009 will be commodities, which will be higher again. As I stated earlier, we are committed to investing in our brand, people and processes around the world. We’ll do this in spite of increasing commodity costs, as it is the right thing to do for the long-term health of our business.

Earnings per share diluted from operations should increase in 2009. However, barring a significant reversal in commodity markets, we don’t expect 2009 earnings growth to be within the long-term targets we set forth today.

Let me quickly discuss our balance sheet and cash flow. Historically, the company has generated significant levels of cash. Following the global supply chain program, we expect operating cash flow growth to resume in earnest. As you are aware, the current capital markets are volatile. This is having an impact on our thinking, as we have preferred to maintain a solid investment grade credit rating that ensures ready access to the capital markets.

Obviously, the supply chain transformation has significant cash costs and CapEx requirements in 2008 and 2009. As I mentioned earlier, we continue to explore opportunities internationally. Dividends have grown at a steady rate but in the short term, we don’t expect the dividend to grow at the rate of the long-term EPS target.

Longer term, bolt-on acquisitions and emerging markets are attractive. Historically, our dividend growth has been in line with our long-term earnings outlook. We expect this to be the case going forward, post the global supply chain transformation.

There’s currently $100 million outstanding on the current share repurchase authorization. Value-added share buybacks are an important consideration in our capital structure valuation. However, it is important that we maintain financial flexibility and solid investment credit rating. We will balance all of these considerations in determining when and how to return excess cash to shareholders. Let me now wrap up.

Today, I hope you got a sense of where The Hershey Company is headed. We have great brands and an advantaged business system, which competes within a strong category. We are confident in our long-term top-line growth rate of 3% to 5%. Our program of reinvestment in our business is already working and will continue to do so.

The benefit of our new approach to consumer demand will enhance our growth in both our core as well as innovation. Additionally, international growth will continue. Commodity costs will rise again in 2009 and will be volatile for the foreseeable future.

Our supply chain program and other costs and price realization initiatives will help fund needed investment in brands, people, and processes. As such, we expect the long-term operating EPS growth to be in the 6% to 8% range, although not at that level of growth in 2009.

I’d like to introduce the members of my executive team who will assist me in answering any questions that you might have. And joining me today is Bert Alfonso, our Senior Vice President and Chief Financial Officer; J. P. Bilbrey, who is a Senior Vice President and President of Hershey North America; Michele Buck who is our Senior Vice President and Global Chief Operating Officer; Ted Jastrzebski, our Senior Vice President and President of Hershey International; and in the corner over there is Burt Snyder who is our Senior Vice President, General Counsel and Secretary.

Since we’re webcasting, before asking your question, make sure that you have a microphone so that everybody out on the webcast can hear. Please state your name and the company that you represent and then if you direct your question to me, I’ll either answer it or pass it on to one of the folks in the management team. With that, open for questions.

Question-and-Answer Session

Todd Duvick - Banc of America

Over the last several years in the food industry and this is more a finance question on the fixed income side, but in the food industry, we’ve seen a lot of the companies within the investment grade spectrum move from the A-rating category to BBB. So the first question is, can you enunciate for us the value of maintaining an A investment grade credit rating? And second of all, would you consider an acquisition that would be larger than a bolt-on acquisition, if that might result in a multi-notch credit rating downgrade?

David J. West

I think right now, given the capital markets and the need to have access to capital out there, as well as we have pretty significant uses of cash this year, first being the global supply chain transformation, but also the desire for to us continue to be in the M&A markets for some bolt-on in emerging markets, we think it’s prudent for us to balance our cash usages and to keep the credit rating exactly where it is.

That’s not to say that if the right transaction came along that we thought was the right thing for shareholders and accretive over the long-term that we wouldn’t look at our credit rating. But the good news is that right now we have a very strong one, and we have room should we ever decide to go in a different direction.

Zachary Wydra - Beck, Mack & Oliver

Can you talk about how you think about in your strategy for passing on rising raw material costs to the consumer, and how you plan on doing that going forward?

David J. West

Actually, we have announced some price increases, and I mentioned price value improvements in the portfolio as some of those initiatives. I will pass it on to J.P. Bilbrey, and JP can talk about that and our approach to the North American business.

