Hershey Company (HSY) — Q1 2015 Earnings Call Transcript

Thank you, Steve. Good morning, ladies and gentlemen. Welcome to The Hershey Company's first quarter 2015 conference call. J.P. Bilbrey, Chairman, President and CEO and I will provide you with an overview of results followed by a Q&A session. Let me remind everyone listening that today's conference call may contain statements that are forward-looking. These statements are based on current expectations, which are subject to risk and uncertainty. Actual results may vary materially from those contained in the forward-looking statements because of factors such as those listed in this morning's press release and in our 10-K for 2014 filed with the SEC. If you have not seen the press release, a copy is posted on our corporate website in the Investor Relations section. Included in the press release is a consolidated balance sheet and a summary of consolidated statements of income prepared in accordance with GAAP. Within the Notes section of the press release, we have provided adjusted pro forma reconciliations of select income statement line items quantitatively reconciled to GAAP. The company uses these non-GAAP measures as key metrics for evaluating performance internally. The non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP; rather, the company believes the presentation of earnings excluding certain items provides additional information to investors to facilitate the comparison of past and present operations. As a result, we will discuss 2015 first quarter results, excluding net pretax charges of $9.7 million or $0.02 per share diluted and gain on the sale of a trademark of $10 million or $0.03 per share diluted. Our discussion of any future projections will also exclude the impact of these net charges. With that out of the way, let me turn the call over to J.P. Bilbrey.

