Hershey Company (HSY) — Q2 2019 Earnings Call Transcript

Thank you, Catherine. Good morning, everyone. We appreciate you joining us for The Hershey Company second quarter 2019 earnings conference call and webcast. Michele Buck, President and CEO; and Steve Voskuil, Senior Vice President and CFO, will provide you with an overview of our results, followed by a Q&A session. Before we begin, please remember that during the course of this call, we may make forward-looking statements within the meanings of the Federal Securities Laws. These statements are based on our current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements contained in our 2018 10-K filed with the SEC and today's press release. Finally, please note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, I’d like to turn the call over to Michele.

Thanks, Melissa, and good morning to all of you on the phone and webcast. First, I'd like to start by giving a special welcome to Steve. He joined the Company following our last call, and he's been a great addition to the executive leadership team. Some of you have already had the chance to meet Steve, and he and I look forward to visiting with more of you in the coming months. Now on to business. We are pleased with our second quarter results and the momentum we are seeing behind our key initiatives for this year. Our balanced plans and capability investments are enabling us to deliver accelerated sales growth and differentiated earnings performance. We are maintaining our market share leadership in our profitable U.S. confection business, and driving incremental profitable sales with our snacking and international portfolios, both of which continue to perform well. These have been and continue to be the strategic priorities of our business. And I'd like to take a minute to thank my colleagues across the business for their contribution to the strong quarter. As we look to the back half of the year, we remain confident in our ability to deliver our financial commitments for the year. In the second quarter, net sales increased 0.9%, in line with our expectations. Organic constant currency net sales growth of approximately 1.8% was driven by pricing and the launch of key innovation, including Reese's Thins and Reese's Lovers, as well as our new packaged candy bags. The net impact of acquisitions and divestitures was a 60 basis-point headwind as the Tyrrells and Shanghai Golden Monkey divestitures offset our Pirate Brands acquisition. The majority of the impact of these divestitures has been realized, and we expect the net impact of M&A to be a benefit for the remainder of the year. Foreign currency exchange was a 30 basis-point headwind in the second quarter. We had another strong quarter of gross margin expansion, which enabled brands and capability investments as well as robust earnings growth. While some of our second quarter margin and earnings gains were training-related, the underlying trends remained solid. This strong gross margin expansion of almost 200 basis points drove second quarter adjusted EPS growth of 14.9%. Steve will share more details around second quarter gross margin performance as well as our expectations for the rest of the year. As we've previously discussed, price realization is a strategic focus area for us. The price increase we announced last summer remains on track, and the final portion is implementing now as we execute our Halloween program. Additionally, last week, we announced a new price increase on our confection instant consumables business. These products represent roughly one-third of our overall sales, and they were priced high-single-digits, contributing to an estimated two points of pricing to our overall portfolio. Consistent with previous practices, we will have a transition period for our retailers to adjust to these new prices, and we do not expect a material sales or earnings impact in 2019 from this pricing action. We anticipate category retail prices for these impulse items to begin to increase in the second half of the year. These actions reinforce our commitment to a more agile approach to pricing strategy that protects our advantaged margin structure while enabling continued investments in our brands and capabilities to drive category growth. Other key initiatives on our U.S. confection business are also progressing well and on track. Retail takeaway was slightly ahead of our expectations coming out of Easter, due to accelerated activation of our Reese's Lovers in-and-out promotion. For IRI, Hershey candy, mint, and gum retail sales increased 1.9% versus prior year since the Easter season ended. This was in line with overall category growth of 1.9%, resulting in flat shift. This growth was led by our powerful Reese's franchise, which grew 12% during the time period behind our new packaged candy bags, our Reese's Thins innovation, and our Reese's Lovers instant consumable promotion. Our new packaged candy bags are on shelf at all major retailers, and we are pleased with the increased branding and improved shopability that we are seeing to-date. We are also excited by the response we are seeing from increased media on some of our smaller iconic brands. These profitable brands are a tremendous asset for us that deliver unique consumer propositions and incrementality to our portfolio. We are leveraging our new media capabilities, both for content as well as targeting, and increased investment to drive growth on many of these brands. Over the past year and a half, we've increased support on our Almond Joy, Mounds, York, Payday, and Twizzlers brands. Our strong gross margin performance has enabled us to support additional brands, Heath and Rolo, in the second quarter. Early results are encouraging with our Heath brand growing 37% and our Rolo brand growing over 7% over the last four weeks. While not all of this growth is incremental, having more brands in our portfolio, staying relevant with our consumers, and growing is critical to our overall category leadership. Our e-commerce business continues to perform well, with second quarter net sales growth of over 60%. Customer-specific data, as well as industry reports indicate that our growth is consistently outpacing competition by 10 to 15 basis points in 2019. As we look to the second half of 2019, we expect to build on last year’s seasonal success with solid performance in Halloween and holiday. Additional Kit Kat capacity is further enhancing our assortment bags for Halloween and enabling our Kit Kat Mint Duos innovation that was launched towards the end of the year. Now for an update on our Amplify and Pirate Brands acquisitions. Per IRI, SkinnyPop ready-to-eat popcorn grew approximately 10% in the second quarter, resulting in a share gain of over 100 basis points. We continue to focus on expanding distribution and optimizing our shelf placement, which is leading to consistent gains in household penetration. As we discussed on our April call, Pirate’s Booty sales performance has declined recently due to distribution losses at a few key retailers and the lapping of some significant promotional activity from the prior year. The distribution losses occurred during the sales transition, but we remain confident that trends will improve in the second half as planograms reset and year-over-year promotional activity normalizes. Retail sales trends for the latest four weeks are already improving versus the last 12 weeks and expect that will continue to improve. Now, for an update on our international business. Constant currency organic sales grew 8.3% in the second quarter, and we continue to demonstrate disciplined investment, resulting in segment operating income growth of 32% versus prior year. In Mexico, we grew our net sales high-single-digits in the second quarter, behind continued strength in our core chocolate business, and the launch of a new Pelon Pelo Rico flavor. In Canada, our Reese's brand eclipsed Kit Kat and is now the number one brand. Our Reese's brand is also seeing great momentum in the UK, recently receiving the Gold IPM award for best new product launch for Easter Reese's Creme Egg. We will continue to focus on our core brand equities to drive profitable sales growth in the second half and beyond. To wrap up, we have good momentum across all of our key strategies, with strong financial results in the second quarter. We will continue to invest in our brands and our capabilities to take this business to the next level and drive sustainable top and bottom line growth. I'll now turn it over to Steve who will provide you with details on our financial results.

