Hershey Company (HSY) — Q4 2019 Earnings Call Transcript

Thank you. Good morning, everyone. We appreciate you joining us for The Hershey Company's fourth quarter 2019 earnings conference call and webcast. Michele Buck, Chairman of the Board, 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 does not intend 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 would like to turn the call over to Michele.

Thanks, Melissa. Good morning to all of you on the phone and webcast. We had a strong 2019, with accelerated business performance and differentiated financial results. This was driven by momentum in our core U.S. confection portfolio in both retail takeaway and margin expansion, like incremental and profitable international growth, and by further expansion of our snacking portfolio, and we continue to invest in our brands, capabilities, and people. I would like to extend a sincere thank you to our employees and all of our partners for their hard work to make this possible. For the full-year, we delivered net sales growth of 2.5% and EPS growth of 7.8%, a testament to our strong brands, business model, and a commitment to balance top and bottom line growth. Constant currency organic sales growth of 1.8% was ahead of expectations, driven by incremental pricing and core base strengths of our U.S. confection business. These gains drove stronger than anticipated gross margin expansion of over 100 basis points for the year, which enabled incremental investments in our brands and employees, and enhanced earnings for our shareholders. We're pleased with the consistency of our results throughout the year, and the momentum we're taking into 2020. In the fourth quarter, net sales grew 4% behind 1.9% organic constant currency growth, and our gross margin expanded 96 basis points. For the full-year, our Hershey Candy Mint and Gum retail sales increased 2.6% resulting in a category share gain of approximately 10 basis points. While a long Easter contributed to this performance, we also finished the year strong with retail sales growth of 2.8%, and a category share gain of approximately 20 basis points in the fourth quarter. As was the case with the entire year, this growth was driven by balanced activation across the portfolio, and we are seeing the benefits from our investment in marketing spending carrying through to retail performance. Our Reese's brand continues to outperform the market with growth of over 6% in the fourth quarter, driven by great advertising, innovation, and strong in-store execution. Kit Kat grew 2.3% in Q4 behind incremental capacity and our new Kit Kat Duos innovation, which launched late last year. Early results of this innovation are encouraging, and we expect continued momentum on this brand in 2020. Our media and packaging investments on our mid-tier iconic brands also drove strong growth with Payday up over 8%, Almond Joy up 6%, Rolo up 5%, and Heath up 35% in the quarter, resulting in a combined share gain of 20 basis points. Pricing remained an important lever for us in the fourth quarter. Net price realization of approximately four points in Q4 was slightly ahead of expectations as we began to see a benefit from our most recent price increase announced in July of 2019, and we expect this to continue in 2020 with planned price realization of 2 to 2.5 points on our U.S. confection business in the U.S. for the year. As we look at 2020, we have another great year of activations planned within our confection business. In just a couple of days, for the first time in brand history, Reese's will be running an advertisement during the 2020 Super Bowl. This will be a great opportunity for America's number one confectionery brand to increase awareness of one of its best tasting, highest consumer rated items in the portfolio, Take 5. As we had shared with you last year, our re-launch of this item is off to a strong start, and we're excited to build on this with an ad during America's most watched sporting event and additional in-store merchandising and distribution. We're also excited about our product innovation for 2020. In addition to our Kit Kat Duos innovation, we are excited to announce the expansion of our THiNS platform in 2020. York THiNS and Reese's white THiNS will launch in March and will be available in both the take-home bag and peg formats. This provides York lovers a unique way to enjoy one of their favorites, and it enables us to secure strong year-to merchandising for our core milk and dark Reese's items that we've launched this past year. Our snacking portfolio also delivered solid growth in the fourth quarter. SkinnyPop ready-to-eat popcorn retail sales grew over 13%, resulting in a category share gain of 170 basis points. And as expected, Pirate's Booty performance accelerated as we began to recapture distribution lost earlier in the year and had strong promotional activity behind our on-pack Disney promotion. Retail sales grew 1.4% in the fourth quarter, and over 4% in December. Our most recent acquisition One Brand grew 35% in traditional measured channels with additional strength in non-measured channels such as e-commerce. Now, for an update on our international markets, we have made significant progress over the past several years by focusing on branded high margin products, streamlining our operating model and right-sizing our investments. Since we began this journey at the beginning of 2017, we have increased our segment income by $125 million over the past three years, while continuing to grow