Hershey Company (HSY) — Q4 2015 Earnings Call Transcript

Thank you, Keith. Good morning, ladies and gentlemen. Welcome to The Hershey Company’s fourth quarter 2015 conference call. J.P. Bilbrey, Chairman, President and CEO; and Patricia Little, Senior Vice President and CFO, will provide you with an overview of our results, which will then be followed by a Q&A session with them; Michele Buck, President, North America and myself. Let me remind everyone listening that today’s conference call may contain statements that are forward-looking. These statements are based on our 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 Note 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. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP. Rather, the company believes the presentation of earnings, excluding certain items, provides additional information to investors to facilitate the comparison of past and present operations. As a result, we will discuss 4Q results, excluding net pre-tax charges of $39 million, or $0.10 per share - diluted, primarily related to the productivity initiative announced in June, a non-service related pension expense, and acquisition and integration charges. Our discussions 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. We made progress against many of our strategic initiatives in 2015. And despite a difficult environment in the second half of the year, we delivered adjusted earnings per share diluted growth within the targeted range we provided during our second quarter conference call. Fourth quarter net sales on a constant currency basis were slightly below our expectations and declined about 3%. North America gross margin expansion resulted in solid operating profit growth, and we continue to hold the line on overall expense control. Hershey U.S. CMG retail takeaway sequentially improved from Q3 to Q4, and increased by 2.5%, although market share was up about 0.2 points. Seasonal performance was good, and we gained market share in both Halloween and holiday. Our fourth-quarter marketplace performance was similar to the full year. Specifically, combined fourth-quarter retail takeaway at one of our largest retailers and within the dollar and drug channels was a solid 6%. The drug class of trade was driven by our precision initiatives, while the other two channels were winners from a consumer trips perspective. However, in the remaining channels, our combined retail takeaway was only slightly up, while small, we also had meaningful gains in non-measured channels, such as e-commerce and food service. For the full year, Hershey U.S. CMG retail takeaway increased by 2.4% and was largely in line with category growth. As a result for the 52 weeks ended December 26, 2015, Hershey U.S. market share was an industry-leading 31.3%. Following a period of relatively consistent marketplace success where we outperformed the category, our momentum slowed in the second half of 2015, and it was relatively in line with the CMG category as a result of increased competitive activity within CMG and broader snacks. Over the last three years, the average growth rate of the CMG category was about 2.3%, below the long-term historical average of 3% to 4%. As we discussed previously, the category is being impacted by many of the same issues facing other food categories, including changing shopping habits like channel shifting, increased competitive activity, and some retailers adjusting their merchandising practices, as well as a proliferation of broader snack SKUs. As a result, going forward, we estimate that CMG category growth will be in the 2.5% to 3% range. Our goal is to outpace the category and gain share on an annual basis. Additionally, we have good visibility into our developing snacks portfolio and expect positive sales contributions from it in 2016. Given our solid CMG position in North America and the investments we will continue to make in our snacks business, we expect our North America segment to generate long-term constant currency annual net sales growth of 3% to 4%. Looking to 2016 and beyond, we are taking actions that we believe will enable us to regain our North America marketplace momentum over our strategic planning cycle. Some initiatives you’ll see in the marketplace in 2016 include a broad-based launch of substantial snacking items, including Brookside Bars, Snack Mix, and Snack Bites canisters, as well as increased distribution of Krave meat snacks. You’ll see incremental investments related to core CMG merchandising in display activity and the introduction of branded pods that bring our brands to life in-store. Although note that this will result in higher trade promotion as we strive to maintain the right mix of quality merchandising and related promotional price points. We’ll also launch Cadbury Chocolates to the stand-up pouch targeting the mass premium market, and begin a 500 store test featuring Scharffen Berger and Dagoba organic brands. Additionally, we will introduce Allan Candy sugar confectionery items in peg bags to appeal to cost-conscious consumers. This is just a brief summary of some of the activity we have in North America this year. Now for an update on our international business. In late December, we reached an agreement to acquire the remaining 20% of Shanghai Golden Monkey. The acquisition is expected to be completed in the first quarter of 2016, subject to government approval. While the category in business has experienced slower growth, we’re committed to the China market and the acquisition of Golden Monkey is important to Hershey’s future growth. We believe in the complementary advantages of Hershey and Golden Monkey