Thank you, Michele. Good morning, everyone. Before I get started, I'd like to take a few minutes to say how excited I am to be part of the Hershey team. Hershey is a great company with strong brands, leading marketing positions, and a balanced approach to profitable growth. I've been energized by the talented team here and their passion for innovation, growth, and transformation. I look forward to partnering with Michele, our Board, and the whole team to achieve our strategic vision and deliver strong and sustainable shareholder returns. Now, on to the financial results. Second quarter net sales of $1.8 billion increased 0.9% versus the same period last year. Organic constant currency net sales growth of 1.8% was driven by net price realization of 1.2 points and volume growth of 60 basis points. The net impact of acquisitions and divestitures was a 60 basis-point headwind and foreign currency translation was a 30 basis-point headwind. These results were all in line with expectations. Adjusted earnings per share-diluted were $1.31, an increase of 14.9% versus the same period last year. This was driven primarily by gross margin expansion and was ahead of expectation, driven by two key factors related to the price increase we announced last week. First, a few select customers increased inventory on our most profitable items in anticipation of a price increase, while total retail inventory levels were not up significantly from the prior year. We benefited from positive mix for the quarter. Second, we increased internal inventory levels to support more demand from our retailers in the coming weeks as we transitioned to the new prices, which resulted in favorable fixed cost absorption. About 90 basis points of our gross margin expansion in the second quarter can be attributed to these two factors, and it is expected to be offset in the second half, primarily Q3, as the internal and external inventory levels normalize. We are pleased with underlying momentum against our margin expansion initiatives, the business reinvestment it is enabling, and the balanced top and bottom-line growth it is driving. By segment, North America net sales increased 0.5% versus the same period last year, driven by pricing, which contributed 1.5 points of growth in the quarter. Volume was a 50 basis-point headwind, the net impact of acquisitions and divestitures was a 30 basis-point headwind, and foreign currency exchange rates were a 20 basis-point headwind. These results were in line with expectations. North America gross margins expanded 180 basis points in the second quarter. As I mentioned, about half of this was driven by favorable product mix and fixed cost absorption related to the price increase we announced last week and is expected to reverse in the second half, primarily Q3. The remaining 90 basis-point expansion was consistent with expectations and was driven by favorable commodities, price realization from our July 2018 price increase, and improved ways as we continue to execute our SKU rationalization program. These factors are expected to continue contributing to solid underlying gross margin expansion in the second half, though will be partially offset by the reversal of Q2 gains from product mix and fixed cost absorption, as well as some additional supply chain costs associated with fully integrating Pirate Brands into our operations. North America advertising and related consumer marketing expenses increased 2.7% in the quarter, driven primarily by advertising. We expect dollar investment to continue to accelerate as we move through the year due to the lapping of last year's media efficiency gains and increased investment in our confection brands. Second quarter total International and Other segment’s net increased 3.9%, driven by volume gains of 960 basis points. This was partially offset by a 320 basis-point headwind from divestitures, a 130 basis-point headwind from net price realization, and a 120 basis-point foreign currency exchange headwind. Organic constant currency net sales in our focus markets, Mexico, Brazil, India, and China, grew 5% versus the second quarter of 2018. International and Other advertising and related consumer marketing increased 38% versus prior year. Most of this increase is driven by increased investment to support Ramadan in EMEA, our India Kisses launch, and timing of consumer marketing spending. Total Hershey adjusted gross profit increased 5.3%, resulting in an adjusted gross margin of 