our organic constant currency net sales. This is a significant accomplishment made possible by the hard work and dedication of many employees around the world. A sincere thank you to everyone who helped drive this business transformation and financial performance. Our international business provides us with important geographic diversification and incremental growth, and we're excited to build on this progress with another year of profitable growth in 2020. In Mexico, we will continue to focus on increased distribution and innovation on our Hershey and Pelon Pelo Rico brand. After strong test results last year, we will be launching a new business model more broadly in 2020 aimed at securing incremental and profitable distribution in traditional trading. Additionally, we will continue to innovate with new flavors and packaging to drive growth in our existing channels. In Brazil, despite a continued heightened competitive environment, we delivered profitable growth in the fourth quarter. Our Dark Chocolate Hershey's portfolio has performed very well, and we're excited to bring new innovation within that platform to market in 2020. Additionally, we're focused on growth in non-traditional retail channels, and we're expanding a successful 2019 test to more regions this year. In India, our National Kisses launch remained on track, and we are leveraging important learnings from our regional launch last year to further optimize the proposition as we expand in 2020. We continue to see this market as a strategic growth vector for our business. In China, we had a strong finish to the year, and we plan to build upon last year's successful flavors of life promotion with new varieties in 2020. Due to the timing of Chinese New Year in 2020 and 2021, we expect 2020 shipments to be slightly pressured, but we continue to feel good about our in-store activations and our base business momentum. In summary, we're pleased with our performance, and believe we will deliver another year of high-quality financial results in 2020. We're proud of what we have accomplished and the momentum we're seeing on the business, but we also recognized we must continue to adapt and invest to elevate the business further. Over the past several years, we've invested in incremental capacity and planning capabilities. I'm pleased by the progress that we've made here and the opportunities that this has unlocked for us. In 2019, we delivered our best case fill rate in a decade and saw meaningful increases in our Advantage Survey rankings. Since 2017, our supply chain ranking with our customers advanced from number 15 to number four, and our customer service is now ranked number one amongst our peers up from number 12 just three years ago. We will build on this with additional investment in our supply chain capabilities over the next several years. As a part of a multi-year capital project, we will add additional capacity for our largest and fastest-growing brand, build agile fulfillment and late-stage customization capabilities, and invest in new data and technology within our supply chain that increases visibility, automation, and digitalization. We believe these investments will enable us to respond to changing needs from both our consumers and customers, while maintaining our advantage margin profile. We look forward to sharing more details about this at our Investor Day in March. In addition to investing to advance our business capabilities, we're also very focused on elevating our talent and culture. In December, I announced several organization changes that I believe will enable us to take our business to the next level. Chuck Raup has been promoted to President at U.S. Chuck is a proven, results-driven, commercial operator with a successful 10-year track record at Hershey, most recently leading the acceleration of our U.S. CMG business. Chuck's deep expertise across snacking, having led all areas of confection at Hershey, and from his previous experience at Kraft will be instrumental to our future success as we pursue our strong growth ambition across traditional and digital channels. Kristen Riggs has been promoted to Chief Growth Officer. Kristen started with the company more than 14 years ago and has worked across nearly all commercial functions. Her focus on driving growth is underpinned by a strategic and analytical understanding of the modern consumer, strong marketing expertise, and tenacity for creating positive change in the organization. Together, the U.S. business and growth office will work seamlessly to ensure the delivery of both 2020 and our growth plan over the next several years. And finally, Chris Scalia has been promoted to Chief Human Resources Officer. Chris joined Hershey in our legal department in 2005 and transitioned to human resources in 2011. Since that time, Chris has led talent management, recruiting, HR operations, and business partner teams as well as workforce development. Chris brings a strong commercial business acumen and analytical rigor to talent planning and development, and a passion to help people and culture drive performance. These changes are a testament to Hershey's talent development and succession planning, and I couldn't be more excited about the opportunities ahead with this tremendous talent across the organization. Thank you to Todd, Mary Beth, Kevin, and Terry for all their contributions to our success over the past several years. I'll now turn it over to Steve, who will provide you with details on our financial results.

