好時 (HSY) 2015 Q1 法說會逐字稿

Good morning.

My name is Steve, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Hershey Company's first-quarter 2015 results conference call.

(Operator Instructions)

Mr. Mark Pogharian, you may begin your conference.

Thank you, Steve.

Good morning, ladies and gentlemen.

Welcome to the Hershey Company's first-quarter 2015 conference call.

J.P. Bilbrey, Chairman, President and CEO, and I will provide you with an overview of results followed by a Q&A session.

Let me remind everyone listening that today's conference call may contain statements 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 2014 filed with the SEC.

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

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

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

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

The non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP, rather the Company believes the presentation of earnings excluding certain items provides additional information to investors to facilitate the comparison of past and present operations.

As a result we will discuss 2015 first-quarter results excluding net pretax charges of $9.7 million, or $0.02 per share diluted, and the gain on the sale of a trademark of $10 million, or $0.03 per share diluted.

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

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

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

While our sales and earnings performance for the quarter was mixed, I was happy with the progress that we made in key areas, particularly in the US business where operating and market place performance was in line with our expectations.

We completed the Krave acquisition towards the end of March and we begun the integration work.

We can now begin to share snacking insights related to consumer and market segmentation as well as distribution and channel opportunities.

As we stated in January and at CAGNY, we expected first-quarter sales and earnings to be pressured due to Easter timing, as seasonal net sales occurred at pre-price increase levels.

However, Q1 results were lower than we anticipated due to some unexpected softness in China.

The weakness was across the majority of the consumer packaged goods space in the China modern trade.

The acceleration of this softness in the first quarter versus Q4 was unexpected.

Chocolate was one of the few categories in China that grew in the first quarter, although less than last year.

In China, Hershey slightly outpace the category and gained market share, however, the pace of growth slowed significantly.

Mark will provide you with additional financial details, so let me give you an overview of the business.

Overall, total Company Q1 net sales, excluding the impact of unfavorable foreign exchange rates, increased 4.6% driven primarily by pricing and net benefit from acquisitions of 1.6 points.

Unfavorable foreign currency exchange rate was 1.1 headwind.

Our expectation was for adjusted earnings per share diluted to be about the same as last year, so the $1.09 that we earned was largely due to lower than expected international sales growth.

Including Easter seasonal activity in the year-ago and current period, the candy, mint and gum, or CMG category, increased 3.9% for the 12 weeks ended March 21, 2015 within the xALC+

C channels.

Gum continues to under perform.

Excluding it, the chocolate, non-chocolate and mint categories increased about 4.2%.

Excluding Easter seasonal activity in the current and year-ago period, combined growth of chocolate, non-chocolate and mints was up 3%.

Hershey first-quarter CMG retail takeaway in the xALC+

C universe was 4.6% benefiting from an earlier Easter versus last year.

We had a good Easter and believe we will gain share in this important season.

Excluding Easter seasonal sales, Hershey's everyday marketplace performance continues to improve.

Specifically, Hershey's xALC+

C COG retail takeaway for the 12 weeks ending March 21, excluding Easter seasonal sales in the current and year-ago period, increased plus 3.1%.

Perhaps the easiest way to assess performance given seasonal timing is by looking at absolute market share results.

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

All in, including the seasonal activity, Hershey first-quarter CMG market share in the xALC+

C universe increased plus 0.2 points.

US first-quarter organic net sales of nearly 3%.

Seasonal sales, roughly one-quarter of our business in the first quarter, declined year over year due to a shorter Easter season.

This was more than offset by our everyday business, which I'm pleased to say increased mid-single digits on a percentage basis versus last year.

This is slightly ahead of everyday retail takeaway of 3.1% due to the timing and shipments of second-quarter promotions and new products.

In the second quarter we believe our everyday momentum will continue with the broader rollout and launch of Ice Breakers Cool Blast Chews, Hershey's caramels, and additional Lancaster cream flavors.

Hershey's first-quarter xALC+

C chocolate retail takeaway excluding Easter was up 3.3% resulting in chocolate market share grains of 0.6 points.

Importantly, retail takeaway was solid across many of core chocolate franchises including Reese's, Hershey's, Kit Kat, Kisses and Brookside.

Switching to non-chocolate candy, or NCC, in the xALC+

C channels, Hershey's NCC business, excluding Easter in the current and year-ago periods, declined 2% as we were lacking the year ago launch of the Lancaster product line.