46.5%, an increase of 200 basis points versus the second quarter of 2018. As mentioned, approximately half of this expansion was driven by favorable product mix and fixed cost absorption that are expected to reverse in the second half. The remainder was driven by favorable commodities, price realization from our July 2018 price increase, and efficiencies from our SKU rationalization initiatives. Given the progress we have made year-to-date and our visibility into the second half, we now expect full year gross margin to increase approximately 100 basis points. Second quarter adjusted operating profit of $370 million resulted in operating profit margin of 20.9%, an increase of 150 basis points versus the second quarter of 2018. Gross margin gains and continued SG&A discipline were partially offset by incremental advertising on our confection brands. Moving down the P&L, interest expense of $34 million decreased $1 million versus Q2 last year. Full year 2019 interest expense is now expected to be in the $140 million to $145 million range due to lower interest rates. The adjusted tax rate for the second quarter was 14.8% versus 16% in the year-ago period. These declines were driven primarily by valuation allowance releases and access tax benefits from stock-based compensation, partially offset by fewer tax credit investments. Second quarter other expense was $13 million, a decrease of $8 million versus prior year due to fewer tax credit investments. We now expect our full year 2019 tax rate to be approximately 18% versus our previous estimate of 17%. However, we also expect our full-year other expense to decline to $80 million to $90 million as we expect fewer tax credit investments. The net impact to the full year of these two changes is expected to be negligible versus our previous estimate. For the second quarter of 2019, weighted average shares outstanding on a diluted basis were approximately 211 million. This is a slight increase versus the first quarter due to an increased number of stock option exercises in the quarter. The Company did not repurchase any shares in the second quarter against our July 2018, $500 million authorization and $410 million remaining. The Company repurchased $56 million of common shares in the second quarter in connection with the exercise of stock options. Total capital additions, including software, were $176 million in the second quarter. For the full year 2019, we estimate capital additions to be towards the high end of our $330 million to $350 million range. As a percent of net sales, this remains slightly higher than our long-term target, as we continue to implement our new ERP systems and invest in core capacity. We continued to return cash to our shareholders with second quarter dividends of $149 million. This was our 358th consecutive quarterly dividend on the common stock. Additionally, this morning, we announced a 7% dividend increase, a testament to our solid balance sheet and strong cash flow generation. To summarize, for the full year, we expect full year reported net sales to grow around 2%, the midpoint of our previously communicated range. We continue to anticipate approximately a 0.5-point net benefit from acquisitions and divestitures and the full year foreign exchange impact to be negligible, based on foreign exchange rates. Full year reported earnings per share-diluted are expected to be around $5.58, comparable to prior year. We expect full year adjusted earnings per share-diluted growth of around 6% to 7%, the top half of our previous range. As we look to the second half, we want to highlight a few areas where we expect trends to vary versus the first half. Underlying gross margin is expected to continue to build as pricing builds. However, recall we expect approximately half of the Q2 expansion to reverse in the second half, primarily Q3. Advertising and related consumer marketing expense is expected to grow more in the second half than the first half as we lap media efficiencies from last year, as well as increase support on our core confection brands. Given current sales and EPS guidance, compensation is anticipated to be a headwind in the second half of 2019 versus the second half of 2018. Due to the timing of tax strategies, we expect the second half net tax impact to be unfavorable versus the prior year. For the full year, we continue to expect a slight benefit to EPS from tax. That concludes my financial discussions. And I'll now turn it back to Michele.

