好時 (HSY) 2013 Q1 法說會逐字稿

Good morning, my name is Phyllis and I will be your conference operator today.

At this time, I would like to welcome everyone to the Hershey's Company first quarter 2013 results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Mr. Mark Pogharian, you may begin your conference.

Thank you, Phyllis.

Good morning, ladies and gentlemen.

Welcome to the Hershey Company's first quarter 2013 conference call.

J.P. Bilbrey, President and CEO; Bert Alfonso, Senior Vice President and CFO; Dave Tacka; and I will represent Hershey on this morning's call.

We welcome those of you listening via the webcast.

Let me remind everyone listening that today's conference call may contain statements which are forward-looking.

These statements are based on current expectations which are subject to risk and uncertainty.

Actual results may vary materially from those contained in the forward-looking statements because of factors such as those listed in this morning's press release and in our 10-K for 2012.

If you have not seen the press release, a copy is posted on our corporate website in the investor relations section.

Included in the press release is a consolidated balance sheet and a summary of consolidated statements of income prepared in accordance with GAAP.

Within the notes section of the press release, we have provided adjusted pro forma reconciliations of select income statement line items quantitatively reconciled to GAAP.

The Company uses these non-GAAP measures as key metrics for evaluating performance internally.

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 2013 first quarter results, excluding net pretax charges of $10.6 million or $0.03 per share diluted, primarily related to costs associated with Project Next Century, non-service related pension expense, and acquisition and integration costs.

Our discussion of any future projections will also exclude the impact of these net charges.

With that out of the way, let me turn the call over to J.P. Bilbrey.

Thanks, Mark, and good morning to everyone on the phone and webcast.

I'm pleased with Hershey's first quarter financial and marketplace results which represents a solid start to the year.

Despite the tough year ago comp and a shorter Easter season, net sales increased plus 5.5%, driven primarily by volume.

Sales growth in the US and key international markets were on track versus planned, and the broader launch of Brookside products got off to a fast start.

Earnings growth was slightly greater than we anticipated, driven by solid gross margin gains.

We're well-positioned to deliver on our financial commitments in 2013, as the investments we've made in our business in Q1 and over the last few years continue to pay dividends.

As it relates to yesterday's personnel announcements, I'm very excited.

These moves are consistent with our philosophy of leadership development.

These senior leaders are Hershey and industry veterans with deep knowledge of our business.

They all had an integral role in the development of our integrated business management process and insights driven performance model that guides all of our business decisions.

Importantly, this will enable us to further leverage their unique skills to drive Hershey's accelerated growth as we evolve into a global Company.

Our Company is structured for accelerated global growth and we're fully aligned on how to achieve our goals.

I look forward to working with all of my colleagues and building on our solid performance.

Bert will provide you with financial details, so let me discuss category and Hershey marketplace performance.

The confectionery category continues to perform well, with recent gains exceeding the category's historical growth rate.

The category continues to be driven by the steady investments in the form of advertising and innovation for most major manufacturers.

Given the high household penetration, impulsivity, as well as affordable price points, we believe retailers and consumers will continue the value the confectionery category.

In fact, Hershey's Q1 household penetration was solid and outpaced other snack categories.

We're very pleased with our marketplace performance.

And for the 12 and 52 week periods ended March 23, we gained market share in every channel where we compete.

Additionally, Q1 market share gains, driven by volume, occurred across all major pack types including standard bar, king size, take-home package candy, and multi-packs.

Before we get into the specifics, recall that in 2013, Easter occurred on March 31, and in 2012 on April 8. Therefore, the timing of Easter obviously has and will impact Nielsen and IRI data related to the March and April periods.

Despite the Easter season being shorter versus last year, most customers had a higher percentage dollar sell through versus last year.

Preliminary analysis of the data indicates that Hershey Easter market share was about flat and in line with our expectations.

Easter timing aside, Hershey's marketplace performance was solid.

CMG, or candy, mint, and gum retail takeaway for the 12 weeks ending March 23 increased 9.4%.

As a reminder, this is xAOC plus C-store data consisting of the food, drug, mass ex and C-Store channels plus the inclusion of Wal-Mart in partial dollar, club, and military channels.

Excluding Easter seasonal activity in both the current and year ago period, a better yet still in perfect measure, our retail takeaway was up 8.6%.

Perhaps the easiest way to assess performance given seasonal timing and therefore noise in the data is by looking at absolute market share results.

We gained market share both with and without the Easter seasonal activity.

All in, including the seasonal activity, Hershey Q1, CMG market share in the xAOC plus C universe increased by 1.4 points.

Including Easter, seasonal activity first quarter CMG category growth in the xAOC plus C channels was up 4.3%.

Gum continues to be a drag on total CMG performance, and excluding it, the chocolate, sweets, and refreshment categories were up a combined 6.5%.

Excluding Easter seasonal activity in the current and year ago period combined, category growth of chocolate, sweets, and refreshment was up 5.4%.

Looking at the FDMx channels, CMG category growth sequentially improved again from most single digits in Q4 to plus 4.2% in Q1.

However, there is a bit of a benefit from an earlier Easter, but it's evident that there is a correlation to seasonal candy being a destination category.