Thanks, Mark, and good morning to everyone on the phone and webcast. While our sales and earnings performance for the quarter was mixed, I was happy with the progress that we've made in key areas, particularly in the U.S. business where operating and marketplace performance was in line with our expectations. We completed the Krave acquisition towards the end of March, and we began the integration work. We can now begin to share insights related to consumer and market segmentation as well as distribution and channel opportunities. As we said in January at that CAGNY, we expected first quarter sales and earnings to be pressured due to the Easter timing as seasonal net sales occurred at pre-price increased levels. However, Q1 results were lower than we anticipated due to some unexpected softness in China. The weakness was across the majority of the consumer package goods space in the China modern trade. The acceleration of this softness in the first quarter versus Q4 was unexpected. Chocolate was one of the few categories in China that grew in the first quarter, although less than last year. In China, Hershey's slightly outpaced the category and gained market share. However, the pace of growth slowed significantly. Mark will provide you with additional financial details. So let me give you an overview of the business. Overall, total company Q1 net sales, excluding the impact of unfavorable foreign exchange rates, increased 4.6%, driven primarily by pricing and net benefit from acquisitions of 1.6 points. Unfavorable foreign currency exchange rate was a 1.1 headwind. Our expectation was for adjusted earnings per share diluted to be about the same as last year. So the $1.9 that we earned was largely due to lower than expected international sales growth. Including Easter's seasonal activity and the year ago in current period, the candy, mint, and gum or CMG category increased 3.9% for the 12 weeks ended March 21, 2015 within the xAOC+C channels. Gum continues to underperform, and excluding it, the chocolate, non-chocolate, and mint categories increased about 4.2%. Excluding Easter's seasonal activity, in the current and year-ago period, combined growth of chocolate, non-chocolate, and mints was up 3%. Hershey's first quarter CMG retail takeaway and the xAOC+C universe was 4.6%, benefiting from an Easter versus last year. We had a good Easter and believe we will gain share in this important season. Excluding Easter seasonal sales, Hershey's everyday marketplace performance continues to improve. Specifically, Hershey's xAOC+C CMG retail takeaway for the 12 weeks ending March 21st, excluding Easter seasonal sales in the current and year-ago period increased by 3.1%. Perhaps the easiest way to assess performance given seasonal timing is by looking at absolute market share results. We gained market share both with and without the Easter seasonal activity. All in all, including the seasonal activity, Hershey's first quarter CMG market share in the xAOC+C universe increased by 0.2 points. U.S. first quarter organic net sales of nearly 3%, seasonal sales, which account for roughly one quarter of our business in the first quarter, declined year-over-year due to a shorter Easter season. This was more than offset by our everyday business, which I'm pleased to say increased mid-single digits on a percentage basis versus last year. This is slightly ahead of everyday retail takeaway of 3.1% due to the timing and shipments of second quarter promotions and new products. In the second quarter, we believe our everyday momentum will continue with the broader rollout and launch of Ice Breakers Cool Blast Chews, Hershey's Caramels, and additional Lancaster Cream flavors. In Hershey's first quarter xAOC+C chocolate retail takeaway excluding Easter was up 3.3%, resulting in chocolate market share gains of 0.6 points. Importantly, retail takeaway was solid across many of our core chocolate franchises including Reese's, Hershey's, Kit Kat, Kisses, and Brookside. Switching to non-chocolate candy or NCC in the xAOC+C channels, Hershey's NCC business excluding Easter in the current and year-ago period declined 2% as we were lapping the year-ago launch of the Lancaster product line. We anticipate that our NCC performance will be a bit better over the next couple of quarters supported by Lancaster in-store sampling events, national FSIs, and some summer fun flavors of Twizzlers. While not as large as chocolate, at NCC we continue to do well within the gum and mint categories, specifically our Q1 gum and mint retail takeaway within the xAOC+C universe was up 11% and 10.5% respectively. As a result, our gum market share increased by 0.4 points to 5.2%, and our mint market share increased 0.7 points expanding our segment-leading position to 40.3%. In the C store classic trade, where the seasonal impacts are minimal, the CMG category was up 5.1% driven by pricing. As it relates to the previously announced price increase, volume elasticity trends are tough to discern in the xAOC universe given the influence of seasonal candy on shelf at pre-price increase levels. However, conversion appears to be on track. Total Hershey's C store performance was solid with retail takeaway up 4.8%, it was driven by pricing of 9-10 points offset by volume elasticity of about 5%. This is relatively in line with our modeling for this channel. Our C store chocolate and mint retail takeaway was