Thanks, Steve. We had a strong start to the year. The actions we are taking to drive core confection momentum, to capture growth via incremental portfolios and regions, and to invest in our brands and capabilities will continue to drive this business forward. We have a portfolio of beloved brands and an amazing team of individuals that are excited and proud to come to work every day. And we remain focused on achieving balanced sales and earnings growth to continue delivering peer-leading shareholder returns. Steve, Melissa, and I are now available to take your questions.

Good morning, everybody, and welcome, Steve. As you noted, consumption in North America was a bit above shipments, organic growth. And I assume some of that was certain things like SKU rationalization and such. But, I guess, with SKU rationalization, I think, expected to moderate some in the second half and pricing expected to build and certainly a greater level of innovation that will hit as well, given some of the, I guess, understatement, if you will, in 2Q relative to takeaway, I guess, why wouldn't organic sales in North America not necessarily keep, let's say, a similar level of momentum, as we've seen more recently? And then, just, I may have missed it, but the incremental pricing that you've announced, is that all list pricing or similar to last year's pricing, where it was a mix of all the various revenue management levers? Thank you.

Thanks, Andrew, it's Michele. Let me address the second part of your question first. The incremental pricing is entirely based on list pricing. As we evaluate our consumption and sales, typically, we expect our net sales and takeaways to align on a full-year basis. However, we continue to experience some variation from quarter to quarter. To give you a clearer picture, if you examine our takeaway trends between the first and second halves of the year, our CMG business showed a 2.6% increase in the first half. It's worth noting that around one percentage point of this growth was due to Easter. When adjusting for this Easter effect, we anticipate that the underlying trend will continue for the remainder of the year. We expect to maintain solid takeaway performance over the full year. There are a few factors affecting net sales, such as fewer new SKUs in the second half and a tougher comparison due to strong seasonal performance last year. Additionally, there are some inventory issues from the second quarter, but we believe that by the end of the full year, things will stabilize as they have in the past.

Hi. Good morning. You said you don't expect a material sales impact from the new pricing action this year. But, I think, I also heard you say that category retail prices for these impulse items will increase in the second half of the year. So, I wanted to reconcile this a little bit, if I could. Are your customers taking up their pricing before you are? If so, why are you protecting your pricing? I just wanted to clarify when you expect wholesale and retail net prices to rise, and if there is any synchronicity with each other?

So, we do expect that we will see some impact at retail on the everyday business, particularly in the fourth quarter. But, as you know, as you look at the back half of our year, we are heavily weighted towards seasons. So, seasons is a much bigger piece of the portfolio than the everyday piece. So, we expect we’ll see some there. But, we also do some price promotion protection. So, many of our retailers have price promotions, trade promotions that they have booked that we've committed to six months out, sometimes slightly more. And we do price protect those promotions when we go out with our pricing action. So, that's why you don't see the full impact. Again, we believe the impact will not be material to us.

But will the increased retail prices potentially lead to a situation where you're not getting the pricing yet, but retail prices are going up, and therefore your volume could be affected by some elasticity trends? I just want to make sure I'm understanding all the factors involved from a net pricing perspective.

There's a little bit of impact there, but it's minimal and all the pricing is baked into the guidance.

Okay. I'll let it go. Thanks so much.