We anticipate that our NCC performance will be a bit better over the next couple of quarters supported by Lancaster in-store sampling events, national FSIs and some summer fun flavors of Twizzlers.

While not as large as chocolate, in NCC we continue to do well within the gum and the mint categories.

Specifically, our Q1 gum and mint retail takeaway within the xALC+

C universe was up 11% and 10.5% respectively.

As a result, our gum market share increased by 0.4 points to 5.2%.

Our mint market share increased 0.7 points, expanding our segment leading position to 40.3%.

In the C-store class of trade where the seasonal impacts are minimal, the CMG category was up 5.1% driven by pricing.

As it relates to the previously announced price increase, volume elasticity trends are tough to discern in the xALC universe given the influence of seasonal candy on shelf at pre-price increase levels.

However, conversion appears to be on track.

Total Hershey C-store performance was solid with retail takeaway up plus 4.8%.

It was driven by pricing of 9 to 10 points offset by volume elasticity of about 5%.

This is relatively in line with our modeling for this channel.

Our C-store chocolate and mint retail takeaway was particularly solid up 4.9% and 8.9% respectively.

These gains were driven by core brand advertising, in-store selling, merchandising and programming.

International results were mixed in the first quarter given greater than expected unfavorable foreign currency exchange rates and China retail softness that impacted overall grocery as well as the chocolate category growth.

Recall, during last quarter's conference call, we stated that chocolate category growth in China was about 8% and that was less than the historical 10% to 11%.

In the first quarter, chocolate category growth was 4%, again softer than we would have anticipated and less than the year-ago period.

Given the Chinese new year holiday, the first quarter is typically the biggest quarter of the year for chocolate consumption.

Some of this softness is most likely due to government policy related to gifting.

However, macro economic news indicates things have significantly slowed and this could be impacting overall consumer confidence.

This is evident when looking at Nielsen data for the broader CPG group, which was also soft.

Our chocolate retail takeaway in China was about 5% in the first quarter resulting in a market share gain of 0.1 points.

In all of the markets where we operate our goal is to ship to consumption so the consumer has a good experience related to freshness and taste.

Therefore, our China first-quarter net sales moderated and declined 47% versus a year ago.

We will continue to execute against plans with our retail partners in China to drive store traffic and in-store activity over the remainder of the year.

As a result, our China chocolate plan reflects the first quarter miss and remains relatively intact versus our initial plan.

We have made some adjustments and so we will get there.

We expect to enter some tier two cities and will increase the level of in-store sampling to drive everyday trial and repeat.

Additionally, we are beginning to get Brookside out into the market and using Golden Monkey distributor assets to help us achieve that.

Shanghai Golden Monkey integration is progressing.

In the first quarter, Golden Monkey was dilutive to our earnings; however, results will be stronger in the second half of the year supported by a solid pipeline of snack and non-chocolate candy new products.

In Mexico, first-quarter constant-currency net sales increased about 16%.

As expected, our business has sequentially improved over the last three quarters as consumers have adjusted to the VAT tax instituted last year.

Importantly, the chocolate category increased about 13%.

We estimate that Hershey retail takeaway was up about 12% driven by Hershey's Bites and a king-sized Q1 event at some selected retailers.

Over the remainder of the year we have a lot of in-store activity planned highlighting new packaging designs and pack types that we believe will generate solid net sales growth.

In Brazil, first-quarter constant-currency net sales increased about 18%.

Results benefited from an easy comp versus the year-ago period and an earlier Easter, although note that we don't have a broad Easter portfolio in Brazil as the Big Kiss offering is our primary seasonal item.

Hershey's tablet bar performance was good, and while small, Reese's is starting to grain traction in Brazil.

Despite mixed international results in the first quarter, we remain confident about plans over the remainder of the year.

We've made adjustments where necessary and have the right mix of innovation and in-store activity to achieve our objectives.

Our international growth profile, excluding Golden Monkey, is similar to prior years and driven by performance in the second half particularly in the fourth quarter.

However, foreign currency exchange rates remain volatile and over the remainder of the year the unfavorable impact on net sales is expected to be greater than our previous estimate.

Given this backdrop and first-quarter softness in China we now expect international net sales, excluding the benefit of Golden Monkey, to increase about 5% versus our previous expectation of about a 10% increase.