particularly solid, up 4.9% and 8.9% respectively. These gains were driven by core brand advertising, in-store selling, merchandising, and programming. International results were mixed in the first quarter given greater than expected unfavorable foreign currency exchange rates and China retail softness that impacted overall grocery as well as chocolate category growth. Recall during last quarter's conference call we stated that chocolate category growth in China was about 8% and that was less than the historical 10-11%. In the first quarter, chocolate category growth was 4%, again softer than we would have anticipated and less than the year-ago period. Given the Chinese New Year holiday, the first quarter is typically the biggest quarter of the year for chocolate consumption. Some of this softness is most likely due to government policy related to gifting; however, macroeconomic news indicates things have significantly slowed and this could be impacting overall consumer confidence. This is evident when looking at Nielsen data for the broader CBG group, which was also soft. Our chocolate retail takeaway in China was about 5% in the first quarter, resulting in a market share gain of 0.1 points. In all of the markets where we operate, our goal is to ship to consumption, so the consumer has a good experience related to freshness and taste. Therefore, our China first quarter net sales moderated and declined 47% versus the year ago. We will continue to execute against plans with our retail partners in China to drive store traffic and in-store activity over the remainder of the year. As a result, our China chocolate plan reflects the first quarter miss and remains relatively intact versus our initial plan. We have made some adjustments on how we’ll get there. We expect to enter some Tier 2 cities and increase the level of in-store sampling to drive everyday trial and repeat. Additionally, we're beginning to get Brookside out into the market and using Golden Monkey distributor assets to help us achieve that. Shanghai Golden Monkey integration is progressive. In the first quarter, Golden Monkey was diluted to our earnings. However, results will be stronger in the second half of the year supported by a solid pipeline of snack and non-chocolate candy new products. In Mexico, first quarter constant currency net sales increased by about 16%. As expected, our business has improved sequentially over the last three quarters as consumers have adjusted to the VAT tax instituted last year. Importantly, the chocolate category increased by about 13%. We estimate that Hershey's retail takeaway was up by about 12%, driven by Hershey's spikes and a King Size Q1 event at some selected retailers. Over the remainder of the year, we have a lot of in-store activity planned to highlight new packaging designs and pack types that we believe will generate solid net sales growth. In Brazil, first quarter constant currency net sales increased by about 18%. Results benefited from an easy comp versus the year ago period and an earlier Easter. Although note that we don't have a broad Easter portfolio in Brazil as the big Kiss offering is our primary seasonal item. Hershey's Tablet Bar performance was good, and while all small Reese are starting to gain traction in Brazil. Despite mixed international results in the first quarter, we remain confident about plans over the remainder of the year. We’ve made adjustments where necessary and have the right mix of innovation and in-store activities to achieve our objectives. Our international growth profile, excluding Golden Monkey, is similar to prior years and driven by performance in the second half, particularly the fourth quarter. However, foreign currency exchange rates remain volatile and over the remainder of the year, the unfavorable impact on net sales is expected to be greater than our previous estimate. Given this backdrop and first quarter softness in China, we now expect international net sales, excluding the benefit of Golden Monkey, to increase about 5% versus our previous expectation of about 10% growth. Now to wrap up. Core brand merchandising, programming, and innovation accelerates over the remainder of the year. There is no change to our advertising and marketing methodology, and we continue to expect that it will increase at a rate greater than net sales growth. We believe these investments should generate full year organic net sales growth or constant currency sales, excluding M&A and FX impacts of around 3.5% to 4.5% in 2015. We expect foreign exchange rates to be greater than our previous estimate by about half a point and be about 1.5 points unfavorable in 2015. We continue to estimate that the net contribution from acquisitions and divestitures will be around 2.5 points. With the profitable U.S. business on track and an increase in gross margin expansion and Golden Monkey accretion later in the year, we expect an increase in 2015 full year adjusted earnings per share diluted of 8% to 10%, including dilution from acquisitions and divestitures of $0.03 to $0.05 per share. Before we provide you with additional financial details, I'd like to take this opportunity to welcome Patricia Little, our CFO as of March 16. Patricia is a seasoned financial leader who knows how to create shareholder value and develop talent, and we believe will be a benefit to our global organization and all of our shareholders.