John P. Bilbrey

I think it’s important as we think about commodity costs; this is not the only element by which we would think about pricing. One of the key opportunities we have in a branded business is to ensure that we’re achieving the right price mix, the right price realization and continuing to expand margin beyond that. So I think we’re in an environment where increasing commodity costs are a reality, but it wouldn’t be the only factor that we would look at in terms of how we approach pricing.

[Paul Bernstein] - Black Diamond

I’m curious on the big box supermarket chains, is it tougher to get shelf space now as a lot of them remodel for the confection aisles? Obviously, you’re redirecting some of that directly to the consumer, so I’m just curious what happened the last couple of years if you are seeing that.

David J. West

The space available to the category hasn’t really changed that much in the last few years in the big box formats. It is still in a very attractive category and profitable and one in which variety plays a big role. So there has really been very, very minimal impact in terms of space for the category.

David Palmer – UBS

In Slide 49, you show core brand ad spending stepping up a lot more in ‘09 than ‘08. I’m wondering what is your thinking about the timing of that step-up? Why not rebase ‘08 and have that ‘09 be more of a normalized year assuming you have the programming behind the core to spend behind?

David J. West

It’s a question of timing. It’s a question of having the right research and the brand positioning the way we’d like them to be before we make the investments. J.P. I will let you add onto that if you would like.

John P. Bilbrey

There’s a couple of things that impact that. One is we had the introduction this year of Bliss in Starbucks. Those will continue to have significant year two support, which may not always have been the way that we’ve done things in the past. The other thing that we’re really trying to be focused against is you saw the advertising today which we have a lot of confidence in.

We have to make sure that we’re getting to sustaining levels on each of these core brands as we go. So we feel very good about where we’re at on Reese’s. We feel very good about the new copy that we’ll be airing around Pure, and those are going to continue to grow at sustaining levels. So we have 52-week programs. We’re on air three weeks, off air a week, but we’re getting to levels that we haven’t been at before, which are annualized.

So as you see those, we’re not taking things back as much as we’re getting to the right base levels and then as we have new innovation, new items, etc, those are also having year two support. So that’s why you’d see the trend that you’d see here.

David J. West

David, you think about it. We spent significantly on Kisses last year and it didn’t really drive the business. Part of that was because we just didn’t have the right product and value proposition. So, dollars for dollars sake is probably not the right approach. We want to make sure that what we’re spending works and is positioned appropriately against the consumer.

Terry Bivens – JP Morgan

You’ve reaffirmed guidance for this year. If I could draw you out a little bit on ‘09, by our numbers if you take up advertising on the order of 50%, that’s a $0.15 headwind as we look into this year and next. You clearly called out higher commodity costs. How should we look, what would you identify as the drivers in ‘09 that you think will get to you a higher earnings level in ‘09 versus ‘08?

David J. West

We will spend against the brands. We have higher advertising spending planned. Commodity costs will be higher again. At this point in time while we are we’re covered forward in some places, we’re not going to have the same visibility as we have for 2008.

What we do have very good visibility for 2009 is the global supply chain transformation where we will have a full year of our Monterrey facility on-line next year and it is just starting to come on stream this year and that’s a significant savings improvement for us next year which will help offset the cost increases as well as give us the feel for the brand.

That’s a big component and the top-line growth, as I said, as we have come to the second quarter here, we’re starting to feel good about the traction we’re getting. We feel good about the growth rate. So we’ll get some top line growth through an advantaged cost structure with the global supply chain transformation behind us.

Terry Bivens – JP Morgan

So you would see hitting your sales growth target longer term next year in ‘09?

David J. West


David Driscoll – Citigroup

On the sales composition, the 3% to 5%, what’s the breakdown? What’s the volume execution in there over the next couple of years in the long-term if it changes?

David J. West

Specifically don’t want to get into it and a lot of it will obviously depend on price realization going forward. So it will be we have taken a number of price increases in the last couple of years. We’re watching the elasticity from that. So the balance and mix between volume mix and price will still a little bit in play.

What we feel good about is that we believe that we can get the core U.S. business to grow nicely. That we have a lot of un-mined opportunities in that core U.S. business and that some of that should be volume, but obviously, we’re going to have to look at price realization given this market and some of that will come, obviously, through looking at our trade promotion line as well.