Hershey continues to outperform the CMG category in the FDMx channels with retail takeaway of plus 9.2%, resulting in a market share gain of 1.3 points.

First quarter xAOC plus C category growth including and excluding Easter was up 6.9% and 5.4% respectively.

Hershey's xAOC plus C chocolate retail takeaway including and excluding Easter was up 10.1% and 9.6% respectively, resulting in an overall gain of 1.3 points of chocolate market share.

Core brands such as Hershey's, Reese's, Kit Kats, Kisses, Ice Breakers, and as well as Brookside all gained share.

First quarter xAOC plus C non-chocolate category growth including and excluding Easter was up 5.4% to 5.3%, respectively.

Hershey's xAOC plus C non-chocolate retail takeaway including and excluding Easter was up 3.5% and 2% respectively, resulting in an overall market share decline of 0.3 points.

As it relates to the mint category, we continue to build our Ice Breaker DUO's momentum.

Specifically, our Q1 xAOC plus C mint retail takeaway was 14.5% with market share up 2 points.

We now have a 39 share of this fast-growing, $750 million category.

In the C-store class of trade where the Easter impacts are minimal, the CMG category was up about 1%.

However, this was significantly impacted by the double digit percentage of decline in the gum category.

Excluding gum, candy and mint were up a combined 4.3%.

Total Hershey C-store performance was strong with takeaway up 6.3% resulting in a share gain of 1.7 points.

Our C-store chocolate and mint retail takeaway was particularly solid, up 7.7% and 14.2%, respectively.

These gains were driven by core brand advertising, in-store selling, merchandising, and programming, including our successful Reese's promotional tie-in with the NCAA March Madness basketball tournament.

In the US marketplace, over the remainder of the year, we have many exciting products, promotions, programs, and merchandising in place across all channels.

And these include Twizzler tie-in with the upcoming Superman movie, various promotions with the pop band, Gym Class Heroes, that will focus on the Jolly Rancher and Twizzlers brands, the Q2 launch of Kit Kat Minis in the stand-up pouch and king-size offering, a baking season ROLO Pretzel Delight promotion, and the launch of a yet to be announced new product that we're very excited about.

The broader launch of Brookside in the US is on track.

We reached targeted distribution at the end of February and began television advertising.

Brookside is growing in all channels including established club business.

Initial consumer response has been positive with all three 7-ounce flavors in the top 10 chocolate pouch velocities in the food channel.

Brookside is currently the fastest growing dark chocolate brand in the xAOC plus C universe and we're very excited about its potential.

We anticipate that Brookside will be about 1 point of total Company sales growth in 2013.

In Q2, we'll be tracking repeat purchases and consumption patterns and will then have a clear indication of the brand's success.

Outside of the US, our international business was relatively in line with our forecast.

China, Mexico, and Brazil were standouts, up solid double digits on a percentage versus the last year both on a reported and constant currency basis.

In China, Hershey continues to be one of the fastest-growing international chocolate companies, as our chocolate growth rate is more than double the category in the cities where we're focused.

We had a good Chinese New Year season driven by Kisses.

In Q1, the China Kisses business gained 1.2 market share points and now has a 5.8 point national share of the market.

Advertising on the Hershey's brand, which started in Q4, continues and is having the desired effect.

We're primarily concentrating on five Eastern markets, and we're seeing solid velocity in retail takeaway.

In Mexico, we continue to see strong growth in the Hershey's and Kisses franchises.

In February, during the important Valentine's season, kisses grew 16.7% in the Mexico supermarket channel and became the largest selling brand in that class of trade.

And over the last three months in the C-store channel, Hershey's was the fastest-growing chocolate brand with a retail takeaway of 13.6%.

In Brazil, we continue to build on our momentum.

We've added advertising in Rio de Janeiro.

And in the focus regions of Sao Paulo, Hershey has surpassed a local brand to become the third largest tablet bar brand.

The broader launch related to increased capacity for Hershey's Mais is on track.

Product was available to customers in January and the first quarter response was strong.

And in Canada, we continued to build on our momentum, as our CMG market share increased 0.3 points.

Our chocolate business gained plus 0.1 points, while our sweets and refreshments market share increased to 0.7 points driven by Jolly Rancher, the fastest-growing candy brand in Canada in addition to Ice Breakers.

Needless to say, we're pleased with the direction of the business.

There are exciting things happening in our focused markets and we remain on track towards the aspirational goals we've shared with you over the last year.

Now, to wrap up.

We're pleased with our Q1 performance.

The strong start to 2013 is similar to 2012.

The category continues to grow and there's a lot of activity during the second quarter, which once we get past, will give us a better perspective on our potential for the full year.

The overall macroeconomic environment appears to be getting better, but it is still difficult to predict consumer sentiment and purchasing patterns.

Over the remainder of the year, we see net sales growing comfortably within our long-term net sales target of 5% to 7%, including the impact of foreign currency exchange rates.

While it is still a bit early in the year to predict where dairy prices could go, we have good visibility into our cost structure and expect to achieve adjusted gross margin expansion of 190 to 210 basis points.