Thank you, Michele, and good morning, everyone. It was a strong year and quarter, and we are pleased with the quality of delivery across our segments. North America achieved net price realization and operating leverage, enabling incremental investment in brands and capabilities throughout the year. We saw consistent solid retail takeaways on our core confectionery brands in the U.S., and our international business delivered another year of incremental profitable growth. We feel good about the momentum we have heading into 2020 to deliver on our algorithmic year for both top and bottom line. Fourth quarter net sales increased 4% to $2.1 billion versus the same period last year, with a slight headwind from foreign currency exchange. The net impact of acquisitions and divestitures contributed 220 basis points of growth. Organic, constant currency net sales growth of 1.9% was consistent with expectations and driven by price realization in the U.S. and volume growth in our international markets. Net price realization for the quarter was 360 basis points, partially offset by anticipated elasticity-driven volume declines of 170 basis points. Adjusted earnings per share diluted were $1.28 for the quarter, an increase of 1.6% versus the same period last year. This was driven by gross margin gains, which were more than offset by increased incentive compensation. For the full-year, net sales increased 2.5%. The net impact of acquisitions and divestitures was a one-point benefit. Organic constant currency net sales growth of 1.8% was partially offset by unfavorable foreign currency exchange of 30 basis points. The delivery of our net sales and gross margin expansion plans allowed for investment in brand capabilities and our employees to drive future growth. This translated to adjusted earnings per share for the full-year of $5.78 cents, an increase of 7.8% versus the prior year. In the fourth quarter, our North America segment net sales increased 3.8% versus the same period last year. The net benefit of acquisitions was 250 basis points. Organic net sales of 1.3% was driven by price realization of 400 basis points, partially offset by elasticity-driven volume declines of 270 basis points. Recall, in the third quarter, price realization was approximately one point lower than expectations due to the timing related to our July 2019 announced price increase. As anticipated, this headwind reversed in the fourth quarter. Without this timing shift, price realization was approximately 300 basis points, about 50 basis points ahead of expectations as we began to get a slight benefit from our most recent price increase. This incremental pricing contributed to stronger than anticipated gross margin expansion in the fourth quarter. Adjusted gross margins in North America expanded 130 basis points versus the prior year. This was driven by net price realization and favorable commodities, which were partially offset by increased logistics and packaging costs consistent with other quarters. North America advertising and related consumer marketing spend increased 5.1% in the quarter driven by planned advertising increases enabled by our gross margin expansion. Fourth quarter international and other segments net sales increased 5.8% versus the year-ago period. Constant currency net sales grew 6.3% offset by a 50-basis point headwind from foreign currency exchange. Volume was a 5.7-point benefit, and net price realization contributed 60 basis points to net sales growth; combined organic constant currency sales net sales in Mexico, Brazil, India, and China grew 6% versus the fourth quarter of 2018 with growth in all markets. International and other advertising and related consumer marketing decreased 11% versus the prior year as we continue to optimize investment in these focus markets. Now turning to gross margin, adjusted gross profit of $898 million in the fourth quarter increased 6.4% versus the prior year. This resulted in adjusted gross margin of 43.4%, an increase of nearly 100 basis points driven by net price realization and favorable commodities. Fourth quarter adjusted operating profit of $370 million resulted in operating profit margin of 17.9%, a decrease of 70 basis points versus the fourth quarter of 2018. Gross margin gains were more than offset by higher incentive compensation. This incentive increase was related to a strong 2019 performance, and a structural market-based increase of variable compensation linked to company performance for our managers and individual contributors. This increase was planned to occur gradually over the coming years. However, our strong performance in 2019 allowed us to accelerate this change, which we believe is important for retaining and securing top talent in our organization. As you saw in our press release reported operating profit in the fourth quarter declined $135 million versus the prior year period, driven by the recognition of a long-lived and intangible asset impairment loss associated with our 2015 acquisition of KRAVE. While meat snacks remain a growing category, volume has been driven by mainstream and value brands. The Premium segment slowed and became even more competitive which pressured sales and margins. While disappointing, this acquisition was an important step to beginning to diversify our portfolio in the U.S. And we have leveraged the learning to