David Driscoll – Citigroup

On price realization in ‘09, I would get the sense from your guidance that you have not modeled in the idea that price realization will cover the commodity cost inflation thus the guidance that you gave us something below 6% EPS growth. Because if it did, if you did have pricing that covered commodity costs and you had top-line at 3% to 5%, I don’t think the math would work out on that type of EPS growth.

Am I correct in my base assumption that you’re right now assuming what would seem like a worst case, commodity inflation comes, you don’t have price realization to fully offset it and thus you dip into your global supply chain cost savings in order to offset those input costs?

David J. West

The commodity markets are volatile. We have very good visibility for ‘08 and we’re starting to have visibility for ‘09 although it is still early in that process. Based on where we are today, we do see challenges on the commodity market. I don’t know that we have taken a conservative approach, but what I would tell you is I think in our minds we have taken what is a realistic case approach to commodities right now.

We are also realistically still in that point where we’re in the process of balancing back the trade promotion spend back against the price increase. And so it’s also a little early to see how much traction we get and how quickly we get the traction in terms of starting to pull back on some of our promoted price points.

So those two things, obviously, would give us a little bit of caution at this point about where we look for 2009. We feel good about the ability to grow the top line. The question really will be within the trade promotion rate and then what happens in the commodity markets and it’s a little too early to call that.

Karen Lamark - Federated Investors

Can you give us a little more color on the research you did with your consumers, maybe breadth and depth and where you might have fallen short or lost some share and basically the fact if there’s any low-hanging fruit you see right now?

Michele G. Buck

In terms of the research highlights, we did a breadth of research so we did multiple different types of research. We talked to consumers as shoppers at point of purchase to really understand their point of purchase shopping behavior. We also did some ethnography as well as really doing in-depth interviewing around our equities, consumer’s relationship with the equities.

As well as a broad segmentation study that looked across chocolate, mints, gum and sugar confectionary to really understand who those key consumer segments were as well as the key need states. And then using that combined with evaluating the marketplace trends, trends we’re seeing in other industries that may not yet have made their way to confections and layering that in is really how we have built the consumer landscape.

Ken Zaslow - BMO

I understand the 2008 and 2009 EPS outlook but the longer term growth outlook, it seems like it’s a little below your peer group. Why do you suspect that given your brands, the low penetration in international right now that your growth rate would be below your peer group? What would it take for you to readjust that back to the median?

David J. West

I think fundamentally as we grow internationally and in emerging markets, it will take investment over time. And we fully expect to make the investment it takes for the long term in emerging markets. So there will be some EBIT margin pressure that comes along with that, and we want to succeed in a lot of these markets, and we’re going to make the investment it requires.

Ken Zaslow - BMO

What would it take for you to be able to raise that level to more in line with your peer group?

David J. West

Realistically, the biggest wildcard for all of us in the industry right now is commodity costs. So, if you wanted to think about where commodity costs go that’s a fundamental question. I think that also we’re very confident in the U.S. business and we believe that we’ll get some traction there, but right now, we want to give you numbers that we think were competent that we can deliver over the long term because we haven’t been delivering what we told you we were going to deliver in the past.

Eric Serotta - Merrill Lynch

Dave, past Hershey presentations seem to be extremely focused on driving single-serve, front-end, instant consumable. They are all phrases you’ve used. It seems that in this presentation, the focus has really shifted quite a bit to center of the store, to the aisles. It seems that over the past few years maybe you neglected the center of the store a little bit but has the pendulum swung too far in the other direction? Can you talk a bit about what you’re doing to drive the front end?

David J. West

Actually, we are still very focused across the entire business front end and in aisle. We do see a lot of opportunity in the aisle because it’s something we haven’t changed in a number of years. And as the portfolio has changed, we put so much innovation out in the last few years that the aisle got a little bit cluttered and confusing for the consumer.

So there’s a big opportunity, as I said, the numbers that we showed you, we’re losing consumers who are actually physically in the aisle who are not buying and so you talk about low fruit, there’s low fruit there for us to get. So that’s one of the reasons that we focused on that today. But we are still very focused on the front end of the store and convenience stores as well because the brand equities are so strong there. So as we invest in the core brand with advertising, that’s going to drive the instant consumable with impulse purchase as well as anything that we’re doing.

Eric Serotta - Merrill Lynch

But can you give us a little bit of comfort as to order of magnitude? Are you looking for volume growth? I remember it was, it was Holiday at Hershey’s and it was late 2005 where you showed a slide where basically, volume was flat over the previous five years. As we look out over the next five years, you talked about some further rationalization on the snack side, should we expect to see material volume growth?