This is enabling us to make's SM&A investments, innovation, advertising, consumer promotions, and go-to market capabilities across our businesses in both the US and international markets.

As a result, we anticipate 2013 adjusted earnings per share diluted growth of about 12%.

I'll now turn it over to Bert who will provide some additional financial detail.

Thank you, J.P., and good morning, everyone.

First quarter results were solid with consolidated net sales of $1.83 billion, up 5.5% versus the prior year and in line with our expectations.

Adjusted earnings per share diluted of $1.09, up 13.5%, was a bit better than expected due primarily to solid gross margin gains and the timing of some SM&A investments.

J.P. provided details related to our marketplace performance, so I'll focus on a review of the P&L, balance sheet, and cash flow.

As expected, first quarter sales gains were driven primarily by volume increases that contributed 5.3% benefit including about 2 points from the broader launch of Brookside products in the US food, drug, and mass channels.

Net price realization was a 0.5 benefit and foreign currency exchange rates was a 0.3 point headwind.

We continue to see consistent growth in our key international markets, as they contributed about 1.5 points of the already mentioned 5.3% growth, excluding the impact of foreign currency exchange rates.

Our US seasonal business continues to be strong as we followed up a solid fourth quarter holiday season with an improved Easter sell-through.

As J.P. mentioned, initial analysis of the data indicates that Hershey Easter market share was about flat and in line with our expectations.

It is worth noting that in a shorter season, we do not get the full benefit of our packaged candy line as purchase frequency is impacted by fewer days.

Turning now to margins.

In the first quarter, adjusted gross margin increased 240 basis points, driven by lower commodity costs of about $35 million and solid supply chain productivity.

As previously stated, while it's still a bit early in the year to predict where dairy prices could go, we have good visibility into our cost structure and there is no material change in our full year outlook.

Given our strong start to the year and solid productivity outlook, we now expect adjusted gross margin expansion of 190 to 200 basis points, which is slightly greater than her previous estimate of 180 to 200 basis points.

The improvement in adjusted gross margin was the primary contributor of growth to adjusted EBIT, up 9.3% year-over-year, resulting in an EBIT margin of 22%, up 70 basis points over the first quarter of 2012.

SM&A excluding advertising increased about 9% in the first quarter, less than our initial estimates.

The lower estimate was primarily due to the timing related of planned increases in the staffing and capability initiatives that will increase our international expansion.

For the full year, we continue to expect SM&A excluding advertising to increase at a rate greater than net sales.

And we expect increases in Q2 and Q3 to be higher than the first quarter increase.

These planned investments in both the US and international markets should benefit the Company over the near and long-term.

Advertising expense increased 22% in Q1, in line with our forecast supporting core brands and new products.

The annual increase in advertising expense remained the same, and is expected to be up about 20% versus last year supporting the Brookside launch and innovation in both the US and key international markets.

Now, let me provide a brief update of our international businesses.

We are pleased with the first quarter progress in our focused markets, especially China, Brazil, and Mexico, whose combined top line growth exceeded 20%.

We remain committed to these markets and will continue to make the necessary investments to build brand equity and drive trial and repeat purchases.

Total reported first quarter international net sales excluding Canada increased about 10% versus last year.

Net sales growth in export markets, which continues to see good velocity at retail, tempered in the first quarter as we lapped prior year distribution gain.

There's no change to our full year outlook in international net sales, and based on current exchange rates, we are on a path to achieve net sales of $1 billion in these markets by the end of 2014.

Moving down the P&L, first quarter interest expense of $23.6 million slightly declined versus $24 million last year.

And in 2013, we continue to expect interest expense to be approximately $85 million to $95 million.

Our first quarter tax rate was 34.4%, and lower than last year, due to the timing of certain tax events.

Excluding the tax rate impacts associated with business realignment and impairment charges, we continue to expect full year tax rate to be about the same as last year.

The tax rate in Q2 will be about 35%, slightly greater than Q1, but higher than the 32% in last year's second quarter.

And this tax rate difference will impact second quarter EPS diluted.

In the first quarter of 2013, weighted average shares outstanding on a diluted basis were proximally 228 million versus 229 million in 2012, leading to adjusted earnings per share diluted of $1.09.

Turning to the balance sheet and cash flow.

At the end of the first quarter, net trading capital decreased versus last year's first quarter by $41 million.

Accounts payable increased $32 million, inventory decreased by $23 million, and accounts receivable was up by $14 million.

Our accounts receivable remain extremely current.

In terms of other specific cash flow items, total Company capital additions including software were $94 million in Q1.

These amounts included Project Next Century capital expenditures of $2 million.

In 2013, we expect capital additions to be about $300 million.

Depreciation and amortization was $49 million in the first quarter, all of which was operating depreciation and amortization, as there was no accelerated depreciation in the quarter.

In 2013, we are forecasting total operating depreciation and amortization of about $200 million to $210 million.

Dividends paid during quarter were $92 million.

Also during the first quarter, we repurchased approximately $204 million worth of our common shares to replace shares issued in connection with stock option exercises.

All shares were repurchased in the open market.

Cash on hand at the end of the first quarter was $730 million, about the same as at year end.

As it relates to our short-term cash needs, the Company is well-positioned to manage the capital needs of the business.