improve the propositions and performance on our more recent acquisitions. Moving down to P&L, interest expense of $37 million was in line with the prior year period. Full-year interest expense was $144 million, an increase of $5.3 million versus 2018 due to increased debt associated with acquisitions. The adjusted tax rate for the fourth quarter was 9.8% versus 9.5% in the year-ago period. This rate was favorable versus our expectations due to the execution of additional tax credits. For the full-year 2019, the adjusted tax was 17.4% versus 19.2% in the year-ago period. This full-year favorability was driven by excess tax benefits from stock-based compensation and valuation allowance releases in our international markets. In the fourth quarter, other expense was $34 million, a decrease of $5.1 million versus the year-ago period, driven by non-service-related pension expense. For the fourth quarter of 2019, weighted average shares outstanding on a diluted basis were approximately $210.5 million, reflecting a slight decrease versus the prior quarter. The company did not repurchase any shares in the fourth quarter against our July 2018 $500 million authorization, and $410 million remain. Total capital additions including software were $82 million in the fourth quarter, totaling $318 million for the full-year 2019. This was slightly below expectations, as some of our IS initiatives were delayed due to employee resource constraints related to our large ERP and supply chain projects. We continue to return cash to our shareholders with fourth quarter dividends of $157 million. This was our 365th consecutive quarterly dividend on the common stock. We have solid underlying momentum in our core business that we believe positions us well to keep the momentum going in 2020. We expect full-year net sales growth of 2 to 4%, consistent with our long-term algorithm. This includes an approximate one-point benefit from the acquisition of ONE brand. We anticipate our growth in North America will accelerate versus 2019 as we lap our SKU rationalization program. While we continue to expect profitable growth in our international markets, we expect the contribution will be lower than 2019 due to less favorable macroeconomic conditions impacting the confectionery category growth. Like 2019, we expect our North America growth to be driven by pricing while our international growth is expected to be more volume-driven. We expect gross margins to expand again in 2020, but at a slower pace than 2019. While we plan to benefit from slightly more price realization, commodities will change from being a tailwind in 2019 to a headwind in 2020. As a result, we expect the adjusted gross margins to expand by 40 to 50 basis points. As was the case in 2019, we will leverage this pricing and gross margin expansion to lead into investments in our brands and capabilities. We expect advertising to grow slightly ahead of sales this year, and will continue to invest in data, technology, and other initiatives to drive sustainable profitable growth in the future. We expect 2020 interest expense to be relatively in line with 2019, and other expense to increase 30 to $40 million versus 2019 as we plan to execute additional tax credits. As a result of these higher tax credit investments, we expect our 2019 adjusted tax rate to be between 16% and 17%. The net impact of investment tax credits and our adjusted tax rate is unfavorable versus 2019 as we lapped the one-time benefit of valuation allowance releases. For 2020, we expect elevated CapEx spending as we advance our ERP transition and initiate a strategic supply chain program. As Michele mentioned, this multi-year capital project will not only add capacity but also give us new fulfillment and technology capabilities that we believe will help us deliver on the needs of our consumers and customers while maintaining an advantageous market profile. Given the significant investments, our CapEx for 2020 is estimated to be between $475 million and $525 million. Our core business sales growth and another year of gross margin expansion are expected to deliver full-year adjusted earnings per share growth of 6% to 8% consistent with our long-term algorithm. Given some of the timing of this year's key initiatives, as well as events we are lapping from the prior year, we do expect second-half financial performance to be stronger than the first half. While we have more pricing in the first half, and are lapping our SKU rationalization program, we're also lapping a strong Easter pipeline still associated with our package and candy transition tax strategies that resulted in a low first-half 2019 rate and second quarter margin benefits associated with our July 2019 price increase. Similar to 2019, while these factors create some volatility in our quarterly financial results, we expect retail performance to be more consistent throughout the year and remain confident in our ability to achieve our full-year guidance. We remain focused on delivering balanced growth with a disciplined approach to building our brands and evolving our business model for the future. We have strong cash flow and a healthy balance sheet and we'll continue to make the necessary investments to drive the business and deliver long-term shareholder value. That concludes my financial discussion, and I'll now turn it back to Michele.