Thanks, J.P. I'm pleased to be here and it's a privilege to be part of the Hershey team, especially given the many opportunities in front of us. I follow the consumer packaged goods space as a board member at another company. So, while I’m a bit familiar with the category, I still have a lot to learn over the coming months. However, in my first few weeks on the job, it's clear that the confectionery category is advantaged. Our business is growing in the profitable North American market and in our focus international markets, and the category has a long runway. I'm committed to long-term value creation, as is our board of directors, and I look forward to helping our company reach its potential. Over time, I look forward to meeting all of you and sharing what I learned and the opportunities that continue to exist for The Hershey Company. With that, let me turn it over to Mark, who will provide you with further information on first quarter results.

Thank you, Patricia. Good morning to everyone on the phone and webcast. First quarter net sales of $1.9 billion was up 3.5% versus the prior year, excluding the negative impact from foreign currency exchange rates of 1.1 points, about half a point greater than estimated. Net sales increased by 4.6%. The fluctuation in the Canadian dollar was responsible for about half of that FX impact, and the Mexican peso and Brazilian real accounted for the majority of the remainder. As we indicated last quarter, given a shorter Easter, volume elasticity related to the U.S. price increase, and the timing of innovation, we expected consolidated net sales growth in Q1 to be around the low end of our long-term target. However, we didn't anticipate the anomaly in China that J.P. referred to. Pricing and net M&A had a 3.8 point and 1.6 point benefit, partially offset by volume that was a 0.8 point headwind. Importantly, North America organic net sales, excluding FX and M&A increased 3.4%, relatively in line with our expectations. North America pricing was up 4.3 points, partially offset by volume that was up 0.9 points due to elasticity related to the price increase and lower seasonal sales. International and other segments net sales increased 8.5%, driven by the Golden Monkey acquisition, with a 13.3 point benefit while FX was a 4.8 point headwind. International and other segment organic net sales were about the same as last year. As we stated in January, first quarter EPS would be pressured; our expectation was for adjusted EPS to be about the same as last year due to seasonal product sales that occurred at pre-price increase levels and our plan for higher SM&A expenses. However, we did not anticipate the lower levels of growth in China within the biggest cities and hypermarkets. This impacted chocolate category growth in the quarter as well as some of our decisions related to the Golden Monkey go-to-market strategies. Hence adjusted EPS diluted of $1.9, down about 5% versus last year, was off versus our plan primarily due to China chocolate sales and Golden Monkey dilution. Turning now to margins, in the first quarter, adjusted gross margin increased 10 basis points driven by supply chain productivity and cost savings initiatives as well as the net price realization which more than offsets higher input costs. Earlier this month we implemented select input cost strategies that we believe will enable gross margin to increase by 155 to 165 basis points for the full year. Adjusted EBIT in the first quarter declined 5.6% versus last year, resulting in an adjusted EBIT margin of 20.3%. The decline was driven by higher SM&A expenses that increased 12.3% versus last year. Looking at a couple of the pieces, advertising and related consumer marketing expense increased by about 8%, and selling, marketing and administrative expenses excluding advertising and related consumer marketing increased about 15%. This increase reflects the addition of Golden Monkey, investments in mark-to-market capabilities in the U.S. and the international markets, as well as knowledge-based consumer insights. Let me now provide you with a brief update on the international business. Similar to prior years, our expectation entering 2015 was for international net sales growth to be back half weighted. We still believe that will be the case given our plans for advertising, merchandising, programming, and new products. Q1 international net sales increased 8.8%. Note that this excludes global retail and licensing results, which was relatively in line with expectations. Looking at our focus markets, we believe China chocolate category softness was impacted by consumer confidence given all the negative headlines you've all seen, like slowing GDP growth. Although we were encouraged that March Nielsen data showed an acceleration in category growth versus January and February. Over the remainder of the year, we expect net sales growth in China to sequentially improve, although it will be driven by performance in the second half of the year. We've adjusted our China plans to generate greater in-store activities, support faster growth in the hypermarkets, we'll be entering some Tier 2 cities, and we have plans to increase our exposure in the fast-growing e-commerce channel. On a constant currency basis, net sales in Mexico and Brazil increased mid-teens on a percentage basis versus last year due to easier comps. Recall that at the beginning of '14 we had the headwind of the back tax in Mexico, and volume elasticity related to the price increase in Brazil. We expect Mexico and Brazil performance to be better than last year; however, we expect the real and pesos to remain volatile and be a major headwind related to reported net sales. Moving down to the P&L, first quarter interest expense of $19.2 million declined $2.2 million versus last year. For the full year, we continue to expect interest expense to be in the $75 million to $80 million range. The adjusted tax rate for the first quarter was 35%, in line with our estimate. For the full year, we expect the adjusted net tax rate to be slightly lower than the year ago rate of 34.5%. This is a little different from our initial analysis and guidance that the full year adjusted tax rate would be about the same as last year. For the first quarter of 2015, weighted average shares outstanding on a diluted basis were approximately 222.7 million, a 1.9% decline compared to last year. Turning now to the balance sheet and cash flow, at the end of the first quarter, net trading capital increased versus last year's first quarter by $69.2 million. Account receivable was lower by $13.8 million and remains extremely current. Inventory was higher by $67 million, and accounts payable declined by $16 million. The net increase in trading capital was driven by acquisitions. Excluding net acquisitions and divestitures, net trading capital increased $7 million. In terms of other specific cash flow items, total capital additions, including software, were $62.7 million in the first quarter. For the year, we expect total capital expenditures to be about $375 million to $400 million, including capital related to the Johor Malaysia project of about $110 million. Excluding this project, CapEx is about $275 million, or about 3.5% of net sales. Depreciation and amortization was $58.3 million in the first quarter, in line with our estimates. During the first quarter, dividends paid were over $114 million. The company repurchased $173 million of outstanding shares in the first quarter against a February 2014 authorization, which is now complete; no shares have been purchased against the $250 million authorization approved in February 2015. This authorization is in addition to the company's policy of repurchasing shares in the open market related to issues in connection with stock option exercises. In the first quarter, the company repurchased $134 million of common shares to replace shares issued in connection with the exercise of stock options. Cash and short-term investments at the end of the first quarter were up $405 million. As J.P. summarized, in 2015, we have a solid pipeline of innovation, merchandising, and programming. In addition, marketing expense is expected to increase at a rate greater than net sales growth. As a result, we expect 2015 net sales to increase 4.5% to 5.5%, including a net contribution from acquisitions and divestitures of around 2.5 points and the negative impact of foreign currency exchange rates of about 1.5 points. Excluding these items, organic net sales are expected to increase 3.5% to 4.5% versus the previous 4% to 6%. While we remain confident in our business plans, a narrowing of the sales range reflects global macroeconomic challenges that continue to persist. The decline of the lower end of the range by half of a point primarily reflects the first quarter China underperformance. We continue to have a significant focus on gross margin and expect that the previously announced price increase as well as productivity and cost savings will result in gross margin expansion of 155 to 165 basis points. Combined with a slightly lower net Cash rate and Golden Monkey accretion in the second half of the year, adjusted earnings per share diluted is expected to increase 8% to 10%. Before we open it up to Q&A, just a couple of thoughts on the second quarter. We have planned to generate solid gross margin expansion over the remaining quarters. However, the second quarter is typically our smallest quarter as it relates to overall net sales. Our international sales profile is similar to the prior year with annual growth primarily driven by fourth quarter performances. Additionally, Golden Monkey will be dilutive in the second quarter before ramping up in the second half of the year. While small Krave margins are lower than the company's average, and it will also contribute to the increase in total consolidated SM&A expenses in the second quarter. Therefore, second quarter net sales, including M&A and FX, is expected to be at near the low end of our full year sales target of 4.5% to 5.5% before accelerating in the second half of the year. Given all these moving parts, we expect second quarter EPS diluted growth to be pressured and around the same as last year. Thank you for your time this morning, and we'll now take any questions that you may have.