Now to wrap up.

Core brand merchandising, programming and innovation accelerates over the remainder of the year.

There's no change to our advertising and marketing methodology and we continue to expect that it will increase at a rate greater than net sales growth.

We believe these investments should generate full-year organic net sales growth or constant-currency sales, excluding M&A and FX impacts, of around 3.5% to 4.5% in 2015.

We expect foreign exchange rates to be greater than our previous estimates by about 0.5 a point and be about 1.5 points unfavorable in 2015.

We continue to estimate that the net contribution from acquisitions and divestitures will be around 2.5 points.

With a profitable US business on track, an increase in gross margin expansion and Golden Monkey accretion later in the year, we expect an increase in 2015 full-year adjusted earnings per shares diluted of 8% to 10% including dilution from acquisitions and divestitures of $0.03 to $0.05 per share.

Before we provide you with additional financial details, I would like to take this opportunity to welcome Patricia Little, our CFO as of March 16.

Patricia is a seasoned financial leader who knows how to create share holder value and develop talent and we believe will be a benefit to our global organization and all of our shareholders.

Thanks, J.P. I am pleased to be here and it is a privilege be part of the Hershey team, especially given the many opportunities in front of us.

I followed the consumer packaged good space as a board member at another company.

So while I'm a bit familiar with the category, I still a lot to learn over the coming months.

However, in my first few weeks on the job, it's clear that Hershey in the confectionery category are advantaged.

Our business is growing in the profitable North American market, and in our focused international markets, the category has a long runway.

I am committed to long-term value creation as is our Board of Directors and look forward to helping our Company reach its potential.

Over time, I look forward to meeting all of you and sharing what I've learned and the opportunities that continue to exist for the Hershey Company.

With that, let me turn it over to Mark, who will provide you with further information on first-quarter results.

Thank you, Patricia.

Good morning to everyone on the phone and webcast.

First-quarter net sales of $1.9 billion was up 3.5% versus the prior year.

Excluding the negative impact from foreign currency exchange rates of 1.1 point, about 0.5 a point greater than estimate net sales increased 4.6.

The fluctuation in the Canadian dollar was responsible for about half of the FX impact and the Mexican peso and Brazilian real the majority of the remainder.

As we indicated last quarter, given a shorter Easter, volume elasticity related to the US price increase and the timing of innovation, we expected consolidated net sales growth in Q1 to be around the low end of our long-term target.

However, we didn't anticipate the anomaly in China that J.P. referred to.

Pricing and net M&A was a 3.8 point and 1.6 point benefit, partially offset by volume that was a 0.8 point headwind.

Importantly, North America organic net sales excluding FX and M&A increased 3.4%, relatively in line with our expectations.

North America pricing up 4.3 points was partially offset by volume that was off 0.9 points due to elasticity related to the price increase and lower seasonal sales.

International and other segment net sales increased 8.5% driven by the Golden Monkey acquisition, a 13.3 point benefit, while FX was at 4.8 point headwind.

International and other segment organic net sales were about the same as last year.

As we stated in January, first-quarter EPS would be pressured, our expectation was for adjusted EPS to be about the same as last year due to seasonal product sales that occurred at pre-price increase level and our plan for higher SM&A expenses.

However, we did not anticipate the lower levels of growth in China within the biggest cities and hypermarkets.

This impacted chocolate category growth in the quarter as well as some of our decisions related to Golden Monkey go-to-market strategies.

Hence, adjusted EPS diluted of $1.09, down about 5% versus last year, was off versus our plan, primarily due to China chocolate sales and Golden Monkey dilution.

Turning now to margins, in the first quarter, adjusted gross margin increased 10 basis points driven by supply chain productivity and cost savings initiatives as well as the net price realization, which more than offset higher input costs.

Earlier this month we implemented select input cost strategies that we believe will enable gross margin to increase 155 to 165 basis points for the full year.

Adjusted EBIT in the first quarter declined 5.6% versus last year resulting in adjusted EBIT margin of 20.3%.

The decline was driven by a higher SM&A expenses that increased 12.3% versus last year.

Looking at a couple of the pieces, advertising and related consumer marketing expense increased about 8%.

Selling, marketing and administrative expenses excluding advertising and related consumer marketing increased about 15%.

This increase reflects the addition of Golden Monkey, investments in road-to-market capabilities in the US and the international markets as well as knowledge-based consumer insights.