Our cash flow remains strong and will continue to increase as we grow our earnings.

Now, let me summarize.

Our US marketplace performance in measured and non-measured channels is tracking as expected.

To enable our US momentum during the remainder of the year, we have planned for core brand merchandising as well as new product introductions.

We expect growth to be driven primarily by core brand volume increases, the US launch of Brookside in food, drug, and mass channels, and the expansion of our five core global brands in key international markets.

As a result, we expect 2013 net sales to grow 5% to 7%, including the impact of foreign currency exchange rates.

We have good visibility into our full year cost structure and there is no significant change in our input cost outlook for the year.

We continue to expect overall cost deflation in 2013.

And given our strong start to the year, we are forecasting full year adjusted gross margin expansion of 190 to 210 basis points.

Advertising will be up 20% versus last year, and will support the Brookside launch and innovation in both the US and international markets.

For the full year, we continue to expect SM&A excluding advertising to increase at a rate greater than net sales as we plan global go-to market capabilities and incur costs associated with the broader launch of Brookside.

Therefore, we now expect full year adjusted earnings per share diluted growth of about 12%.

We will now open it up for Q&A.

(Operator Instructions)

Jonathan Feeney, Janney Capital Markets.

I wanted to ask about specifically the costs per unit, and as those might course over the year, you've really seen -- I guess my first question would be -- this improvement in cost per unit you've seen here with 5% volume growth and a much smaller, I think we'll say, 1% growth in adjusted COGS.

How much of that is Project Next Century and how much of that would you say is input cost?

And over the rest of the year, should we expect a similar in trajectory in cost as we look at it that way?

Jonathan, we've slightly increased our adjusted gross margin by about 10 points.

And obviously, off an already strong level.

In the first quarter, we actually saw very good performance on the productivity side.

We gave you sort of an indicator of the $35 million in terms of commodity cost reduction.

But we did have really good productivity in the quarter, as we're just getting underway in Next Century last year, sort of starting up the plan.

We previously said that this year's total productivity included about $25 million of Next Century and about $75 million overall.

I will tell you that the first quarter was a bit better than if you divided it by four.

So that certainly helped.

And as we get through the year, your point is a good one.

We also are getting -- it's largely a volume year as we see at this point.

And we do get good absorption, particularly on our big brands like a Reese's or a Hershey where we have great productivity because of the scale.

What you expect to see going out further is probably a bit lower on the expansion in the second quarter because our volume tends to be -- it tends to be the smallest quarter.

While we do produce a lot, that's mostly Halloween product which gets hung up on the balance sheet and sells out in the third.

So it should be solid all year long, a little bit lower, certainly in the first quarter into second, and solid in the back half.

Ken Zaslow, Bank of Montreal.

Bert, with your new role, can you talk about what initiative and strategy you'll be taking?

Is there any different direction or how do you see your role going?

It's a new position for you and I just want to kind of -- we may not get another conversation with you that readily.

So I'm just kind of thinking about your big picture thoughts on what you're going to be taking on as president of the international.

We've obviously talked about it a lot internally.

I think part of what you're going to see is a lot of continuation because we've all, as the senior management team, spent a lot of time together on our international strategy.

The intention of the role is a bit of our -- of how we're evolving into the international business.

It does give us -- or will give me obviously the ability to look at Latin American and Asian regions on a more combined basis.

We're very focused on the rollout of our five global brands that we started to talk about, about six months ago.

And the good news is that we have very solid teams in place at both the regional president level and below that at country management.

So we see it as putting more resource as a Company against that international growth trajectory.

The ability to assess things across regions, which, today, we do primarily at J.P.'s level, but now we'll have some extra insights against that.

But I think strategically, you're going to see broad continuation.

And obviously as things evolve, I'll have the ability to assess where things may ebb and flow.

But that's the way we're thinking about it.

Do think it will be more geographic expansion and do you think there will be greater probability of acquisitions globally?

We're already pretty focused on the markets are talk about continuously, China, Mexico, where we're making our biggest bets, certainly followed by Brazil and a little bit slower burn on India.

J.P.'s talked in the past about other markets that are interesting for us.

There are Southeast Asian markets that are interesting, to a lesser degree, Eastern Europe.

We know that Western Europe, not for us, in terms of the cost benefit.

M&A, we're focused, clearly, on trying to develop growth that's inorganic, primarily in our category and possibly adjacent categories where we can get some capabilities and local brands.

So it will be primarily in the focused markets where we are today.

Robert Moskow, Credit Suisse.

I looked at the Nielsen data and got kind of head fake by how strong it was.

Even when you're giving us the information here, I'm a little confused.

So if the category was up -- if your business was up and retail 9.4% with Easter, and still up 8.6% without Easter, but then your shipments are only up 5.5%.

There must of been another element to this that caused you to be shipping below the rate of consumption.

And I want to know is there a mismatch on pricing?

Maybe the pricing got pulled forward into fourth quarter for you, but the consumers saw something else in first quarter?

Is that what it is?

I think, Rob, the way to think about it is, first of all, we like to be able to ship to consumption as close as possible.

It's always the goal.