and the opportunity that we have with these businesses together. Earlier this month we kicked off the year of the Golden Monkey campaign. The key elements of the campaign include activating TV and mobile advertising and executing merchandising and display at retail. This is well underway, as it started in early January. Our China Chocolate fourth-quarter net sales results were less than our expectations, as we adjusted our sell-in for Chinese New Year given category softness. In Q4, the contraction of the China Chocolate category accelerated and was down about 13%. As a result, for the full year, the category was about flat versus last year. In a slowing category and our overweighting in hypermarkets, this has negatively impacted our performance. In 2015, Hershey retail takeaway was down 11%, and market share declined by 1.1 points to 8.5%. Similar to what we discussed over the last year, category performance is being impacted by macroeconomic issues and the related impact it’s having on consumer shopping behavior and confidence. Given the China news flow that we’ve all seen, it continues to be difficult to gauge consumer behavior. We’re focused on the integration of our businesses in building distribution on our portfolio. While small, our e-commerce business in China is a bright spot. In the fourth quarter, our e-commerce business increased over 75%, driven by solid China Singles Day performance. For the year, our China Chocolate e-commerce retail takeaway outpaced the category. In 2016, we will continue to invest in our e-commerce platform, increase Brookside distribution and trial, and focus on channel development. In Mexico, net sales in local currency for the quarter were about flat versus the previous year. For the full year, local currency sales increased by 6%. Within the chocolate category, we’re seeing investments by all major manufacturers in new products and core brand investments. As a result, our chocolate marketplace performance lagged the category. Chocolate market share in the modern trade in Mexico for the year is down as our retail takeaway of about 4% lagged category growth of about 12%. In 2016, within the modern trade, we’ll concentrate on portfolio core chocolate Hershey’s and Kisses franchises and our small but profitable grocery branded items. Our traditional trade initiative with Sigma is progressing, and we expect our market share here to improve this year. In Brazil, local currency net sales in Q4 were slightly down versus last year, given the macroeconomic environment and competitive activity. In 2015, we were the fastest growing chocolate company in Brazil, as retail takeaway increased about 13%, resulting in a share gain of 0.2 points. In 2015, we successfully exited the Bauducco JV and established our own sales team while securing logistics agreements. In 2016, we expect growth to be driven by Hershey’s brand, mainly through pricing and core innovation. Constant currency net sales in India declined in line with estimates around the phase-out of our edible oil products. This completes our transition to a confectionery and snacks-based portfolio. We believe the macroeconomic environment and competitive activity in the international markets where we operate will continue to be a headwind for the chocolate category and Hershey in 2016. Therefore, we estimate constant currency international and other segment net sales growth of mid to high single digits in 2016. Over the long term, we expect global economies and category trends to improve, and our international business on a constant currency basis will contribute about one point to our overall long-term sales target. Despite the aforementioned macroeconomic issues facing consumers and competitive activity, we believe the global confectionery category will continue to grow. We will continue to invest in our core brands in the U.S., as well as capabilities related to knowledge and insights. Despite the slowdown in the international markets, we will build on the strategies that we’ve established, as they will benefit the company over the long term. We will also make incremental investments in our existing snacks platform, as it will provide us with another lever of growth. These initiatives should enable us to achieve long-term constant currency net sales growth of 3% to 5%. Given the scale advantages of our North America business and a balanced approach to international investments, the company expects to generate long-term earnings per share diluted growth of 6% to 8%. Patricia will provide you with all of the financial details that we believe are innovation, advertising, consumer investments and insights, work within our confectionery and snacks business should enable us to deliver on our 2016 objectives. Although note that sales and earnings will build throughout the year, as our Q1 profile will continue to be pressured. For the full year, excluding unfavorable foreign currency exchange of about 1 point, constant currency net sales growth is expected to be around 3%, resulting in an increase of adjusted earnings per share diluted of about 6%. As we look to the long-term, I remain encouraged by our prospects. Hershey has many opportunities to leverage its U.S. scale, global brands, and core capabilities. Additionally, we’re continuously examining our manufacturing footprint and overall cost structure and believe opportunities exist to maintain and improve margins. Our balance sheet and cash flows remain strong, and we will continue to be disciplined in exploring sources of growth via M&A. I’ll now turn it over to Patricia, who will provide you with some additional details on our financial results.