If the more sizable part of the top line weakness in the quarter, as you talked about, was international and SGM, I just want to make sure that I'm clear on why the full year organic sales target is coming down? Is it just the organic piece of the international, particularly China that you talked about, or is there some North American angle to that as well? I just want to make sure that's not changed.

It is the China flow-through in the first quarter, Andrew, that you’re seeing; the U.S. business is off to a good start and is forecasted to be as we anticipated earlier in the year.

Okay, and then despite this dilution, the sales weakness in SGM, I guess you talked about still looking for the same full-year contribution from acquisitions, but I guess you only have, I think, maybe two quarters left to make up for that first-quarter weakness in SGM because I think you start lapping it in the fourth quarter, if I'm not mistaken. So I'm just trying to get a sense of what gives the comfort level there that the acquisition contribution can still be the same despite the first quarter?

Yes, that's correct. Last year we had two months, if you recall, from Golden Monkey in the fourth quarter. And as we start off the year, we had a similar pattern as we did in the chocolate business, we were lower in terms of the Chinese New Year. What we have in Golden Monkey, which is different than the regular chocolate businesses, we have a part of the business that is not so seasonal, which is the bean curve business, and we also have a lot of innovation which kicks in after the New Year. That's been the typical pattern where we have distributor meetings early in the second quarter for that innovation, and there is a very strong innovation pipeline for that. So our expectation is that we will be on target for that accretion during the full year and that will come into the back half. The other small acquisitions and divestitures, such as Mauna Loa or Krave, kind of offset each other.

To follow up on Andrew's question, I want to clarify that in the first quarter, the greater dilution compared to your internal plans was largely due to Shanghai Golden Monkey. However, for the full year, you do not anticipate the dilution to be as significant as initially expected at the start of the year. It seems you will increase spending on certain in-market activities to try to boost sales. I'm trying to understand why there wouldn't be more dilution if you are spending more to drive sales, especially since it was already more dilutive than anticipated in the first quarter. Am I understanding that correctly?

Yes, not exactly. Let me clarify. We have always indicated that Shanghai Golden Monkey would contribute slightly positively to the year, and we just want to reaffirm that despite a slower start due to the New Year. Our operating income in the rest of the China business was also lower for the same reason of a slow start. What we mean is that the slight positive contribution from Shanghai Golden Monkey to the year is still on track based on our ongoing activities. Regarding higher spending, we are not forecasting increased spending in the international business to meet our targets for the year. Additionally, given the significant sales decline in China, we do not anticipate being able to recover that lost sales, which Mark discussed during the call. We are experiencing higher year-over-year costs in the sales force as we expand into more cities, and while we did have advertising in the first quarter during the Chinese New Year, it was not as effective as we had hoped it would be.