However, the retail takeaway was very broad across the entire portfolio and also across some of our biggest brands.

So there's really two things to think about.

First of all, in the quarter, you had a lot of price relative to what in the first quarter last year still would have had some promotional activity.

We had some new item introductions in the first quarter that weren't in this quarter.

And so, you really saw at retail, a higher percentage of products sold at full revenue which is good for retailers as well.

And then the other item was lower inventory.

And so normally, we would probably have something in the range of 4.95 weeks of inventory, and we believe this particular quarter, we had probably somewhere in the range of about 4.4, 4.5.

So that inventory was a bit lower, which also impacted shipments there as well.

We think those are the two biggest items that we have.

I don't know, Bert, if you want to add any other perspective.

But that's really what we're seeing.

And so we feel quite good about the fact that the share results were what they were, and we don't see that we've got any issues in the marketplace in terms of not being able to supply demand.

J.P., that sums it up.

I think it's a little bit of -- mostly the price that you're seeing -- Easter was the very last of the season that we got a bit of price on.

If you would recall, last year the first one was -- rather Valentine.

Sorry for the confusion.

Valentine was the last season where we saw some pricing.

While most of that ships in the fourth quarter, the retailers see it in the first quarter.

And so that's the bit of pricing that we did get.

Otherwise, all the other pricing has flowed through.

No, we didn't get the pricing, it's what Stan, what you would see in your Nielsen data.

That's what I thought.

But I think John, you were saying, or J.P., you were saying that there might have been some inventory burning at the trade?

Is that what you were implying?

I wouldn't think of it as major burning, but what we did see is a lower inventory level than what is usual.

And we really see it as being the strong off-take that we got, and then we have the ability obviously to come in behind that.

As I said when I opened, we usually like to forecast as closely as possible, shipments to consumption, as we can.

In this case, Q1, as we had hoped, had strong category growth.

And then, we were able to obviously grow share during that quarter and build on top of that.

And so it just took us to a lower inventory level than we're usually at.

I think that really -- I don't think there's any mystery beyond that.

I think that really accounts for the difference if you look at the growth, promotion pricing versus previous year and then the inventory drawdown.

Alexia Howard, Sanford Bernstein.

I just wanted to ask about your investment levels in the markets outside of North America, particularly China.

I know that when Campbell's went into China and Russia for the first time they were capping investment levels at a certain number of pennies per share per year.

I believe you're still in investment mode in China.

Is the plan to manage that investment to the certain absolute level going out maybe with view to reaching breakeven in a certain number of years?

So I just want to get a sense for the parts to profitability there.

And then as a follow-up question, in some other segments we've been hearing about increased price-based competition in some categories, particularly in China.

Have you been seeing that at all?

Or is it really just a matter of a fairly easy environment to take pricing and grow distribution?

Thank you.

Sure.

Alexia, let me start and then Bert can pick up if he likes.

In terms of our model in China, as you've heard us talk in the past about how we think about these concentric circles and economic density and building out our organization and adding brands.

So we don't really think about it at this point in time in terms of how many cents per share it would be in terms of our investment level.

What we're really looking at is how do we build consumer centric portfolio?

How do we get an organization that can execute against that portfolio?

And how can we advertise behind it in a way that we believe those investments are good for us?

And we've consistently said we don't want to get out over our skis.

So we don't want to plow into an investment level that's fixed, nor do we want to be constrained by that as we see opportunity.

So I think you would continue to see us in an investment mode in China.

As you know, we believe we have good gross margins in those businesses that we can grow into when we're are not in an invest mode.

But that really is not going to be the case, I don't think, in the immediate future.

So we're very satisfied with, as we continue to turn on advertising and build our portfolio, our Hershey bars as an example is doing terrific as we've begun to expand that.

And then we have what we think is a very exciting new item introduction in China.

That will be later in the year that we'll talk to you more about in coming time.

But we really feel good about the profile of China.

Great, and then in terms of pricing competition?

Any step-up there or you're not seeing that?

No, I think that we continue to be headed down a track of what we think is good for our brands.

You'll see different promotion activity in the trade that some brands may choose to do.

But I wouldn't see that as a trend necessarily from our perspective.

David Driscoll, Citigroup.

Wanted to talk a little bit about Brookside, a very exciting brand launch and something that looks to be unique in the category.

J.P., I was wondering if you could start off and just talk a little bit about when was the last time Hershey launched a new brand with the significant marketing budget that you're going to put behind Brookside?

And then just to follow-on on the line of logic on Brookside, can you also comment -- give us your perspective on what you would expect the incrementality of a product like this to the entire chocolate category and to your franchise?

David, we're very excited about Brookside and the launch.

And we believe the investment levels that we're making are appropriate for what we believe the potential for the brand is.

So I don't necessarily have a historical perspective, so I'm going to kind of put that to the side.

But we believe that the Brookside brand has enormous potential.

We're off to a good start.

We're making it broadly available in the marketplace.

We're seeing good repurchase behind the early trial that the consumer has in the US.

And we're going to continue doing consumer testing as broadly as possible to see where the relevance of the brand can continue to play.

But we've got a lot of runway in front of us.

We've got a lot of work to do.