David J. West

I think you will see volume growth over time. And there will be some years where you will see it and other years where you won’t and it will depend on what’s going on within the price realization equation. But over time, we believe that we can get the business to have some volume growth.

And that’s part of the forward algorithm of how you would get to a 3 to 5% growth is that core U.S. business has to grow. And 3% category growth in the U.S., we would expect that we would at least hold our share if not gain, and to get to that number, there’s going to have to be some component of underlying volume growth. You can’t get all the way there on price index.

Jon Feeney – Wachovia

Dave, when you showed us the slide on emerging markets, you definitely mixed levels of evolution and it strikes me that in some of the places where you have big wide space. It’s big established players in candy and confectionary in these markets. Do you think ultimately getting big in these markets is going to involve some acquisition or partnership and if so, why not take advantage of the relatively low funding costs now to become a little more aggressive there if that’s, in fact, a high priority for Hershey?

David J. West

Emerging markets are clearly a priority for us. Some of the markets that you saw there, the way they were arrayed on the chart already took into account market concentration, competitive ease of entry. So some markets are clearly going to be more attractive than others, specifically with respect to chocolate.

The good news in most of those emerging markets that you saw there, growth as the economy continues to develop is going to continue to be very, very high. And those categories will grow and there will be room for all of us and that’s something that, frankly, as we’ve gone into some of these markets we’ve looked for a partner, a joint venture partner.

We have done it in China. We did it in India because we think it helps us with the higher level of success factors, the degree of success on the way in. If we have someone who knows the market and knows the local custom, etc., and the distribution channel, that’s the way we have gone in and we’ll continue to be acquisitive or do joint ventures where it makes sense in these markets. But most of the markets that were up on that chart are not very concentrated with big global players.

Gretchen Montgomery - Deutsche Bank

The C store channel has been challenging of late. Have you seen any reluctance in consumers to buy anything in the stores after pumping so much into the gas tank? Can you just talk a little bit more about your strategy in the C store channel?

David J. West

If you saw the chart, our latest C store take away is some of our best that it’s been in a while. We’re encouraged by that.

John P. Bilbrey

There’s several things happening in that channel. You do have the pay at the pump issue where people are making more trips to the C store but putting less in the tank when they go there. And there’s still a number of, one of the things we hear is that there’s still about the same level of traffic going into the store. You also have to remember that for most of our products, they are still very accessible, and so we think that’s continued to help us there as well.

It’s a very unique time for the C store operator and one of the things that has helped us there as we’ve increased our coverage of C stores is there’s about 140,000 C stores in the country and if you saw what Exxon announced last week that they’re going to be getting out a number of their stores. The trend is for those stores to become franchise stores, and we used to be able to impact about 40,000 stores by going through a headquarters. That’s changing and that whole channel is becoming more fragmented.

So what’s really helped us is to have very dedicated retail coverage of a higher percentage of stores than we have in the past, and therefore our average distribution levels on the right items are higher than they actually have been and that’s helped us overcome some of the headwinds that that channel could be facing.

Robert Moskow - Credit Suisse

Michele, in the consumer research that you did whether you determined whether competition had elevated their game? Specifically, I think, Mars has been gaining the most market share. What did they tell you about their perception of brands like Snickers and M&Ms, and where do you think that they exploited vulnerabilities of Hershey? Then secondly, do you think that the tie-up of Mars and Wrigley is a threat to Hershey in any way, and what steps do you think they will take?

Michele G. Buck

As we did our consumer research, obviously, what we tried to look at was the entire landscape, where our brands fit, where the Mars brands fit. Clearly, as we did that we looked at where all the brands in the category really sit from a need state and consumer segment perspective. So, you look at that and say clearly there are a couple brands that are doing well there that are living in a space that’s been really sorted well and really well defined.

What we’ve tried to do then is look at our ownership position in certain need states and really look at how we can bring that to life with consumers. I would say, yes, we do understand where their brands play. We do understand what the strengths are and then we’ve looked at the entire landscape to see where the opportunity is for us. They’ve been out there. I think the investment in our core businesses is a big way that we’re going to win in the marketplace.