Let me now provide you with a brief update on the international business.

Similar to prior years, our expectation entering 2015 was for international net sales growth would be back-half weighted.

We still believe that will be the case given our plans were advertising, merchandising, programming in new products.

Q1 international net sales increased 8.8%.

Note that this excludes global retail and licensing results, which was relatively in line with expectations.

Looking at our focus markets we believe China chocolate category softness was impacted by consumer confidence given all the negative headlines you have all seen like slowing GDP growth.

Although we were encouraged that March and Nielsen data showed an acceleration in category growth versus January and February.

Over the remainder of the year we expect net sales growth in China to sequentially improve although it will be driven by performance in the second half of the year.

We have adjusted our China plans to generate greater in-store activity, support faster growth in the hypermarkets.

We will be entering some tier two cities and we have plans to increase our exposure in the fast growing e-commerce channel.

On a constant-currency basis net sales in Mexico and Brazil increased mid teens on a percentage basis versus last year do to easier comps.

Recall that at the beginning of 2014 we had the headwind of the VAT tax enactment in Mexico and volume elasticity related to the price increase in Brazil.

We expect Mexico and Brazil performance to be better than last year; however, we expect the real and pesos to remain volatile be a major headwind related to reported net sales.

Moving down the P&L, first-quarter interest expense of $19.2 million declined $2.2 million versus last year.

For the full year we continue expect interest expense to be in the $75 million to $80 million range.

The adjusted tax rate for the first quarter was 35%, in line with our estimate.

For the full year we expect the adjusted net tax rate to be slightly lower than the year ago rate of 34.5%.

This is a little different from our initial analysis and guidance that the full-year adjusted tax rate would be about the same as last year.

For the first quarter of 2015, weighted average shares outstanding on a diluted basis were approximately 222.7 million a 1.9% decline compared to last year.

Turning now to the balance sheet and cash flow.

At the end of the first quarter, net trading capital increased versus last year's first quarter by $69.2 million.

Accounts receivable was lower by $13.8 million and remains extremely current.

Inventory was higher by $67 million and accounts payable declined by $16 million.

The net increase in trading capital was driven by acquisitions.

Excluding net acquisitions and divestitures net capital trading capital increased $7 million.

In terms of other specific cash flow items, total capital additions including software were $62.7 million in the first quarter.

For the year we expect total capital expenditures to be about $375 million to $400 million including capital related to the Johor, Malaysia project of about $110 million.

Excluding this project, CapEx is about $275 million or about 3.5% of net sales.

Depreciation and amortization was $58.3 million in the first quarter, in line with our estimate.

During the first quarter dividends paid were $114 million.

The Company repurchased $173 million of outstanding shares in the first quarter against the February 2014 authorization, which is now complete.

No shares have been purchased against the $250 million authorization approved in February 2015.

This authorization is in addition to the Company's policy of repurchasing shares in the open market related to issues in connection with stock option exercises.

In the first quarter, the Company repurchased $134 million of common shares to replace shares issued in connection with exercise of stock options.

Cash and short-term investments at the end of the first quarter were up $405 million.

As J.P. summarized, in 2015 we have a solid pipeline of innovation, merchandising and programming.

In addition, marketing expense is expected to increase at a rate greater than net sales growth.

As a result, we expect 2015 net sales to increase 4.5% to 5%, including a net contribution from acquisitions and divestitures of 2.5 points and the negative impact of foreign currency exchange rates of about 1.5 points.

Excluding these items, organic net sales are expected to increase 3.5% to 4.5% versus our previous 4% to 6%.

While we remain confident in our business plans, a narrowing of the sales range reflects the global macro economic challenges that continue to persist.

The decline of the lower end of the range by 0.5 a point primarily reflects the first quarter China under performance.

We continue to have a significant focus on gross margin and expect that the previously announced price increasing as well as productivity and cost savings to result in gross margin expansion of 155 to 165 basis point.

Combined with a slightly lower net tax rate and Golden Monkey accretion in the second half of the year, adjusted earnings per share diluted is expected to increase 8% to 10%.

Before we open it up to Q&A, just a couple of thoughts on the second quarter.

We have plans to generate solid gross margin expansion over the remaining quarters.

However, the second quarter is typically our smallest quarter as it relates to overall net sales and our international sales profile is similar to prior years with annual growth primarily driven by fourth-quarter performance.