But I would just tell you that from what we see of the early customer reaction, consumer reaction, off-take, repurchase, we're just awfully encouraged.

And we think this can be a very big brand.

We have some discussions internally on what we think that number is.

I'm not going to share that right now because we've got a lot of execution, David, in front of us to make this story come true.

But really off to a terrific start.

If I may just follow-up on this just one other way.

My impression is that, given the ingredients year and how different it is from other products in the category, that we should be thinking that this kind of the new product has a greater incrementality to your franchise then, say, other new products.

Maybe if it's a brand extension on one of your other lines, they might be good, but they might actually take away some sales cannibalistically when you do a new product launch of that sort.

So is it a fair point to say that this is really a different type of new product versus what we might have seen over the last few years from Hershey?

Yes, I think that's right, David.

It's around -- if you follow it from a dark chocolate standpoint, it's a -- it has the potential to be a big dark chocolate brand by itself.

If you think of the halo effect of the good things inside and all the benefits you get from dark chocolate, within the category, I think it does have a lot of incrementality to it.

And then, because of the halo effect of the great things in the center with the fruits packed in and dark chocolate antioxidant benefits, it allows you to think about it more broadly than as a chocolate item only.

And we're certainly exploring that and trying to understand more.

So we think it has a lot of incremental potential for the Company as an adjacency as well as incremental business for us within the core category that we compete.

And if you could just make one clarification on the points of distribution.

Is it correct to think that this product is more -- or the availability in the food classes of trade is really where we're going to sell this product and to a lesser extent in convenience stores?

Or maybe I'm just trying to get at how much representation in convenience stores will it actually have?

We think packaging is obviously important.

We'd like to see it in convenience.

We have convenience packaging that will be in the future of the brand.

And so right now, we have a lot of work in front of us to get it across the channels and in distribution where we're currently focused on.

But yes, this should be a multi-channel brand with packaging that makes it readily available to the consumer when they're looking for a great tasting product.

John Baumgartner, Wells Fargo.

John, looking at some of the measured [channel] data lately, looks like Bliss sales are down quite a bit.

I'm not sure if that's more of a comparison issue there.

But just wondering if you could walk through your strategy in terms of trade-up, anything you're seeing there?

As you've heard us talk about in recent times that the trade-up segment, as we used to define it, has largely blended into premium and mainstream.

And so I think that segment has changed a little bit.

Bliss volumes are lower than they were a few years ago, and I think having to compete in more of a mainstream type environment than they have before.

So that's changing a little bit.

We continue to be very committed to the Bliss consumer.

And so we see the brand as continuing in our portfolio with a meaningful presence.

One of the things you're starting to see now is the premium segment is growing a little bit again.

And I would anticipate that to continue.

But again, that also had a little bit of suppression of pricing.

But I think that will ultimately be back where it was.

And then I think what will be interesting to see is, is if there's as much delineation as their historically was around this sort of middle segment which we call trade-up.

And I don't know how to predict that one necessarily, but we do see that Bliss plays an important role.

There's competitive brands which consumers also look for.

And so we think it gives us a position to continue to compete there.

David Palmer, UBS.

In recent times, the state of the US and global gum category, it certainly stands in contrast to the US and global chocolate category.

I'm wondering from your perspective, if you we're sort of writing the case study of diverging fates of these two categories, what factors would you attribute to these diverging fates?

And I ask partly because Hershey seems to be leaning a little bit into this weakness with some investment there.

And I know you're not the leader.

And obviously the big buckets are cyclical factors, secular factors, and just the stewardship of the leaders in these categories.

Thanks.

I'm not going to try to get too deep into gum strategy.

As you know, we play a modest role there.

We've said in the past that we think gum is a segment that's driven by innovation and advertising and news.

We think that's why our gum has done pretty well as modest as that businesses is.

And so, we continue to be excited about our mints business, which despite the fact it's a smaller segment, we continued to grow there.

And largely, that's around innovation and advertising and in meeting consumer usage occasions and also preferences, I suppose, around how they interact with the product.

So I think there is a big challenge for the gum segment to understand what's happening with the consumer.

And I know there's companies out there spending a lot of time against that.

But I certainly don't have the answer for other folks on some of that.

So we're going to continue to be very focused against our mint business.

And we're really excited about how it's performing.

It's a great front-end item.

It's good for retailers.

And that's probably as much as I should say about the gum segment.

When you're thinking about gum and mints, and I know that it plays more to portfolio to be going after mints harder, but are you even -- are you more excited about the receptivity of innovation on the mint side?

Is it fair to say that the future seems brighter on that side of the two?

It's certainly the case for us.

And there's still a large gum category out there.

It is a larger category than mint.

But this for us is a great way to play and we think it's a global opportunity.

And we have what we think are some pretty exciting innovations that continue to innovate around what some of the strengths, as we understand consumer insights around mints, relative to gum that will continue to leverage that.

And so we feel pretty good about where we're spending our time.

These are profitable brands.

And so, that segment is working really well for us.

Thilo Wrede, Jefferies.

I might have missed it in your comments, but is the Brookside distribution in regular retail, so grocery stores, is it already where you want it to be?