We have a powerful group of brands, a lot of breadth of brands and our iconic brands match up very well with theirs. So supporting our brands from a core investment perspective is huge for us. We have a lot of untapped potential there and that is we’ve now lined our brands up more tightly against the need state, we’re in a much better position to win. So we understand where they sit and we think we’re in good shape there.

David J. West

I think I’ll add onto that and I can’t stress it enough and so I will take a chance right now. No one is asking questions so I will make a statement. The demand landscape that we’ve talked about today and why it gives us such confidence, back in 2004 and 2005, as we were looking much more at the snack market, we changed our approach to research. We were doing research at a more elevated level. We were doing research across the snack market, of which confections was a piece.

The role of confections in the total snack market, if you will, is one very much of just sweetness variety. And so our research and brand positioning, we thought we lost granularity against some of the core brands and some of the need states, and what we have done and what we have done with the research that we’ve done is we were very one dimensional in the past, and what we now have is a two-dimensional. It’s in the only the need state that the consumer comes in with, but it’s very much about the demographics and the decisions that the consumer makes when they come into the category.

We have a two-dimensional look at the category now, which we didn’t have in the past. What that does Rob to your question then is it’s very clear at the intersections of those need states as well as the consumer segments, what are consumers looking for? What do they perceive as value? What brands live there? Why do they buy them, and more importantly, why are they not buying ours, so there’s brand repositioning that comes from that. It’s much tighter positioning than we have ever had a much better defined target than we ever had.

So our dollars will work harder and more importantly, our brands won’t stack on top of one another, and so I think it’s a piece of research and we feel very good about it. We have seen the success that we’re having on Reese’s, and we believe that we’re going to have the success across a number of other brands and that’s why we feel so good about our ability to grow the U.S. business.

The second part of your question, which was Mars and Wrigley, what they’ve publicly stated is obviously, that they will run somewhat separately, chocolate from the non-chocolate and the gum and mint businesses. I’ll take that at face value, but I’ll act as if they’re not going to not operate that way. You have to believe that they’re going to get some marketplace synergy.

We still have leadership in chocolate. We have great brands that are underinvested in and as we invest, we think that we are going to get a lot of traction there. That would be the first thing.

The second is the combination change is very little about the season. Gum and mints are very underrepresented seasonally so we continue to believe that our seasonal navigator tool and our competitive advantage with bringing category insights and solutions seasonally will continue. And as I said, we have a 40 plus share of packaged candy in the aisle which is a huge part of the category and that changes very little based on the Mars and Wrigley combination.

So there are places where we are advantaged. We will continue to be advantaged. Frankly, they will have a lot of scale on the front end if they function as one unit. We’re aware of that. We have great brands, too. So right now today, while we may be battling in a three-part race, if we battle in a two-part race, the brands will be the same and the consumer need states are a little different.

So we’re aware of it. We’re watching it closely and in the short term as they try to figure out what they’re going to do, you can imagine that we’re going to be as aggressive as we can to make sure that we defend our position within the category. Two competitors that we respect and have respected for a long time, so that doesn’t change.

[Tom Clancy] - Philadelphia Trust Company

Aside from questioning the logic maybe of reminding the Hershey bar consumer that the product will melt on them, I’m really happy to see you are investing in the brands again, but I couldn’t help but notice that refreshment was noticeably absent. Are we giving those products up for failure, or just waiting for new innovation before investing in them?

In regards to Mexico, since that seems to be a critical part of achieving your ‘09 guidance and the top law enforcement ministers seem to be dropping monthly down there, can you talk a little bit about how the stability of the Mexican government affects your supply chain and ability to meet demand?

John P. Bilbrey

I think the best way to think about all of these from just a total standpoint is we have to get the fundamentals right around our core brands first. So it’s not that we’re ignoring other parts of our portfolio as much as we’re committed to the parts of our portfolio that we know that we need to drive, succeed and get to the right spending levels again.

Within refreshment and mints, the one area where we continue to focus is around mints. We have about a 30 share in that category. We think there’s an opportunity around functional items there and we’ll continue to focus against that category. Less so probably in refreshment, and then I would comment on gum briefly as well, where we have unique products like our Ice Cube product that also has functionality.

We’re a number three player there but we also believe that there’s items that are fashionable and unique where we can create a discontinuity and we’ll continue to focus on those things as well. But the overlying comment is it’s not that we’re ignoring parts of our portfolio as much as we’re focusing on the parts of our portfolio that we believe we have to drive and get right first.