Thank you, J.P. Good morning to everyone on the phone and on the webcast. Fourth quarter net sales of $1.91 billion decreased 5% versus last year and generated adjusted earnings per share diluted of $1.08, an increase of 3.8% versus last year. Excluding the negative impact from foreign currency exchange rates of 1.9 points, net sales declined 3.1%. Pricing and net acquisitions and divestitures were 1 point and a 40 basis point benefit respectively, offset by 4.5 points of lower volume, due to slightly lower sales in North America versus estimates and the expected sales decline in China. Fourth quarter North America net sales were slightly below expectations, due to a decline in spreads and baking chips sales amidst increased competitive activity. Our focus on inventory levels at select retailers was likely looking to manage working capital and resulted in slightly lower seasonal sales than anticipated. Excluding the 1 point impact of unfavorable foreign exchange rates in Canada, North America net sales increased 1.2% versus the year-ago period. Net price realization in this segment was a 2.3 point benefit, while volume was off 1.4 points. On a net basis, the Allan Candy and Krave acquisitions in the Mauna Loa divestiture provided a 30 basis point benefit. Total international and other segment net sales for the fourth quarter declined about 27% versus last year. Foreign currency exchange rates and trade promotion were unfavorable by 5.7 and 4.2 points, respectively. In October, the Shanghai Golden Monkey acquisition sales provided a 1.1 point benefit. The international and other segment core business volume was off about 18 points, due primarily to the Chinese chocolate business and Golden Monkey’s November and December performance being less than a year ago. Turning now to margins. Adjusted gross margin increased by 80 basis points in the fourth quarter; however, this was less than our forecast. Gross margin expansion was driven by net price realization, which was off versus our estimates. Supply chain productivity and cost savings initiatives were partially offset by obsolescence, other supply chain costs stemming from lower volumes, and slightly higher commodities. We did benefit from lower dairy; however, this was offset by the higher cost of simple ingredients. In the fourth quarter, we nationally debuted Holiday Hershey’s Kisses Milk Chocolates and Hershey’s Milk Chocolate Bars made with simple ingredients and no artificial flavors. These are some of the first products in Hershey transitioning to the commitment announced last year regarding simple ingredients. Operating profit in the fourth quarter increased by 1.3% versus last year, resulting in an operating profit margin of 19.9%. The increase was driven by gross margin gains and lower selling, marketing, and administrative expenses. Selling, marketing, and administrative expenses, excluding advertising and related consumer marketing and acquisitions and divestitures, declined by 5.9%, driven by the implementation of the business productivity initiative announced in June and the company’s continuous focus on non-essential selling, marketing, and administrative spending. Total advertising and related consumer marketing expenses declined around 7% compared to the fourth quarter of 2014, driven by planned reductions in international spending. North America on-air advertising was higher in the fourth quarter, although advertising and related consumer marketing expenses for the quarter were in line with the year-ago period, as production costs were less than anticipated. For the full year, North America advertising and related consumer marketing expenses increased by 3.1%. Let me provide a brief update on our international business. As J.P. mentioned earlier, we reached an agreement in late December to acquire the remaining 20% of Shanghai Golden Monkey. The agreement is expected to be completed in the first quarter of 2016, subject to government approval. We are concentrating on bringing the businesses together and focusing on optimizing the structure for top-line growth. This is still a work in progress, and we’ll share our plans with you in the future. In the near term, the business will not return to the operating income level of 2014 and will be a drag on total company operating profit in 2016. China chocolate category performance continues to be below the historical growth rate of 11% to 12%. In the fourth quarter, the China chocolate category was down about 13%, as marketplace trends slowed across all channels affecting all major manufacturers. This contraction impacted our Chinese New Year sell-in, so we expect China chocolate category growth in 2016 to be flat to slightly up versus 2015. We estimate that our retail takeaway will be relatively in line with category performance. In 2016, we expect our China chocolate operating loss to improve versus 2015, as we anticipate lower trade promotion. However, margins will be pressured, given the decline in growth sales volume. Mexico’s fourth-quarter net sales in local currency were about flat versus last year. For the full year, local currency sales increased by 6%. Brazil’s fourth-quarter local currency net sales were down slightly versus last year, due to the tough macroeconomic environment and competitive activity. As a result, we are managing our costs and focusing on core brand SKUs that we believe will allow us to improve our profitability in these two markets. India’s fourth-quarter local currency sales declined by about 60%, and we are in line with estimates, as we phased out sales of edible oils at the end of the third quarter. We expect this to continue to be a headwind for the first eight months of 2016. Moving down to our Profit and Loss statement, fourth-quarter interest expense of $19.2 million declined by $2.1 million versus last year, or 9.7%. For the full year, interest expense was $76 million and was in line with our previous estimate. In 2016, we expect interest expense