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I just got off the HSY call. Some of the main concerns for FY09 stem from the company’s significant price increase in August (up an average of 10% in U.S. business). In FY09, HSY is raising both its everyday price points and its promotional price points. In the past, when HSY has raised its prices, it has typically not raised its promotion price points. Management’s lowered FY09 2%-3% revenue growth (from long-term 3%-5% range) is based primarily on the fact that they could see lower volumes as a result of the higher prices and some shift in mix between products sold at everyday price points vs. promotion price pts. They are also expecting revenues to be hurt slightly by currency in FY09, but they don’t have much emerging mkt exposure, which they said is a good and bad thing (only good b/c they won’t be as hurt by FX YOY).

There were also a lot of questions around commodity costs in 2009 because the company recently hedged a lot of their costs (management won’t specify what % of costs are hedged) and cocoa and sweetener prices have since come down. Commodity cost increases are expected to be higher in FY09 vs. FY08. Management really won’t give too many details on this front except to say that from where they sit they are comfortable having greater visibility on 2009 as a result of their hedging strategy.

They are seeing improvements in volumes on the core brands they have increased advertising behind. Hershey Milk, Reese’s, Twizzlers were all up mid sd. Refreshment, snacks and Kisses brand are still all underperforming.

In FDM, ex convenience, market share was flat for the quarter. In the last 4 weeks (first month of 4Q), HSY gained share in the c-store category for the first time in 2 years. Company attributes these improved share trends to their increased retail coverage efforts.

They are seeing some slowdown in the overall premium chocolate category, but they have little exposure so although it is bad for the category, they think is somewhat of a positive for their overall core brands.

Kerry Bauman
Senior Analyst