Thanks, Steve. I'm proud of what we have delivered over the past several years, and I'm optimistic about 2020 and our future. We continue to operate with a healthy level of dissatisfaction and constantly push ourselves to elevate the business even further. We are excited about the opportunities ahead, and we look forward to sharing more details about our strategic plans in March. Steve, Melissa, and I are now available to take your questions.

Good morning, everybody.

Good morning.

Good morning, Andrew.

Hi, there. So, two things for me; first, as we think about some of the various pieces that drove the fourth quarter unallocated corporate, maybe can you give us a sense or help quantify a bit, you know, how much sort of is expected to stay in the base as we go through 2020, and how much of any sort of reverses out and perhaps helps to become a bit of a tailwind to 2020 operating income? And second, I know it's a smaller business, Michele, but your comments on a new business model in Mexico just peaked my interest, I think you were talking about a new model to gain some incremental distribution, I didn't know if that was something along the lines of more of like a partnership or perhaps you can expand a little bit on that, and that's it. Thank you.

Andrew, why don't I take that one first, because I think that's a quick one, which is really the focus there in Mexico is a new model to capture traditional trade. So, it is not anything beyond that, but really it's a focus to go after that traditional trade business.

Got it.

And just picking up on the compensation and what stays and goes just in the fourth quarter really had three things that rolled in. One was if you look year-over-year, there was a re-based impact on incentives. The prior year period had below-target performance and payout. So, in the fourth quarter, you sort of catch up to target. We had then a predicted over-target performance, and then the market adjustment that we talked about, and clearly as we roll into 2020 that one-time market-based adjustment will go away, and so will the performance will reset at a target level. So, roughly 50% of that increase will stay going forward, and about half of that will go away.

Great, thanks very much.

Hi. The results are largely as expected, though incentive compensation might be slightly higher than anticipated. I wanted to discuss capital expenditures. The increase in CapEx is significant, related to the ERP and supply chain program. Are there any expenses reflected in the income statement due to this increase in your ERP program, or is it primarily a CapEx effort? Additionally, what measures are you implementing, if any, to address potential customer service issues? Thanks.

Sure. The ERP program has been going for a number of years, and so, you're right, there's a portion of that CapEx step up in 2020 due to the ERP program continuing. There is a portion that hits the P&L. Year-over-year for '20 it's not a material factor, and it's obviously factored into our guidance. As we get to the March Investor Conference, as Michele said, we'll talk more about the supply chain project, and probably also talk more about the next couple of steps that we expect on the ERP program, but for 2020, it's fully reflected from both OpEx and CapEx.

And we have a big focus on change management to the end of your question relative to really managing the risks and business continuity during that period of time, and we can talk a bit more about that in March.

Okay. Well, I'll wait till March then. Thank you.

Hi, good morning. Thank you.

Good morning, Ken.

Hi. First the increase in CapEx, does that change your outlook at least in the short-term on M&A? I know most of the M&A you've been doing is relatively, I guess, tack on in nature. So, my guess is probably you'll stay opportunistic, but I'm just curious for your thoughts there. And then my second question is, thank you for the guidance on the gross margin outlook, I guess, in that guidance, are you assuming any incremental pricing action, whether it's list prices, whether it's reduced promos or pack size changes, things like that, or is it just sort of status quo and you have all the pricing actions that you need already baked into hit that gross margin number? I'm asking because obviously, cocoa has gone up a little bit, and I know your heads there and so forth, but just curious.