to be about $85 to $90 million. The adjusted tax rate for the fourth quarter was 29.3% and 33.2% for the full year, slightly better than our estimates. In the fourth quarter, we recorded $25 million within the other income and expense line related to the previously mentioned U.S. Government investment tax credits. In 2016, we expect to purchase about the same amount of tax credits as we did last year, which should result in an adjusted tax rate that is similar to 2015. For the fourth quarter of 2015, the weighted average shares outstanding on a diluted basis were approximately 219 million shares, down 5 million versus last year, providing a $0.02 benefit in the quarter, resulting in adjusted earnings per share diluted of $1.08, or an increase of 3.8% versus a year ago. Now, let me provide a quick recap of year-to-date results. Year-to-date net sales decreased by 0.5%. Excluding the negative impact from foreign currency exchange rates, net sales increased by 1.1% compared to the year-ago period. Operating profit increased by 1.8%, resulting in an operating profit margin of 20%. Year-to-date, adjusted gross margin was 46% versus 44.9% last year, or a 110 basis points higher as a result of net price realization and supply chain productivity and cost savings initiatives, partially offset by higher input costs and slightly higher commodity costs. Year-to-date, adjusted earnings per share diluted increased by about 3.5% to $4.12 per share. Turning now to the balance sheet and cash flow. At the end of the fourth quarter, net trading capital decreased versus last year’s fourth quarter by $40 million. Accounts receivable was higher by $2 million and remains extremely current. Inventory was lower by $50 million, and accounts payable declined by $8 million. Total capital additions, including software, were $119 million in the fourth quarter and $357 million for the year, in line with our forecast. This included capital related to the manufacturing facility in Malaysia. In 2016, we expect CapEx to be in the $285 to $295 million range. During the fourth quarter, depreciation and amortization totaled $62 million, and dividends paid amounted to $123 million. No shares were repurchased in the fourth quarter under the approved program, and to date, $230 million of outstanding shares have been repurchased against the $250 million authorization approved in February 2015. For the full year, the company repurchased $403 million of outstanding shares. Additionally, the company repurchased $15 million of common shares in the quarter and $180 million year-to-date to replace shares issued in connection with the exercise of stock options. This morning, we announced that the Board approved an additional $500 million share repurchase program that will commence after the current program is completed. This authorization reflects the company’s strong balance sheet and confidence in our ability to deliver long-term earnings per share diluted growth of 6% to 8%. We believe this business model will enable the company to generate meaningful and predictable cash flow from operations. As such, we’ll continue to have Board-level discussions related to capital structure, including dividend increases, value-added share buybacks, and M&A opportunities. Cash on hand at the end of the quarter was $347 million. This is lower than a year ago, primarily due to acquisitions and share buybacks. In 2015, we faced a number of challenges due to changing shopping behavior and greater levels of competition. Our plans for 2016 and beyond reflect the reality of the current retail and consumer environment. We are confident in our long-term ability to execute at retail and provide consumers with CMG and snack products that can drive growth. As J.P. mentioned, we will continue to invest in our core brands in the U.S. and key international markets while building on the strategies we have established, as they will benefit the company over the long term. Additionally, we’ll continue to make incremental investments in our existing snacks platform, as it will provide us with another level of growth. These initiatives should enable us to achieve long-term constant currency net sales growth of 3% to 5%. Given the scale advantages of our North America CMG business, snacks margins that are lower than the company average, and a balanced approach to international investments, the company expects to generate long-term adjusted earnings per share diluted growth of 6% to 8%. For the full year, excluding unfavorable foreign currency exchange of about 1 point, constant currency net sales growth is expected to increase around 3%. The company expects gross margin to be about the same as last year. The business productivity initiative announced in June is on track and the company is also focused on non-essential selling, marketing, and administrative spending, as it continues to leverage existing resources. Additionally, we will continue to invest in advertising and related consumer marketing, including a greater shift to digital and mobile communications. As a result, the company expects adjusted earnings per share diluted to increase around 6%. Before we open it up to Q&A, just a couple of thoughts on some of the items pressuring the first quarter. First, Easter is a week shorter this year. Additionally, merchandising in display space will be lower at select retailers, as we will not lap their new floor designs until late in the second quarter. And as I mentioned earlier, some of them are also focused on carrying lower levels of inventory. As J.P. stated, direct trade will also be higher to ensure that we maintain the right mix of quality merchandising and promotional price points. Competition for this space in the store is robust. We continue to listen to the consumer and invest in simple ingredients, which we are currently purchasing at a slight premium to traditional ingredients. Thank you for your time this morning. We will now take any questions you may have.