And those comments are related to the China chocolate business, Bryan. So not only did you have the SEM dilution, you had all the investments we made in the China chocolate business throughout '14 that happened perhaps in the back half that are now in your pace, that will be in the pace of the first half this year.

Okay.

Like in sales force, et cetera.

And then just one last follow-up to that is just, it sounds like you know in terms of when you built this plan in I guess October and November versus where we are today, Chinese New Year was weaker than expected and a lot of this I guess is more macro, it’s not just specific to Hershey and so I guess as you go forward in terms of as you've done the planning going forward has it incorporated that maybe that the macro environment is just not as strong as it was when you initially planned 2015, or is the expectation that it's the same? I'm just trying to understand how it accounts for what seems like just slower growth generally in China.

We've taken that into account. As we looked, to your point, as we developed the plan last year, we said during the January call that we expected Chinese growth to be approximately the 30% that we grew in '14. While we were seeing some slowdown, let's call it in December, we weren't planning for as poor a performance. We know we think there's a lot of this is cyclical based on what you're hearing, GDP, consumer confidence, and things that we've already mentioned. We don’t think it's as much structural. In fact, some of the structural changes we think actually help us in the long run, things like urbanization, as well as more of a consumer economy which is what the government's pushing. But, we've lowered certainly the overall year expectations, as you know, we said we would be somewhere around 30 and that the category would be in the low double digits. We certainly lowered that to the high single digit. Still think we can do two or three times the category growth rate but we certainly lowered that overall year expectation not trying to make up the first quarter.

Let me add one more comment; it's very important for us in China. We are focused on building our brand and expanding our portfolio. Shanghai Golden Monkey is essential for our distribution efforts. We believe we have the right brands and growth strategy, and while the market may moderate, we remain confident in our business model over the long term. Volume plays a significant role in our success, which means we also need to carefully manage our investment pace. We are optimistic that with our plans in place, we will continue to grow in China, particularly through distribution and portfolio expansion in the near term.

I had a question for Patricia if I could, and first welcome to the food industry. I'm curious, and I realize it's still early days, right, but is there anything you're seeing that you might consider sort of low-hanging fruit you'd like to pick? I don’t know whether that's in the balance sheet or M&A strategy, really anything, is there something you're looking at and saying, you know what, we can and I guess should be doing this differently?

Thanks for the question. I don't think it's so much that I'm going to come in with those kinds of answers. What I've seen is a leadership team here who's really focused on all of those things, on M&A, on cost leverage, on how they manage the brands, on how they focus on growth both in North America and the key focus markets. I view my job as being really a catalyst to help that team bring all of their great ideas to fruition, so I wouldn't say that there's low-hanging fruit that I come in to see. What I see is a group that's working on all of those very actively.

Okay, and then this is a question just one more for anyone really. You're one of the first food companies to report since the Kraft Heinz deal, and I recognize you've already made significant improvements to your cost base over the years, and I appreciate you're more of a growth company, right than either Kraft or Heinz. But I guess when you read about some of the massive margin improvements that 3G is able to implement, you know, I guess on some level do you think to yourself, boy, maybe there's a lot more we can do than what we're currently planning on, or do you say this is our plan, we'll need to balance top-line growth with margins and so forth? I’m just curious how you react to what seems to be a continued trend here in food.

So, I think, as you rightly point out, we're very focused on growth. We've been investing in our business about the new geographies and I think very importantly in capabilities. So, I can’t specifically talk about 3G. What I do think is very important, as I mentioned on the last call at CAGNY, we're really looking at how we evolve our business model, how we allocate and reallocate resources against what we believe are opportunities. You’ve heard us talk about knowledge and insight. We continue to believe that’s really important and we’re investing in different skill sets there than we have. So, we have to be mindful of the pace of our business. We have to make sure that the volume continues to be the elixir that makes all things affordable. So, you should expect us to continue to take a hard look at the leverage we have against our P&L, and you’ll hear us talk a bit more about that we're doing a lot of work in that area. But I think for our company, we strongly believe that there has to be an ongoing balance between brand building and P&L leverage. That obviously takes cost as one of the key levers, but we want to make sure that we maintain the right balance and focus on all those things.