David J. West

The factory in Monterrey as I said, we’re on track. It’s up and running. We are bringing product out of Monterrey into the U.S. and we’re on schedule. And no, we have experienced no issues, nor do we expect to experience any issues in the supply chain in the movement of that product.

Thaddeus J. Jastrzebski

Mexico is a market we’ve been in for over 40 years so we have saw a lot of variability in the government there and a lot of things happening economically and have consistently been able to grow strongly in that market. Mexico is a model as a business platform, one that we would like to duplicate in other places. We have a diverse portfolio. We have a chocolate business, a sugar confectionary business and a drink business and that diversification gives us quite a bit of stability in the business and has allowed us to see very strong growth over the recent years.

Judy Hong - Goldman Sachs

Dave, if we look at your brand portfolio, you’re still underrepresented in the premium segment, and that’s really where a lot of the growth is going to at this point. So can you just talk about how quickly can you transform your portfolio so that you become a bigger player in that part of the segment?

Obviously, competition is pretty intense in that part of the segment. You’re late to entering that segment. Does really having that 42% share of the overall chocolate give you advantage in becoming a bigger player in that part of the segment?

David J. West

Having the 42% shares or 43% share of chocolate up until this year did not give us any real leverage of scale in premium. We tried a number of acquisitions, we had Scharffen Berger and Dagoba and we also had Cacao Reserve, any of those things by themselves were not large enough to have scale within that part of the category.

What Starbucks has allowed us to do, obviously gives us an incredible brand to take in there. It carries the rest of the product line-up with it. So when you look at our off-shelf displays and our end aisle displays on premium we now have the ability to use our retail sales force and our category management capabilities to compete more effectively in premium.

Are we all the way where we want to be with premium at this point in time? No. However, we do think we can get there over time and we’ll use a lot of our consumer learnings that we have currently had to develop some innovation, I think, that will give the consumer something that’s a little bit more unique in their delivery of the product, but I don’t want to talk any further about it right now. But we are starting to leverage our scale in that part of the category.

Judy Hong - Goldman Sachs

How critical is that part of your 3% to 5% growth algorithm? Is that more longer term opportunity? Or in the near term it’s really the core sales improvement that will drive 3% to 5% sales growth?

David J. West

I think in the near term, it’s fair to say that the core will be a disproportionate part of that growth. Because there’s so much there that we can do as we invest in the brand, as we get the retail capabilities back in place. And as we really talked to the core consumer and get better positioning in a much more sharply defined set of brand and portfolio roles that the core will grow. And the good news is for us, while that happens and the base becomes that much stronger, innovation then comes in on top of that as incremental.

In the past what we’ve done is the core and the base was declining. And then as we just poured innovation in it, basically it just got back to flat. Getting a core, getting a revitalized and stronger core business and base brand business growing allows the innovation to work harder for us rather than the innovation trying to answer the solution for the declining core. So you’re starting to see some strength in our core.

Vincent Andrews - Morgan Stanley

Dave, could you just discuss your market share goals in a little more detail for 2008 and 2009? And maybe provide some sensitivity around your brand advertising spending in terms of how that plays into those goals and what type of competitive response you’re expecting and what you might have to do from a spending perspective to meet your market share goals or to adjust to a competitive response?

David J. West

For 2008, and we’ve not stated a share goal necessarily externally, but as you see, we’re starting to see some flattening and the declines have certainly lessened. We would expect as we go through the rest of the year here that we hope to get back to a more flattened share position than we have in the past. And that trend is improving across all classes of trade and in the non-measured component of the market we’re also feeling very good about our business there as well.

I think what the take-away for us would have been, we’re not surprised that up and through the Easter time period with the early part of the year being as seasonal as it is and particularly Valentine’s being in there that we didn’t gain a lot of share. Bliss and Starbucks came after the post-Easter season and as Bliss and Starbucks have come into the market, as well as some of our increased advertising on the core we are starting to see improvement in our retail coverage as well.

You should expect to see consistency going forward and hopefully that we will have erased the losses as we get through the year here, and then as we go forward in 2009, we will continue along the same path. It has been a difficult couple of years here with the share losses and we think we can see the light at the end of the tunnel in terms of stopping the erosion.