Hi, good morning. Thanks for the question.

Hey, good morning, John.

Good morning, John.

John, I think Michele spoke to the plans for 2015, it was pretty specific in terms of the improvements in the retail coverage and space acquisition and sourcing from snacking. And in Q4, you also had a bump from marketing, but we didn’t really see much awareness of share gains as the year unfolded. So, maybe just in hindsight, how did your execution evolve relative to that CAGNY plan, and what’s holding back your share gains there?

Yes. So, John, thanks for the question, it’s Michele. I would say two things relative to Q4. First of all, our biggest shortfall in Q4 was really around our grocery and snacks business. So we saw a lot of competitive activity, both in baking and as well in spreads. I would say on spreads, to some degree, we’ve really learned our way to where we will win in that category, and where we’ll focus. We’re doing well with jars, and we’ve seen some price value issues in the instant consumables. The other piece, when it comes to CMG, we gained share in the season, so we had solid growth. But we didn’t gain as much as we anticipated, because frankly, we saw more competitive activity in the marketplace. We have adjusted our plans coming into this year to be even more competitive to regain that share momentum.

Is there a sense that it involves more trade promo going forward or a balance between advertising and promotions?

There absolutely will be more trade promotion and more trade investment. As we look to this year, you will see us investing more in trade. There are more snack options out there, so there’s more competition. As you know, there are some retailers who are shifting to cleaner floor policies, leading to a little less space and more competition for it.

One of the things, John, you would have seen over the course of the year, if you look at CMG pricing, it was relatively modest as we got into the fourth quarter. You could see a bit of lower pricing compared to some of our average pricing as well, and we believe that may have had an impact on some of our business.

Okay. Thank you.

Good morning, Bryan.

Hey, good morning, everyone. So I guess just one question related to the change in your long-term growth algorithm. Could you describe, I think in the previous algorithm, there was some explicit expectation that M&A would be a contributor to the growth algorithm? So could you talk about in the 3% to 5% sales growth expectation? Is there any expectation for M&A? And also, I guess within that, how much are you expecting in North America for the non-confections business to contribute to growth? So the expansion of things like Krave and other snacks, how does that build into the 3% to 5%? Thanks.

For clarification, we would not have included M&A in any of our previous guidance, nor would it be in the current algorithm. Think about it broadly without breaking out the Krave pieces of the business, which are relatively small. You should be looking at 3% to 4% in North America and 1% in international. If you think about this year, it certainly falls within that range. But as you saw in our comment, we talked about 2.5% to 3% and a point, so that’s a good way to think about it in terms of 2016.

Specifically on snacking, we’ve looked to have that at between a 0.5 point and a point off of the CMG.