Thank you and good morning, Steve. It's great to have you on the call and this is a nice quarter for you to join the Company. Can you discuss the pricing and its impact on the king size bars? It seems that the king size bars will exceed the $2 price point, which might lead to some down trading. Building on Ken's question, I want to understand the overall effect of this price increase and how it influences the loose bar portfolio. Could you explain these impacts further? The king size has always been a crucial part of your loose bar business, particularly profitable. If this leads to down trading to the standard bar, please walk us through how you foresee the price increase affecting this situation.

So, David, we utilize advanced price elasticity modeling. Whenever we adjust prices, including this instance, our model examines the effects of surpassing key price thresholds and the relationship between regular counts, single bars, and king sizes because they have interconnected impacts. It also considers competitive items in the market and their effects. All of this information informs our elasticity models, which help us predict the conversion curve. Additionally, we assess this situation and, in certain cases, if we identify a need, part of our overall pricing strategy may involve reinvesting in trade in specific areas to maintain current price levels. We also invest in advertising since historical data shows that when we adjust pricing while simultaneously reinvesting, it aids in accelerating the conversion curve. We believe all these factors are accounted for in our marketplace strategy. You're correct that some of these businesses may experience particular issues, but we believe we have thoroughly integrated those considerations into our plans.

I have a quick follow-up regarding your comments on Reese's. We understand that the Reese's Lovers promotion was very successful, but surprisingly, the feedback I've heard is that it was such a great product that retailers were disappointed they couldn't reorder it. What are your thoughts on dealing with a situation like this that has performed so well? Are there any plans to make part of that promotion a regular offering, or will you consider repeating the promotion at a later time? What is your perspective on this?

So, David, it's definitely a wonderful challenge to have. We will assess all of those possibilities. Interestingly, it can be beneficial when consumers really enjoy something and eagerly anticipate its return to the market. We have often found that this approach can be quite effective. It was a successful promotion that we could potentially repeat in the future. Therefore, we will be considering all options to decide whether it should be made a permanent offering or if we should utilize it to generate ongoing interest and excitement, which is crucial in this category.

I guess, I want to come back to the price increases as well and focus a little bit more on what's different this time. Looking back at some of the pricing cycles, particularly on single-serve, arguably, they were all cost justified? And we don’t certainly see kind of what the cost justification is for this magnitude of pricing in single-serve. So, question number one is, are we missing some sort of cost pressure out there that necessitates this price? And if not, without the cost pressure, how might this be different? Do you expect to have to deal back more to reinvest more to keep retailers happy, or do you expect the relationship with retailers to be very similar to what we see in the past cycles?

As we shared, we’ve evolved our pricing approach from one in the past that was much more cost and commodity-driven to much more of a strategic pricing capability, where we think strategically across the portfolio at where we have opportunity on an ongoing basis more than versus that kind of episodic approach. But we approach it in much the same way as we have in the past in terms of how it gets impacted and executed through retail. And I wouldn't anticipate that we would see any type of different scenario versus other times when we price instant consumables in the marketplace. We haven’t priced that part of the portfolio for probably more than five years. And we expect to see similar results based on what we've seen in our elasticity models.

Looking back at the hikes in 2014 and 2011, the buy-in or protection period lasted eight weeks for both cycles, resulting in the deferral of the P&L flow-through benefit by one quarter. In July, the previous announcement led to a material flow-through of price benefit by the fourth quarter. You are suggesting that this time will be different, but it seems that the situation is quite similar. What is the disconnect here? Why shouldn't we expect a more significant benefit in the fourth quarter?

We expect to see some impact in Q4, but we do not anticipate that it will be significant. Some of that impact will depend on the inventory levels that people are holding and how that plays out.

Jason, it's Melissa. I mean, I think the one piece that we had talked through that was a little different than the last time is we did have retailers kind of building inventory on these packs before we announced. So, there is a little bit more inventory in the marketplace at those old prices. And that’ll take a little bit longer to cycle through that just because the speculation was out there in advance. So, that is a little different from the last time.

Hey. Good morning, everyone. So, just I guess, a question first, just about Reese’s Thins. It's been in the market now for I guess almost two months. And so, any sort of takeaways in terms of how that's performing in the market, better or worse than expectations and how you're thinking about that for the balance of the year?