John, as you look to your cost basket here, gross margins are tracking a bit more favorably relative to your last update. With that sailing going for you, do you find you're still needing to reinvest the incremental benefit in sales force or marketing, or have you reached the position where SG&A budget is more or less fixed and those costs can flow through more to products going forward?

Well, I think that there are a couple of things you probably see. As we raised our gross margin outlook, part of that is around commodities and input costs. As I said, we want to make sure that we continue to look at the levers that we put in place. So, yes, we’ve invested in our selling capabilities, and we want to continue to invest in our brands, some of that's in our international markets but it's also importantly in our U.S. market as well, where we get the right see store level of coverage where we get the right frequency in stores so that we can win in merchandising. If we look at our overall business model, we think we’ve got the right approach. And, to make sure that you continue to be reassured that we are mindful about what we can afford and cannot afford, obviously, we want to make sure that we continue to grow into those investments at the appropriate pace. But I think over the long-term again we're really committed to our business model and we also feel good about the markets that we're in. We think we're in the right markets long-term and it will have to weather some of the volatility of the short-term ups and downs. But we're in this business to stay, we’ve been here a long time, and we plan to be here longer.

I have a couple of follow-up questions. Should we interpret this as selective input cost strategies being somewhat one-time in nature? Did you manage to secure some hedges or something that ensures the gross margin improvements for this year?

I think, Eric, we look at what we believe are the right strategies to protect our brand investment in our pricing. I would just reiterate that we can be anywhere between 3 and 24 months hedged on some of our key commodities. Certainly cocoa’s been volatile, so we’ve looked for opportunities to price when we think it’s a good value, and the entire industry is getting some benefit out of dairy. While I'm not trying to predict where dairy goes, it feels as though it’s in a direction which could benefit. If you look at a lot of the tree nuts and so forth, those are going up largely. So again, we try to look at the overall commodity basket and we feel pretty good about how we've been able to take a forward view to protect our current plans.

Thank you for that. Regarding the U.S. business overall, from my travels, it seems like there is increased promotion in the market. I notice many buy-one-get-one promotions, and several of the pegboard and mini products introduced in recent years are frequently on sale. J.P., you've previously pointed out the rise of snack-based competition. Could you share your observations in the market and whether these perceptions are accurate?

Eric, we believe there is significant activity in the snacking sector. Analyzing the overall snacking market and share performance reveals some moderation, although CMG is returning to its historical performance levels. Meat snacks, particularly Krave, are doing exceptionally well. We're in a time where the variety of snacking occasions is expanding, leading to increased consumer options. We need to ensure that our brands are effectively merchandised at the point of sale. One key takeaway I have from the first quarter is the improvement in our everyday business. If we exclude Easter and focus on the state of our everyday business, our everyday brands are performing well, which is a strong indicator of our advertising effectiveness. The combination of effective advertising and the improvement in our everyday business outside of seasonal factors is a very positive sign, and it’s the aspect I feel most optimistic about from the first quarter.

Wanted to follow up on two points. The first one on Ken's question regarding kind of the cost structure of the company. J.P., I think you indicated in the release here that SG&A investment, kind of excluding the acquisitions, was up about 10%. Yes, I think over the years you guys have really been adding to your capabilities within that line. The question here is, is all of that 10% increase focused on these emerging market opportunities or how much of it is really focused on the U.S.? And then how do you think about that in light of Kraft-Heinz and the zero-based budgeting and all these commentary regarding the U.S. marketplace where it seems as if folks are really taking costs out of their U.S. operations, not putting them in?