Or is there still further expansion opportunity?

There's still further expansion opportunity.

We usually look to make sure we have about 60% ACV as we start thinking about turning on advertising.

We've got advertising on now.

And we would expect Brookside to have broad-based distribution levels across all channels, but we still have space to go to get that as deep as we want it.

So when I don't manage to find the product in some channel checks, it's just a matter of time until you get on the shelf in those stores as well then?

Absolutely, and if it's not near a store near you, you give us an address and we'll make sure it is.

(Laughter).

And then the other question I had for you, J.P., did I understand you correct that this new product that you initially talked about is targeted at China, it's not for the US market?

It will start -- actually, on what I was referring to, we'll actually use China as a lead market.

And then we would hope to see that as an item that's more broadly available as we believe the usage occasion is one that's globally relevant.

Is that the first time that you used China as a lead market for a new product introduction that you intend -- ultimately intend to go global with?

Actually, we've had a couple of different instances where we've had products come from our international businesses.

Brazil is certainly one where we've taken some products other places.

And we see that being relevant in China as well, as we explore some different areas there.

Eric Katzman, Deutsche Bank.

Congratulations to everybody on their new positions.

I wanted to ask just more of a broader-based question about China, in particular, but maybe it applies to some of the emerging markets.

Obviously, as I think you stated at CAGNY, Mars has 40% to 50% share in China.

Mondelez is on record as spending a lot of money.

I think Ferrero and Lindt and others have been spending aggressively.

You're spending aggressively now.

Why -- is that the reason why you were a little bit more cautious on margin outlook in emerging markets?

How should we think about one player that's got the vast majority of the market or a big chunk of the market, and everybody else spending aggressively to get their fair share?

How does this all play out in terms of margins?

The sales are great, as you're doing good job, but ultimately, what kind of profit can you really get out of these markets if everybody is spending aggressively behind it?

I think, Eric, the way that we think about it is, is that -- and let's just talk about China, in particular, as you referenced.

If you look at the history over the last 10 years, certainly the last 5 years, and you look at the acceleration of market growth, we believe that just from a category standpoint in market, the story is still very much about market growth.

Now, you obviously have Mars who has a first mover advantage.

They have a very nice business there and a leadership share.

At the same time, that share is representative of a market which has doubled in the last five years anyway, and will continue to grow over time at an impressive rate.

So I think part of the work to be done here is really around category growth, bringing the consumer into the category, and then making sure we're participating in that category.

So where we're really, I'll call it thoughtful and balanced is, is that in our model, where we do have gross margins that are acceptable today and yet we're in an investment mode, we have the ability to balance that as we go forward.

So as we've talked about turning on advertising in focused markets, we're very satisfied with the response we get from the brand from those -- from Kisses as an example.

But we don't have a broad enough portfolio yet to be satisfied with our overall returns there.

And so as we continue to balance investing in our sales organization, investing in our brand development, and then not expanding at a rate that we get out over our skis, we think it's a very good way for the Company to participate in the China market.

So we're not necessarily saying we're going to go be number one by a specific date.

That could be a really costly and foolish thing for us to do.

We want each of these markets to be successful for us.

We want them to be rewarding for our shareholders.

And therefore, we have a pretty planned approach, and we don't want to get out of balance with what is a very precious North American business.

And so our approach I think, frankly, is very advantaged.

And at the same time, maybe not the same choice that everybody would have because they may have legacy businesses that don't allow them to look at this in the same way that we do.

Okay.

And then on a more shorter-term -- thank you for that -- just shorter-term, Bert, I guess you kind of sounded like there was a fair amount of delay in spending on some of this international SG&A, in part US as well.

The tax rate is higher.

You have a very tough comp in the second quarter.

And as you noted, it's typically a seasonally a smaller quarter, so you don't have as much leverage.

Did you give -- I got cut off -- but did you give any guidance on second quarter earnings?

Is it a low single digit EPS kind of growth rate?

What are we talking here?

We don't -- we haven't given quarterly guidance and not moving toward that.

But I think it captured all of the data points that we tried to provide.

So while we do expect earnings growth in the second quarter, it won't be comparable to what we're expecting in the other quarters.

Matthew Grainger, Morgan Stanley.

Just a general question, the CMG category as a whole has seen very strong sales trends.

And obviously you gained an impressive amount of market share in that context.

If you look more broadly at what you'd consider the snacking category, overall, can you give us a sense of how you think about both the CMG category and your own market share performance in that bigger snacking picture?

And I guess if you assess any near adjacencies you might have, what other snack categories do you view as your strongest competition for share of impulse purchases?

I think the general comment I would make is that CMG has held up very well within the overall snacking universe.

So for whatever interaction there is across any of those brands, we've certainly continued to have a category performance that's good and then we've continued to do well obviously within the category.

And I think a big piece of that really is around the fact that we continue to offer an affordable indulgence.

The category has benefited from the amount of advertising and attention from all manufacturers that it's gotten.

The innovation has been, I would call it stickier in that it has been productive.

And so, that's had a nice effect on the go-forward basis.

So I continue to be very optimistic about the category.

Certainly we feel good that the first quarter has given us the evidence that the category is going to perform well.