So Reese's Thins is performing well. It is exactly in line with our expectations. We are feeling good about not only the trial but also the repeat, which is strong and building. And we believe that based on what we're seeing to-date, it will be a sustainable item for us, and that we may be able to extend further off that platform.

So, I guess, following up on that, just in terms of extending off of that platform, is that possible to go with Thins across some other brands, maybe as we look into next year?

Yes. While we don't want to make any firm commitments on our future innovation plans, we see potential in a concept like that as something that could serve as a platform for expansion. Historically, we've found that basic ideas can be applied across brands, allowing us to achieve scale in merchandising and other areas.

Can I ask about the comments you made regarding the popcorn brand earlier? I'm curious about the pricing on the SkinnyPop line, which seems to have decreased significantly over the past three quarters. The rest of the category doesn’t appear to have followed this trend. I'm wondering about the competitive dynamics behind this and whether you expect to continue using similar pricing strategies moving forward. Thank you.

One of the key aspects we appreciate about SkinnyPop is its premium pricing. We're pleased to report that we're experiencing robust growth, with overall retail growth in the double-digit range, indicating that our pricing strategy is effective. However, due to the specific dynamics of the retail channels, we observe more significant fluctuations in promotional pricing in the marketplace, especially because SkinnyPop has a larger presence in club businesses compared to our other products. This can lead to more pronounced variations. Therefore, we are not considering any changes to our pricing strategy for this brand.

And just as a quick follow-up. I mean, you've made a number of diversifying snacking acquisitions of late. Are you still very actively looking for more opportunities to do that? Thank you. And I'll pass it on.

Yes. I believe that M&A is a key component of our growth algorithm and of our strategic vision for the Company. And we continue to stay very active in the market, investigating categories and assets. So, as you know, it's all about finding the right one. But, you can expect to continue to see us be focused on further expanding the portfolio.

Steve, I hate to be the one to greet you with an accounting question, but you're CFO. So, the benefit you had in the second quarter from the inventory build, and that relates to inventory and your own inventory, right? It hasn't shipped out the door yet?

There are two parts that we talked about on the call. The one is, retailers or distributors built some inventory. And that doesn't benefit us from fixed costs, but the mix that they built and gave us a favorable mix impact. And then, we built a bit of our own inventory because we build our inventory this time of the year anyway for Halloween. But beyond that, we built some more in anticipation of the price increase. And that's the portion that drives a fixed cost absorption, basically those costs and inventory until it bleeds out in the third quarter.

So, I understand, like your volume was down in North America in the quarter but retailers were building up inventory, does that mean it would have been worse if they hadn't been building up inventory?

In total, retailers did not increase their inventory; they added to it in anticipation of price increases for our more profitable brands that we discussed. Overall, inventory levels did not rise. I'm not sure if that sums everything up.

The counting impact has more to do with our internal inventory than external inventory.

Okay. The next question is, if it hasn't been shipped yet, how do you account for inventory benefits on that volume? Is it because you get better rates on labor or on your commodities? It seems like you wouldn't gain that benefit until it actually shipped to a customer, but maybe I just don't understand the accounting.

Yes. You're getting more efficiency in your plans by running more volume, and then it goes into the inventory, so off the P&L into the inventory until it comes back when you do the sale.

I just had a question for you in relation to the price increase. Obviously, it's well validated by competitors taking prices up too. I guess, I'm just curious, with input costs down, are you getting much pushback, say from retailers, on this pricing strategy, especially at this time when input costs are more favorable?

So, our retailer conversations around pricing have gone well so far. The retailers know and appreciate that we continue to invest in our brands that we provide a lot of investments to drive category growth in terms of our category management and other investments with the customer. And we really jointly work together to drive revenue growth and profitable growth, which benefits all of us. So, at this point in time, we're feeling good. As you know, the category has price. So, it's been a category initiative. And we're feeling good at this point.

Okay. You mentioned that the North American sales growth rate for the second half will be similar to the first half, excluding the Easter benefit. If I understand correctly, you expect pricing to remain at that level. With increased marketing efforts and a solid new product pipeline, it seems that volumes could increase in the second half of the year, although I don't think that was your implication. I'm trying to understand how this factor may impact your growth rate for the second half.