Well, I think David, first of all, a couple of things. I would tell you that as a consumer insight-driven company, a brand-building company, we're going to always be focused on growth and growing our brand. Cost is a lever, and it’s an important one. So, look, if we can all capture synergies in our business via acquisitions and add-ons and making sure that we've got P&L leverage, we absolutely have to be focused to get that because the investments that we make have to pay for themselves. But first and foremost, we have a business model that we want to pursue. So, yes, I think there are some very good reminders in the marketplace that suggest that, listen, you got to make sure you're not getting fat, but you also have to make sure that along the way to not getting fat, you're allocating resources in a way that you can win in the marketplace on a go-forward basis. So that's important. If I come back to the first part of your question, we're balancing those investments both internationally and in the U.S. We’ve proven over and over again that the passion of our sales organization, our feet on the street represent us better than any other choice we could make. I've also seen some evidence in the marketplace where some other companies are coming to that conclusion as well. But for our company, we continue to be focused against those investments, and the only way we can grow our brands in these new markets is to forward invest in the capabilities that make them broadly available to consumers, and we'll continue to do that. But we’ll do that in the most effective and efficient way we possibly can.

I have a follow-up question about international markets. From what you shared, it looks like Mexico, Brazil, and India saw a 15% increase, which aligns with your expectations. That seems to be on track. The challenges in the international segment appear to stem from China, leading to a shortfall, so I want to confirm my understanding. The 47% decline in the China business is primarily an inventory adjustment after significant product shipments to retail in anticipation of a 30% growth in Q1. However, you mentioned that Hershey products only saw a 5% growth in first quarter retail in China, which implies a significant shift in the shipment patterns for Q1. Is that correct?

Yes, to your first point, it is largely China. There were other small bits, right? So there are a couple of our export markets where the dollar is making the product quite expensive, an example could be an export market like Japan, which is actually in quantitative easing, so their currency's going the other way. So there were a few markets, and certainly our export business was impacted, but it was largely a China story in the scheme of things. And you're quite right; as we anticipated the growth in the first quarter for Chinese New Year and didn’t see that coming along, we obviously shipped less into the marketplace because J.P. mentioned earlier in his remarks, we try to ship with the consumption pattern is. We don't expect that will be made up in the rest of the years, so we've adjusted down our growth, although we think the rest of the year should be more normalized than what we saw during the Chinese New Year.

Okay. So, the short version here is you do the big catch-up in the first quarter to get the distribution inventories on track, and then the remaining three quarters are negatively impacted by a fundamental view that the China growth rate is lower than what you had previously thought, is that right?

I think that's correct. Again, don't forget a lot of the next wave of China business, Golden Monkey is a little bit less seasonal, does come in the last four months of the year.

Just following up more directly with David, if China was down with Shanghai Golden Monkey declining 47% on a 5% takeaway, what were your expectations for China in the first quarter? Also, how much did you reduce that internal forecast for the year?

We don't typically discuss quarterly results. In our first quarter call, we mentioned that we anticipated the China business would grow approximately 30%, similar to the 34% increase we saw last year. We expected this growth to translate into low double digits for the category, but we have adjusted that expectation down to high single digits due to the miss in the first quarter.

Thanks for that clarification. Regarding the growth, how much of it can be attributed to the channel penetration from the Shanghai Golden Monkey acquisition? Can you provide an apples-to-apples comparison of how the Shanghai Golden Monkey business is performing?

On the first part of your question, the synergy aspect of Golden Monkey, we're in the very early stages of that, so there is very little of that. And the reason for that is, as we plan for those synergies; let's take an example, chocolate products through Golden Monkey sales force. We're still in the process of designing different pack sizes, different price points which are more appropriate for those markets. So there is not a lot of the miss that's accounted for by not penetrating Hershey products to Golden Monkey. On a year-over-year basis, we haven't given that type of information, but the Golden Monkey certainly had a similar impact in the first quarter as you would see in our chocolate business based on the same lower New Year.

Thank you. And do you continue to expect that or do you expect that cross-selling opportunity, once you get through the appropriate pack sizes, remains significant?

Very much. Well, it's not all incremental to what their business model has been all along. A lot of that will come toward the end of the year as we design these pack types and we start to launch into the next wave of Chinese New Year, if you will, which comes later in the year, but we're fairly confident that we have the right products, we have to reconfigure them, and they certainly have the capability to get them into lower Tier cities and traditional trade. And just to answer your TRIPS question, Alexia, it looks pretty much similar to last year. We see store dollar in one of the largest retailers in the country continue to really, really shine.