Maybe I'll take the first part of that question relative to thinking about M&A relative to the additional CapEx. So clearly, it has an impact on free cash flow. Our capital allocation priorities aren't changing. You know, we continue to look first and foremost at funding, both organic and inorganic growth, protecting the dividend and obviously watching overall leverage. I would say as we sit here today, we have with the incremental CapEx investment we're not pulling back, or looking for potential inorganic opportunities as they come available, we'll always do that with an eye towards leverage and the value proposition for shareholders. I would say no change in our posture from that perspective. On the gross margin side, we don't comment about specific pricing actions that we might have planned for the coming year. We can say price continues to be a strategic part of our repertoire of tools to use along with all the other components. So, anything you want to add to that, Michele?

Yes. I would just say, I mean, overall, we are expecting price in that 2% to 2.5% range for the year in North America, and our gross margin guidance is consistent with that being a part of it.

Great, thank you so much.

Good morning, everyone.

Good morning.

So, it seems as though the core business is chugging along, you've got the modest price increases rolling through each year. In terms of the future business development, acquisition strategy from here, can you talk a little bit about what the key learnings have been from what's worked with SkinnyPop Popcorn, and what seems to be improving with Pirate's Booty, and maybe some of the things that didn't work so well with KRAVE and Brookside? And then also maybe just talk about what your priorities are from here, is it going to remain within salty snacks in the U.S., are you thinking about more overseas acquisitions, what's the priority list from here? Thank you very much, and I'll pass it on.

Sure. Let's begin with our overall strategy, which focuses on capturing additional snacking occasions. Within that, our top priority is to explore categories outside of sweet indulgence in the U.S. This includes both salty snacks and savory products, as well as our recent acquisition of the ONE brand nutrition bar. Our emphasis is largely on better-for-you options in the savory category in the U.S. While we are open to pursuing opportunities in confectionery if we identify gaps in our portfolio, we are more cautious about international acquisitions due to the higher risks involved and our limited scale outside the U.S. The types of businesses that are suitable for us internationally are somewhat different. Regarding our key learnings, the most significant one revolves around the selection of assets. We are a branded high gross margin company, and we focus on growing and building those kinds of brands. SkinnyPop and Pirate's Booty align perfectly with this model. In particular, the acquisition of KRAVE did not satisfy our criteria for adequate scale or gross margin. Therefore, the main takeaway is to stick to what fits our business model. Additionally, we have learned valuable lessons about integration, balancing our scale with fostering an entrepreneurial spirit. It's important to recognize that the businesses we acquire are in growth phases and need support to scale effectively.

Great, thank you very much. I'll pass it on.

Hey, good morning, folks. Thank you for citing me in and happy belated New Year.

Thank you.

You're welcome. I want to come back real quick on the CapEx piece because it's a surprisingly large number. And it sounds like we'll get more detail on where that spends coming at the Analyst Day, but given that you're spending a lot more into supply chain and you explain at the same time that your prior margin for growth productivity savings are poised to step down. Is it unreasonable to think that we should expect a larger or some sort of news around renewed productivity goals over the next couple of years?

Yes, we're not announcing today any renewed productivity goals, I would say productivity is and will remain a key part of our algorithm. You're right last couple of years with margin for growth that probably had higher than historically typical productivity. 2020 is down a little bit from that as that kind of peak of that program passes. And we will do as we always do, kind of continue to look for additional productivity opportunities and some of the improvements coming in terms of fulfillment with the supply chain investment will actually set the future for some more as we go forward.

Yes, a little bit additional context. In the past, we did big supply chain projects and those tended to be much more focused on utilization of capacity and also margin enhancement. This supply chain project is very much focused on enabling growth and doing so by providing increased flexibility and customization capabilities that will then allow us to meet consumer and customer needs while maintaining the advantage margin structure that we have.