Vincent Andrews - Morgan Stanley

But if you are not seeing that trend, would you step up the spending until you get to that trend?

David J. West

We’ll evaluate as we go along in terms of how we’re spending whether it be on, on the consumer and also in retail and part of that is also realistically how the price realization throughout the category occurs, but we’ll continue to evaluate it. Our goal is to stop the erosion, and we’ll do what we need to do.

Henry Armstrong – Armstrong Associates

Can you talk about your marketing effort directed at kids? I don’t see much about them as a demographic group or a product aimed at them in particular. Is that a function of them being at the wrong end of the price value equation or restrictions on marketing or some other factor?

David J. West

We participate in the protocol about advertising specifically to children. We’re just not doing it. And so essentially, we think that we can penetrate the households and kids will eat what mom brings home. So as we continue to target mom as the shopper, not necessarily the consumer, but mom bringing products home, that’s how they get into households, and we’re allowing the parents to make that decision in terms of what their kids eat. And that’s pretty consistent across the entire U.S. food and beverage industry.

I think pretty much everybody, and I’m looking at Burt to nod at me, and I think everybody in the industry has signed on to the CARU. That’s not a surprise, and, obviously, we have some brands that kids love and we have some products that kids love, and we don’t feel disadvantaged by not specifically speaking directly to them.

David Palmer – UBS

I just saw some data yesterday that Starbucks over-indexed with women more than any other brand in restaurants. Something like 57% of the consumers were women and your own consumer analysis since we’re looking through it, it does seem like a lot of discussion about the core. It was more about her, the woman being the target.

I was just thinking a lot of your brands, your old promotions, the NASCAR type of stuff and certainly your core channels like C stores, a lot more male. Is that really a key insight here that you are really realizing that you are just not there with female side of the population and to that degree, are you doing a lot more with the more female oriented channels, drug stores and maybe even a little higher up, the department stores and whatnot?

David J. West

I think part of the learning within the brand positioning work would be that we need to make sure that we are talking to all consumers. And Reese’s tends to be more male skewed so as I talk about it in the presentation, the advertising, and the consumer efforts around Reese’s will be much more around the Olympics. It’s the Batman movie; it’s the NASCAR tie-in.

But when we talk about Hershey’s, it will be much more about connections with family, friends and S’mores is one of those examples of a family occasion. So I think the important thing is we are as we are looking at our merchandising and advertising vehicles going to be much more focused and sharp about our target.

Andrew Lazar - Lehman Brothers

What role does trade spending play going forward? That was obviously a big focus and advertising is shifting back. Is that part of the reason we haven’t seen as much of the price realization as we might see as we go through the back half of the year?

And second, should we expect more in the way of cash and non-cash charges for incremental productivity projects that maybe haven’t been announced yet and what would be the timing on that?

Does the Hershey Trust contribute or how do they contribute to your ability to create shareholder value as the CEO of a publicly traded company? Any more clarity on that relationship and the timing of this editorial over the weekend and things would be helpful.

John P. Bilbrey

What you would see around trade spend is if you were to go back several years, you would have seen trade spend be more important than where we were in terms of our advertising and consumer spend. What we think is the right thing to do is not let the pendulum go back the other way but necessarily bring them into balance.

So we would see trade spend as a percent of net sale continuing to be relatively constant going forward because we think we’ve got that about right, and then the thing that we’ve remodeled is how do you get the consumer spend with the working media back to the right levels. That’s what we think is the right thing to do there.

David J. West

With respect to cash and non-cash charges, we’re in the process of implementing a fairly significant transformation of our supply chain. We closed six manufacturing facilities, are in the process of closing six manufacturing facilities and reducing our headcount by about 3,000 jobs and then adding 1,500 back in Monterrey, Mexico. That project will obviously go on through 2010 and that is consuming quite a bit of our cash flow, but also of our human capital as well.

As we look forward, clearly, that’s the big slug of getting our productivity, but also getting our capacity utilization and improving the way we make products, allowing to us customization short run products for consumers. There is more room as we get to 2009, 2010, as we get to a steady state in the manufacturing network.

There’s still opportunity for to us improve utilization either maybe bringing in some things that we’re currently making on the outside, inside. But we’ll also continue to look at ways to become more efficient, but certainly nothing of the scale or scope of what we’ve just accomplished in the global supply chain transformation program.