Sure. So, as we think about the back part of the year, I did mention that some of the last were a little bit tougher for us as we look at the back half, given the strength we had in season. There's also a bit of pipeline fill that we had in the second quarter from our new products. If you think about the new products that we had in the marketplace, we had the new packaged candy bags, we had Reese's Thins, we had Reese Lovers. Reese Lovers actually hit the market a little sooner than we anticipated; it hit in Q2. We thought more of it was going to hit in Q3. And so, those things come out of our numbers in the back half of the year. And then, if you think overall about the business, we are increasing our DME spend and we'll have impressions up similarly to the first half of the year. But it's going to cost us a little bit more on that just because we're mapping some of the efficiencies that we realized as we brought some of our creative production in-house a year ago. Hope that helps.

It does. Yes. Thanks so much for that.

Thanks. Just a little bit of a follow-up on Chris's question on volume and your return on advertising. This summer is the summer of Reese's, and you've already been spending back in the quarter on advertising. And it sounds like you're going to be doing even more in the next quarter or two with the benefit of pricing behind you. So, I guess the question is about volume. It’s been tough to grow for a lot of players in the instant consumables area. What makes you think or how confident are you that you're going to get a volume response from this advertising in the second half? And I guess, it doesn't seem like that's baked into the numbers. So, how are you going to be judging this return on investment? Thanks.

As we adjust our pricing, we anticipate a change in volume. This is simply part of how the conversion process functions. In the first year after a price change, we experience a decline in volume, but eventually, consumers adapt to the new prices. To speed up this adaptation, we invest in advertising, which we’ve found significantly enhances the conversion process. This year, we're feeling the effects of pricing changes from last year, while the current year's pricing adjustments will primarily influence the market in 2020.

So, perhaps safer to say that you would be hoping to see a volume response as the year progresses, and perhaps that exit rate on volume is going to be how you judge this advertising push?

I would say that the improvement towards the end is how we measure it.

Michele, I just wanted to touch on the international business. The focus markets are growing mid-singles, but that's a slowdown from last year, especially in LatAm and India. So, how much of that deceleration would you say is just harder comps relative to anything incremental on the competitive front on the consumer side? And then, I guess secondly, the non-focus markets, I guess, the export markets. I mean, those are still a part of the business and your growth seems to accelerating. And so, just what's driving that pickup? And how do you think about the export businesses fit in strategically over the longer term for you?

Yes, absolutely. So, if you think about our international strategy, certainly, we believe international is an important part of our business model. And we will be continuing to focus on profitable growth across the key markets. The way we think about that business, we have scaled businesses in Canada, Mexico, and Brazil. We have a very highly profitable export business just because we don't have those fixed costs of feet on the ground as we export. But we found that to be a very viable piece of our business model and actually growing increasingly, across the board, particularly we’ve seen a lot of strength for Reese’s brand in the UK, with very limited investment on our part. And then, the place that we're really placing bigger bets for the future are in China and India, the big emerging markets that have so much potential growth, and we're excited about those opportunities. So, yes, I would say the slowdown in the top-line growth is really a factor of, as we build scale that same kind of growth just off a bigger base starts to drop down. But we're feeling really good about the performance across all those markets. They've been hitting expectations. India, we launched Kisses, feel good about what we're seeing there and about expanding that opportunity. So, yes, we're feeling good about that piece.

And just a follow-up on the pricing, just to be clear. It sounds like the second round of pricing you are taking is going to be in excess of commodity inflation. So, maybe thinking about benefit net of inflation for next year on your margins, or are you going to spend that back elsewhere in the business? Just to be clear on that.

We run our business model to ensure we balance pricing and margin expansion through effective cost management, which allows us to reinvest in the brand. We actively manage commodities and hedging, evaluating our outlook along with other cost factors. This ongoing analysis helps us determine the best pricing strategies, recognizing opportunities for smart cost management while reinvesting. Our approach considers the overall profit and loss rather than focusing on any single aspect.

Yes. And I'd say the key is, the proactive past year. So, we're not ready to talk about 2020 yet, but certainly having the pricing in place will be a good way to start the year.