Thank you. That's good context. I understand a little bit better. I appreciate that. Switching gears real quick to the growth side, so new capabilities help drive growth, but from a volumetric perspective, there's not a lot of growth right now in at least in your North American portfolio, and I know there's some elasticity components there, but how should we think about the growth trajectory for both the category and your portfolio as we track through the next 12, 24 months?

So first of all, we think both volume and price are important to our long-term algorithm. During the years where we have pricing, those years will be much more pricing driven than volume driven. And we do a lot of hard work on our programming to keep our volumes flat during that time. Otherwise, according to the models, we'd actually decline in volume. So we're pleased that we've been able to do that. But over the years, you'll see a bit of both. And as we look at the actual growth outlook, we continue to think that the CMG category is going to grow at that 1.5% to 2% type of range. We believe in 2020 that it will be at the higher end of that range given the pricing in the marketplace, but we believe it will not be as high as 2019, which also had the additional benefit of a long Easter, and we look to grow in line or slightly above the category growth rate.

Got it, okay, Thanks a lot. I'll see you in Florida.

Okay.

Hi, good morning. Just piggyback off of Jason's question on organic sales for the year, how should we think about maybe how the China and Brazil macro situations really kind of play into how you think about the international business, I know it's a smaller part and then on the U.S. front, anything to comment on Snap and how that any potential developments in legislation might potentially impact that business as you think forward? Thank you.

Yes, so certainly we have seen macroeconomic softness in several of the developing markets in which we participate. As we developed our plans for the year, we tried to take that into account as other factors that were known at the time, clearly the coronavirus would be the one unknown that really we didn't have visibility to at the time, and we are tracking that carefully. We do anticipate that will have an impact on our business in China. But as you know, we're a predominantly North American based company. So not as big an impact as we may see from some others, and we are carefully tracking, and always do kind of what happens with Snap at this point in time; we have not built in nor anticipate something significant there, but we'll keep a close eye on that.

As a quick follow-up to that, Michele, I appreciate the color for China, as you think about it being a potential impact as you noted, is it more from a manufacturing standpoint that facilities or maybe offline until maybe the beginning of February, as is the case for the industry, or is it more just an early indication that depletion rates in the retail channel are already starting to come in a little bit as travel slows, any color there would be helpful. Thank you.

Yes, I would say it's more the latter which is our business tends to have a seasonal skew around Chinese New Year, we sold in our volume and now consumers are not able to go to retail and so we're trying to carefully watch what's the take away will be and any waste implications from the fact that that portfolio is seasonal in nature. So that's the biggest hit for us.

Good morning, thanks very much. A couple of detailed questions first and then a real question. The detail question is on looking at your takeaway data you gave us, so 28 on Candy Mint and Gum or 11.3 on salty snacks, 2.5 overall, is it like last quarter where all that gap is that all KRAVE that were kind of flushing out of the system is my first question because it would seem to me it'd be something like in the threes overall if that was the case. And second question, real question is, it seems like pricing works a lot better than it used to, and it's worked fantastically at times in the past decade. But it seems like you get it, you see less elasticity, you grow gross margin like, is there something just new under the sun here where you have better capabilities, and you can just price more tactically going forward than used to be, if any detail on that, I'd appreciate it.

Okay. So relative to your first question, you're right that there are some of the smaller emerging brands like KRAVE that are a drag to our total consumption. The other piece is our grocery business, which is comprised primarily of syrup and baking chips. Syrup tends to be a pretty stable business. But baking chips has big promotional windows, and it's very competitive. So, we always have decisions to make relative to which pieces of business to go for at which just don't have the profit margins that we're interested in. And so we passed on some less profitable business this year. And that was a drag in our total retail takeaway. Relative to pricing, I would say we think about the impact as being pretty consistent with what we've seen over the years that we've always had a pretty solid ability to leverage price, and we believe that's only though because of all of the investments that we make with retailers in retail specific programs. The high level of advertising we put behind our brands that create the brand value proposition for the consumer then it enables that. So but we see basically the elasticity being somewhat in line with what we've seen historically.