The last question is with respect to the Hershey Trust and shareholder value. The Board of the Hershey Company works on behalf of all shareholders regardless of whether they hold class A shares or class B shares and that’s really where the strategic alternatives of the company are evaluated and where value creation is evaluated.

The Board is essentially new. Last year, November timeframe, we have worked as a Board to make sure that we’ve gotten everybody up to speed on the business, and allowed the time for everybody to get comfortable with the strategy. So what you’re seeing here is what we talked about in January is the outgrowth of the conversations that started with that new Board of Directors.

The Trust has common directors with our Board, three directors that are Hershey Trust directors are also directors on the Hershey Board so there’s obviously an overlap and an awareness of what’s going on, the Trust has an awareness of what’s going on with the company.

So realistically, at this point, there’s nothing from a value creation standpoint that is not on the table. The Trust has some clear views about their holdings and I would ask you if you have any questions based on their statement that they made yesterday, if you’ve got questions on that to go ask the Trust specifically if you need clarification, but I think it was pretty clear what their intention is.

Todd Duvick - Banc of America

With respect to the Trust and some of the speculation in the market last year about conversations that you have had with Cadbury, if you would like to update us on anything there, that would be great. I wouldn’t expect you to, however.

But thinking about on the international growth front, you talk about joint ventures and distribution agreements, have you had any discussions with Cadbury with respect to some of the markets that they are in? Something akin to what you are doing with some of the brands in the U.S., maybe to expand the Hershey or Reese’s brand into some of their markets?

David J. West

I won’t comment on M&A. That’s just as a matter of policy not what we do. The only thing I will tell you is that we have ongoing conversations with Cadbury with respect to the U.S. market because we have the license to use the Cadbury brands in the U.S. And as part of that, we have supply conversations all the time, but they’re limited to supply conversations around the Cadbury products in the U.S. Specifically, usually around the Cadbury Eggs. Beyond that, that’s really the ongoing conversation that the company would have with Cadbury.

[Tom Clancy] - Philadelphia Trust

You mentioned that the restructuring will go through 2010. What level of restructuring charges or what diversion should we continue to expect between GAAP EPS and non-GAAP?

David J. West

I think we’ve been pretty specific about how those charges are going to be phased. We gave you the slides on that.

[Tom Clancy] - Philadelphia Trust

I think that was just through ‘08. Is it going to continue at the ‘08 level, or have we cleared the bulk of that hurdle?

David J. West

We specifically outlined that when we first highlighted the project. If you got anything specific that you are modeling, you can give Mark Pogharian a call in a follow-up, but I would go back to the charts that we showed today and you can model in the change between the GAAP and the pro-forma for 2009 and 2010 based on what we’ve already publicly released.

[Tom Clancy] - Philadelphia Trust

Can you talk about your EPS growth of 6% to 8%, how much of your cash flow will be contributing to that? So what would the operating profit growth be above that?

David J. West

We’re not going to specifically talk about any of the interim pieces of the algorithm at this point. Obviously, we remain a strong generator of operating cash flow and on a go-forward basis. We talked very specifically today about international emerging market acquisitions or joint ventures. That’s something we would use our cash for.

Clearly, the we have been a fairly shareholder friendly company in the past with respect to dividends and dividend growth. And we talked about on the longer term basis that if the dividend growth would be somewhat similar to that earnings profile. Then depending on how opportunistic the M&A markets are, what isn’t out there that would determine what you would have left over from a cash standpoint and whether that cash buyback share pays down debt. That’s something that clearly, the markets will determine as we go forward. And what the opportunities in the M&A landscape are.

So you, we have an assumption in our models, but you can probably do the math yourself and figure out that what we are doing is pretty much on a go-forward basis. We’re a good generator of cash and we’re pleased about that. We’re going to use it hopefully to grow our business.

[Tom Clancy] - Philadelphia Trust

Are the bolt-on acquisitions that you’ve alluded to included in your 3% to 5% or are they additive in your 3% to 5% top line?

David J. West

We have not modeled in anything in the 3% to 5% going forward for those acquisitions.

I see no further questions and based on that, I’m going to call the webcast to a close and I want to thank all of you for coming and for your attention and interest in The Hershey Company. If you have any follow-up questions, Mark Pogharian or [Mana Fern] will be available to take them. Thank you for coming in today. Appreciate it.

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