Just two questions. First is, on the smaller brands like the Rolo, the Heath, what have you done differently with them? Is it just activating marketing? What other brands have you not touched yet that may be in the potential? Then, I have a follow-up.

Yes, I would primarily attribute this to marketing. Over the years, we've noticed that an upgrade in packaging graphics can positively affect our smaller brands, especially since they don't receive much support at retail. Refreshing the packaging has proven beneficial. We've implemented this on several brands and observed a noticeable lift in performance through advertising. Engaging with consumers through advertising has shown to unlock potential as they start to recognize these brands. This approach has been our main strategy for activation. We have already engaged most of the smaller brands, though there are a few more that we might consider investing in moving forward. While I can't disclose specific names for competitive reasons, I can mention that there are a couple of additional brands we are contemplating minor investments in. However, the ones you've seen this year, including Heath and Rolo, are the stronger candidates where we anticipate seeing a more significant impact.

I have a follow-up question regarding your earlier comment about losing distribution in one of the acquisitions. Was that part of the original plan? What steps are being taken to regain that distribution?

Regarding the Tyrrells brands, we experienced a loss of distribution owing to a few retailers which wasn't anticipated. Following our acquisition of the business, our sales team quickly mobilized to restore that lost volume. It will take some time since we can only secure shelf space once the customer has a planogram reset scheduled, with the next resets expected in the fall. We anticipate that distribution will begin to return around September or October, and we have commitments supporting this expectation. The issue was not about the brand's worthiness of shelf space; rather, it was a minor integration challenge. We're optimistic about the performance metrics, as we are seeing significant single-digit growth in velocity for Tyrrells where distribution has remained intact.

And there's more distribution gains across the U.S. or are you there and you’re just starting to execute now? I leave it there. Thank you.

No. I think, there's more opportunity in distribution across the U.S.

Good morning. So, Michele, a quick clarification question for you. The price increase you took this year, meaning July 2018, that is going to be contributing about 1.5% for full year pricing, but on an annualized basis, it's 2.5%. So, there's a phasing effect. My understanding is from what you're saying on today's call is that the go-forward price increase is closer to 2%, but with no phasing. So, we should think about it being a clean 2% for next year. That's the first part of my question.

Yes. That's generally a fair way to think about it.

Okay. And then, the second piece a little bit on the strategy. The way I understand it to simplify the math is that North America breaks down a third center store, a third front of store, and a third seasonal. And it sounds like you took pricing across two of these pieces of the third, meaning one-third is left untouched. Could speak a little bit about what's happening in that portion of your business and how we think about when might be appropriate times to also kind of monetize the pricing opportunity?

We have implemented some minor pricing adjustments as part of our strategy. Generally, we have adjusted prices across our entire portfolio, though the sweets segment has seen less of an increase. However, we have made some seasonal increases in line with our broader pricing strategy. At this moment, I cannot provide information about our future pricing plans. Nonetheless, we believe we have made some progress in this area. Moving forward, we will continuously assess our entire portfolio to identify opportunities for further price increases.

Just back to the international business. Can you maybe give us a sense of the margin progression there and sort of what inning we're in? Obviously, divesting Golden Monkey is a big help. And you've done quite a bit to really improve the profile there, the trajectory of margin extension has obviously been really strong. But now, it looks the kind of the runway ahead over the last four quarters more indicative of what we should expect or is there still some big step-ups to come?

I wouldn't expect a big step up. Certainly, we're going to continue as we do everywhere to look at every line item on our P&L and continue to look at opportunities to improve margin, because that's just a piece of who we are as a company. But, I think the really big step-ups have been taken.

Yes. I’d agree. And going back to the earlier question, in and out also matters, the mix between the export countries and the ones that we have feet on the ground. And as the feet on the ground grow, that will have an impact on how that margin progresses as well.

And is pricing a meaningful component of what you can push there to, or is really the pricing focused just North America?

So, we have always had a very active pricing component in those markets. As you know, there are economic volatility components in those markets that are Forex etc. So, we do continue to price in part of why our margins are where they are is some of the pricing there, but it does vary by market. And given they’re a smaller piece, we just don't talk as overtly about that on the calls.

Thanks, everybody. I'll be around today to answer any follow-up questions you have.