We've said that we're interested in adjacencies.

Those adjacencies would certainly be close in for us.

Most likely, you wouldn't see us going real far afield into things that we might not feel as comfortable with as the businesses that we're in and things that are close to that.

But we think, as we talked about Brookside, we think Brookside has a very nice healthy halo advantage that could expand into adjacencies.

And also, the single serve element of our business in singles and standard bars and other items that are on-the-go nutrition are things that we're interested in as well.

I think overall snacking continues to look very positive to us and we're going to participate in that overall segment.

Rob Dickerson, Consumer Edge.

Just one quick, easy question and then a follow-up.

I know obviously, a lot of questions on the international part of the business.

I think at CAGNY, you actually -- you reconfirmed the net sales target for '17, but it looked like you brought the profitability down, but I guess it was originally at low mid-teens to low double digits.

I'm just curious, one is, if the sales target is still there for '17, it would seem like the profit target has come down.

And then two, very simplistically, when should we expect the international sales to be broken out just in terms of materiality?

Let me try to put some context around that.

A couple of things that we've done in terms of targets.

One is we've put an aspirational target of $10 billion out there, which we certainly have a lot of energy against.

The other thing that we've talked about is that our organic business gets us to something south of that and then we're hopeful that we can add some value creating M&A that gets actually to the $10 billion.

So we haven't given a very, very specific target around that what organic is.

All we've really said is that it doesn't get us all the way to the $10 billion.

In terms of our investment pace, at CAGNY we we're pretty transparent about bringing that down slightly because we think it gives us the ability to invest at a faster pace and actually move that organic target up closer to the $10 billion.

So there is a little bit of alignment between the two.

Our view is based on where we think that the markets will provide the best return for top line growth and a path to profitability.

So China, we've talked a lot about and J.P. has given some context around that today.

It's in investment mode.

Other markets like Mexico where we have profitability, we really just want to take that to a greater level.

And so our ability to be able to continue to have fast paced top line growth in these markets and invest behind those so long as we're getting that type of growth is how we think about the business.

And we can ebb and flow that investment if for whatever reason we don't think we're getting the types of returns in terms of business growth and market share that we anticipate.

Okay, perfect.

And then just a follow-up on some of the discussion around the retail versus reported.

I thought you'd earlier, and maybe I'm mistaken, but I thought you said you still saw a little bit of pricing in Q1 because of the year-over-year effect from Valentine's Day?

Was that right?

And then if you have -- if that's the case, [baking] was up 50 bps in Q1.

Should we be expecting to see a similar rate of pricing growth throughout the year or more or less?

How do you think about that?

No, you shouldn't.

Our reference to pricing, and I may have confused folks by throwing Easter in there which wasn't relevant.

Valentine was the last season that we actually got pricing on.

Most of that for us ships in the fourth quarter.

So you would have seen that pricing there.

But it scans at the retail level in the first quarter.

So we were trying to explain the difference between our 5.5% growth and about 3 points higher in retail.

We did get a little bit of pricing because some Valentine obviously does.

And we also had some promoting -- promoted items last year when we had early in the year launches from particularly our Crunch 'N Chew product around Jolly Rancher.

So there was a bit less promotion as our product launches were not effective January 1 like they were last year.

We actually launched those products late December.

You should not expect to see pricing at least based on today's plan going forward.

We're talking about it as that basically a volume year, although that could change.

Operator, we have time for one more question.

Bryan Spillane, Bank of America.

Bert, congratulations to you and to everybody else who was promoted.

It's definitely well deserved.

I just have one question, just trying to square a couple of numbers related to what you said about international.

So ex-Canada, it was up 10%.

And then China, Brazil, Mexico were combined up 20%.

I guess the export markets would have been -- were they actually down in the quarter?

Is that sort of how you go from 20% to 10%?

Yes, we had a couple of export markets that were actually -- where we actually gained distribution last year.

We had new accounts, primarily in Asian markets.

And so those we expected would be down a bit, just based on some pipeline for the last year in terms of new accounts.

And, so, we continue to think that for the year, we're still going to be in the 15% to 20% range, but the first quarter had a bit of an anomaly from that perspective.

And that was more of a year-over-year timing thing more than anything else?

That's correct.

Okay.

And then just the 20% growth in China, Brazil, and Mexico, in aggregate, just how much of it is being driven by volume growth and volume growth driven in part by distribution gain and/or trial, people using our product for the first time?

If you can give some context in terms of how much pricing -- is there any pricing in that 20%?

I'm not going to comment on the pricing.

But I would tell you that in China in particular, while we had good volume growth in Kisses, one of the things that we did last year was we turned advertising on for the Hershey brand, Hershey bars in the fourth quarter.

And so we did see some distribution gains, but more than that, we saw velocity gains in the existing distribution and China.

In Brazil, we launched a chocolate covered wafer product late last year.

Our capacity also increased because we put some capacity in place.

And so you're seeing distribution gains vis-a-vis new product growth, but most of it would be volume.

Thanks for participating in today's conference call.

Matt Miller and myself will be available for any other follow-up Q&As that you have.

Thank you.

This concludes today's conference.

You may now disconnect.