Okay. Thank you.

Yes.

Good morning, Ken.

Good morning. According to Nielsen, it looks like there were some share losses for Hershey in both the Halloween and Christmas seasonal candy, at least especially chocolate. First of all, is that accurate? And second, could you give us a little color about what happened and what the company is doing, if it is an issue, to remedy the problem this year?

If you look at both of those on a volume basis, across all of our seasons over the course of the year, we were up about 3.7% on a volume basis. If you look at Halloween, it was about 7.5%, and it was about half that for the holiday, so 3% something on holiday. But there’s about a 0.25 point in terms of share, which is below what we would have set our targets. But we did gain share in both of those at a modest level. But we did gain share. If you just look at the CMG pricing, relatively modest as we got into the fourth quarter, you could see a bit of lower pricing versus some of our average pricing, and we believe that may have had an impact on some of our business.

No, I would just go back to the comment I made about some increased competitive trade dollars driving merchandising during the seasons, and we’ve adjusted that in terms of our offerings going forward.

Okay. I’ll follow-up after the call. Thank you.

Thank you.

Good morning, Eric.

Hi, good morning, everybody. I guess on the Premium segment, J.P., you mentioned going with Dagoba and Scharffen Berger?

And also we’d be introducing a Cadbury item as well. You can think of those as mass premium, and then Scharffen Berger would obviously be in the super premium category.

Yes, and remember, Eric, that Scharffen Berger and Dagoba are currently in a 500-store test market.

It’s a 500 selected retail environment test. But Cadbury is a broader offering, since it plays in mass premium.

Okay. And then just a follow-up more of an accounting question, I guess, for Patricia. So now that you own 100% of SGM, does that mean that there’s greater EBIT losses that have to be recognized versus, I guess, you had a minority interest that kind of can back out on the net income line or on a pre-tax basis? But does this International EBIT get negatively affected by the fact that you now own 100%, and then I’ll pass it on. Thanks.

No, it doesn’t. So first just to be completely clear, we haven’t yet closed the rest of Golden Monkey, and it’s been 100% consolidated from day one.

Day one, yes.

Okay, okay. Thank you. Pass it on.

Good morning, Alexia.

Good morning, everybody. Can I ask about the outlook for 2016 on the Chocolate category in the U.S.? It looks from the Nielsen data that it’s been very on-again, off-again, much more precarious than we’ve seen in previous years. What do you think is happening there in terms of consumer behavior, retailer behavior, and are you confident that or where do you see the category getting back to as we move into the middle of the year and past the Easter pressure? Thank you.

We would see chocolate by itself being somewhere between 2% and 2.5%. It’s a fairly broad range. I think, Alexia, what we think about in our 2016 plan is that we’re going to maintain a strong focus on our core brands. We also believe there’s an opportunity for growth as we look at quality merges over 2015, and that innovation plays an important role in achieving incremental quality merges, making us competitive. As long as there is a strong focus against our major core brands alongside good quality merges through our innovation activity, that will make us competitive.

Alexia, I would just add to that. We also know chocolate is really a destination during the seasonal periods, and that trend will continue. We believe that provides a solid foundation and base as consumers look for chocolate during these peak times, in addition to all of J.P.’s comments regarding the outlook for the year.

Thank you. In the interest of time, I’ll pass it on. Thank you.

Good morning, David.

Hi, good morning. This is actually Alexis Bornin in for David this morning.

Okay. Greetings.

Hershey’s international segment was profitable in 2013 and 2014. The segment took a big step backward in 2015. When do you expect the segment to return to profitability?

We are not going to lay out an exact timetable. But clearly, we are not going to be back to those 2014 levels in 2016.

Good morning, Jason.

Hey, good morning, folks. How are you?

Good.

Good.

I think what you’re going to see in total is that it will be a more competitive environment, and that you’ll see a greater trade spin in 2016 than you would have seen in 2015, which could lead to some lower net prices. That certainly could have a mix effect in terms of the P&L.

The other thing I would just add to that is important to note that some of the trade spending will go into promoting price points, where some of that will also be investment to really secure space in other ways.