Well, it works whatever it does. Thank you.

You're welcome.

Good morning. Thanks for the question.

Good morning, John.

I guess, Michele or Steve, I just like to hear a bit more about the operating leverage, given the importance of that to the P&L. We've seen plant closures over the years you've had the modernization in Hershey. Now there's talk about, I guess, the smart plants. So as you exit the margin for growth, how do you think about leverage from here, I mean how large of a contributor will manufacturing be given the increases in capacity, flattish category growth relative to leverage from SG&A at this point and a lot of moving pieces, just trying to get a sense for the factors and how it materializes?

Steve, you want to take that?

Driving operating leverage over time is going to continue to be a key part of the algorithm. And so, all of these investments whether we're talking in the manufacturing area or some of the capability investments, all are with an eye towards driving a return over time and ultimately driving leverage of itself. Some of the investments in digital and data, all have a business case around leverage at the end. And so as we've done in the past, as margin for growth wraps up, we will kind of that Michele said in the past go right back through the P&L and attack each one of those to continue to drive sustainable leverage. Anything to add there, Michele?

Nope.

Okay. And just as a follow-up there. Based on the guidance, it looks as though non-advertising SM&A for 2020 should increase a fair amount year-on-year. Are there any particular callouts there in terms of the plan, whether it's in-store programming, your sales force feed on the street or anything else worth note that we should think about here?

Our data and technology investments do fall in that line. So investments around ERP, investments more broadly around data and technology when it comes to analytics and how we evaluate the business, new data sources, et cetera filling up buckets, that's a significant piece.

Okay. Michele and Steve, thanks for the time.

You bet.

Great, thank you. I guess first question, Michele is just, given the amount of investment you deployed over the past two, three years to now, speaking to the next two to three years, to become more efficient. With that in mind, as we see brand support increase, I feel like at least, usually that brand support goes to larger brands, right, just higher margins that are leverage overall. But you've also acquired a number of smaller companies that are faster growth, smaller with faster growth, on trend, et cetera. So, like, when you step back and say, okay, we kind of, let's say, we've kind of gotten through the first part of kind of our investment overall supply chain ERP, now we have further investment, like should we be expecting, increased innovation in the marketplace on brands like Skinny and Pirate's Booty and One, and I just asked because, you seem to be kind of the on-trend growth to your brands, not as big, but there's a lot of potential there, and I feel like we just haven't seen a tremendous amount of new innovation come out of those brands so far post acquisition?

Yes, that's a great question. Overall, as we aim to grow the business, we believe in maintaining balance with various factors such as distribution, advertising to boost base velocities, seasonal offerings, pricing, and so on. Each of these elements plays a role at different stages and for different brands. For brands like SkinnyPop and Pirate's Booty, we want to ensure we are fully leveraging their core strengths since they have not yet reached their full distribution potential relative to their velocity levels. Therefore, our focus remains on strengthening core distribution and advertising to increase household penetration. Many of our brands have around 40% household penetration, but brands like Pirate's or SkinnyPop have notably less. Our strategy is intentional, prioritizing the core while carefully introducing innovation. We have launched some seasonal items and explored the right flavor profiles, but we've learned to take a measured approach to innovation, particularly based on experiences from earlier acquisitions where we focused too much on innovation instead of core strengths.

Okay, fair. And then, just a quick follow-up, I guess what's implied with further capital spends, especially in 2020 on the CapEx side and overall investment, I'm assuming, as leader of a company, right, the expectation is that this does build efficiency obviously. So, essentially, hopefully de-risk further acquisitions, even a smaller scale. So, basically KRAVE doesn't happen again?

Yep, we're always focused on making better and better decisions and learning from every action we take in the past. So and we feel good about what we're seeing on SkinnyPop and Pirate's in particular and One is on track integration and acquisition model wise as well.

Okay. Super. Thank you.

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