Yes, because, Jason, Michele’s last point is pretty important. With more snacks coming on over the last few years, I don’t think that will abate. Everybody is trying to capture the perimeter of the store.

Yes, got it. And then one other quick follow-up question. You mentioned the cost upgrades that are weighing on our margins in terms of simple ingredients, as well as the mixed impact from lower margin snacking items. Can you give us a sense of the magnitude of margin headwind you’re anticipating in 2016 from those initiatives?

I mean, we typically don’t talk about inflation as a percent looking forward; we’ll always tell you what it is. When we report for various competitive reasons, we don’t want to get into that level of specificity. But we do have net inflation this year.

Okay. Thanks a lot, guys. I’ll pass it on.

Good morning, everybody.

Good morning. I want a little bit more detail about the competitive landscape, not only within the chocolate candy. You mentioned pretty high levels of competition a couple of times in the narrative, but also some of your competitive pushback and different behavior you might have gotten from some of this extension into other categories with Krave and some of the non-candy snacks?

Yes, I think we’ve been fairly clear in terms of how we’ve talked about the confectionery environment. Beyond broader snacks, the comment I would make specifically regarding meat snacks is that in the premium segment we compete, the meat snacks business continues to be up about 25%. Overall meat has slowed a bit in terms of growth, and of course a core part of our focus is to continue to build distribution around the Krave business, and then you will see us introduce some extended items to our current line as we build out that distribution. From that standpoint, I don’t think it’s a significant difference. It's probably a positive for us. In terms of broader snacking, as I said on a previous call, over the last 18 to 24 months, around 80 SKUs have been added in that segment. It’s more fragmented than it has been before, offering the consumer different alternatives for trial, and we’ve seen some competitiveness and a bit of competitive pressure as a result. However, it comes back to ensuring that we’re winning merchandising and display across each segment in which we compete.

Thanks, J.P.

Thank you.

Good morning, Andrew.

Good morning. Hershey obviously talks a lot historically about being a gross margin focused company. I guess this year, you’ve got to reinvest a little of that into trade promotion, and you’ve talked about some ingredient cost from some of the new products and things. I guess, is it a shift at all in Hershey’s long-term emphasis on gross margins, or more getting the base right and moving from there? And then last thing would be with the reduction in the long-term growth outlook; I guess, does it change management’s or the Board’s view on thinking about maybe creating even if it’s larger scale partnerships, or in pieces of the business, whether it would be overseas or in the U.S. to help compete and grow? It’s a broader question.

Yes. If you think about your first question around gross margin, we will always defend our brands. We will be a brand-building, consumer-centric company and invest in our brands. But I would tell you that there’s no change in our philosophy. We continue to be a gross margin focused company. There may be years or periods of time when you have to change the way you achieve that, but we’ll always prioritize gross margin. I’m not going to speculate around any kinds of comments from partnerships; we continue to look for ways to grow and build our business in ways that are beneficial to our shareholders. So, we’re always examining our strategic options in terms of how we build our business, and that would be the only comment I would make.

Thank you.

Good morning, Rob.

Hey, good morning. Thanks for the question. I thought that the guidance for 2016 sounds very reasonable and sets a logical base. But the one assumption I wanted to ask you about was China. Going back to kind of flat to up a little bit from a category perspective. In the broader context of international being down as much as it was, what are the drivers that help China stabilize especially given your modern trade exposure? Did you consider something a little more cautious just in the near-term for international?

Yes. There are a couple of things that I would say, and maybe Patricia and I can both talk about this a little bit. If you look at the total international business, about 80% of the impact of that business occurred in China. We know that was a very unique event. About another 10% of that was really India in the oils business and then, of course, you have the impact of FX. And then on a local currency basis, both Brazil and Mexico were positive contributors, albeit modestly. That’s a little bit of where you see us come out. Also, as I mentioned earlier, as we look at our different opportunities, I think you’ll see us moderate our pace and approach to where we think we could best allocate capital while remaining consistent with our long-term investments and strategies. So that also has an influence, and I think it’s quite pragmatic to go to where you think the business is going. Patricia, do you have anything to add?

Yes, I think 2015 was a tough year in China overall, dealing with both macroeconomic forces, and we’re not alone in experiencing them. There was also the added complexity of an integration that frankly didn’t go the way we wanted. We’re starting to see a path moving through both of those aspects. And while I think the macroeconomic environment in China is unpredictable, some of this is within our control as we start to bring the businesses together and understand what we possess with regard to brands, supply footprint, channels, and distribution. That’s where we will be putting our focus on things we can control.

Thank you.

Good morning, Matt.

Hi, this is – good morning. This is actually Pam Kaufman calling in for Matt. I was hoping that you could elaborate on the stable advertising and marketing expense that you saw in North America during the fourth quarter? And the company’s previous commentary about plans for increased advertising and programming during Q4? Did it have the anticipated impact on your non-seasonal business in the U.S.?

First of all, a comment I would make is that if you look at the numbers, part of what you need to recognize is that GRPs were actually up in the fourth quarter. Some of our actual administrative costs and non-working costs were actually lower. So the brand investment in eyeballs on brands was up. It’s important to understand this as you look at the absolute numbers.

Yes, so the non-working kind of production costs that actually had some timing shifts. In terms of impact on the business, we felt good about our everyday takeaway in Q4. While we don’t have all of the analytics back on the spending, based on what we know thus far, we feel positive. Also, as you examine the takeaway with our launches of Snack Mix and Snack Bites, which are key innovations on our core brand, remember that Snack Mix is rolling into the salty snack category and not CMG. So consider that in your observations of everyday takeaway.

Okay. Thank you.

Good morning, David.

Good morning. I’ve seen data from the NPD Group, showing a decline in volume for the sweet snacks mega category. I guess we’ve seen some falls in the chocolate category as well. Clearly, we can see some category-specific reasons like packaging innovation that’s run its course. When you think about the consumer, I know you do a lot of consumer insights work, do you see significant macro shifts, or things you can push against? You mentioned in your release today that consumers want simpler ingredients. But could you comment on some of the other invisible trends, perhaps on a short-term basis, that you think you could push against to cause category growth to improve? Thanks.

If you examine the overall category trends, overall chocolate was up. We were up pretty consistently with the category. Non-chocolate particularly lagged behind, and gum and mint outperformed those segments. We have deemphasized some of the sweets business, and that’s visible in our performance. Many of the brands are still performing well, but if we look at the absolute programming volume for brands like TWIZZLERS, it's somewhat lower, and that’s reflected in our business. Therefore, it seems the sweets business performs better in channels aligned with certain income cohorts. To that end, we are leveraging Allen Candy acquisitions to expand our portfolio through pegged bags and capitalize on select places that could benefit us. We’ve also noted our competitors emphasizing those brands, which influenced our performance.

Thank you.

Good morning, Rob.

Hello, good morning. I just had a larger question around your debt capacity and how you look at leverage. I know you’ve previously mentioned maintaining 1.5 to 2 times leverage to adjusted EBITDA. How do you perceive running a lower leverage relative to your peer set? One could argue that a potentially inefficient capital structure is the right way to go if you’re thinking about snacking opportunities and leveraging your distribution network. So, why not increase your leverage a bit more than you have historically to grow more quickly via acquisitions and not just in China, but perhaps in the snacking side in the United States?

We really like where we stand right now on leverage, something we revisit every year. It gives us capacity to do something incremental. If a large and appealing opportunity came along, we would certainly be open to it. I don’t believe our leverage would constrain us in that situation. However, at present, we are confident in our opportunities ahead.

Okay, thank you. And just very quickly, I’ve seen some material on your SOFIT brand. I haven’t heard mention of it much, but I believe it’s selling on Amazon. Is that something we should expect more of in the future such that SOFIT would roll out like Krave or Brookside into mass retail, or is that more of a test for the time being?

SOFIT is in the test and learn phase. It's a brand from India focusing on soy protein, and part of our efforts to learn about the protein segment in plant-based products. You’ll see more testing in the U.S. versus shipping it from India, and it’s an interesting brand, but we’re adopting a learning approach.

I’m delighted you found it on Amazon, because we just…

All right. Thank you. Thank you for joining us today. I’ll be available for any follow-up calls that you may have.