Additionally, Golden Monkey will be dilutive in the second quarter before ramping up in the second half of the year.

While small, Krave margins are lower than the Company average and it will also contribute to the increase in total consolidated SM&A expense in the second quarter.

Therefore, second-quarter net sales, including M&A and FX, is expected to be at near the low end of our full-year sales target of 4.5% to 5.5% before accelerating in the second half of the year.

Given all these moving parts, we expect second-quarter EPS diluted growth to be pressured and around the same as last year.

Thank you for your time this morning.

We will now take any questions that you may have.

(Operator Instructions)

Andrew Lazar, Barclays.

If the more sizable part of the top-line weakness in the quarter as you talked about was international and SGM, I just want to make sure that I am clear on why the fully organic sales target is coming down?

Is it just the organic piece of the international, particularly China, that you talked about, or is there some North America angle to that as well?

I just want to make sure that is not changed?

It is the China flow-through the first quarter, Andrew -- this is, Bert -- that you are seeing.

The US business, as J.P. mentioned, is off to a good start and is forecasted to be, as we anticipated, earlier in the year.

Okay.

Then, despite -- this is for you, Bert -- the sales weakness in SGM, you talk about still looking for the same full-year contribution from acquisitions?

You only have, I think, maybe two quarters left to make up that first quarter weakness in SGM, because I think you start lapping it in the fourth quarter, if I am not mistaken.

I'm just trying to get a sense of what gives the comfort level there that the acquisition contribution can still be the same despite the first quarter?

Yes, that's correct.

Last year we had two months, if you recall, from Golden Monkey in the fourth quarter.

As we start off the year, we had a similar pattern as we did in the chocolate business.

We were lower in terms of the Chinese new year.

What we have in Golden Monkey, which is different than the regular chocolate business, is we have a part of the business which is not so seasonal, which is the bean curd business.

We also have a lot of innovation, which kicks in after new year, and that's been a typical pattern where we have distributor meetings early in the second quarter for that innovation.

There's a very strong innovation pipeline for that.

Our expectation is that we will be on target for that accretion during the full year and that that will come in the back half.

The other small acquisitions and divestitures, whether it be Mauna Loa or Krave, offset each other.

Thank you.

Bryan Spillane, Bank of America.

Just a follow up to Andrew's question.

I just want to make sure I caught all these pieces.

In the first quarter, the down side relative to your internal plans was really the, partly at least, the more dilution from Shanghai Golden Monkey, but for the full year you are expecting the dilution to be similar or the same in terms of what you thought it was going to be at the beginning of the year.

But it sounds like you are going to spend more money for some of this in-market activity to try to boost sales, so I'm just trying to piece those pieces to gather.

Why it wouldn't be more dilutive if you're having to spend more money to drive sales, especially since it was more dilutive than you thought in the first quarter?

Am I thinking about that correctly?

Partially, not exactly.

Let me explain.

We'd always said Shanghai Golden Monkey would be slightly accretive to the year and all we are trying to do is reconfirm that despite a slower start attributable to new year.

We did have, obviously, lower operating income in the rest of the China business due for the same reason, that we had a slower start.

What we're saying, in this case, is that the Shanghai Golden Monkey's slight accretion to the year remains intact based on the activity programs that we have in place.

In terms of higher spending, we are not projecting higher spending in the international business in terms of getting back to our targets for the year.

We are also, given the magnitude of the China sales miss, we are not projecting that we can make up that sales miss, which is part of what Mark explained on the call, down on the lower end.

We do have higher year-on-year costs in the sales force.

That is our program as we actively go into more cities.

And we did still have advertising in the first quarter during Chinese new year although it certainly wasn't as effective as we thought it would be.

And those comments are related to the China chocolate business, Bryan, so not only did you have the SGM dilution, you had all of the investment we made in the China chocolate business throughout 2014 that happened, perhaps, in the back half that will be in the base the first half this year.

Okay.

Like in sales force, et cetera.

Just one last follow up to that.

It sounds like, in terms of when you built this plan in October or November versus where we are today, Chinese new year was weaker than expected and a lot of this is more macro.

It's not just specific to Hershey.

As you go forward, in terms of, as you have done the planning going forward, has it Incorporated that maybe the macro environment is not as strong as it was when you initially planned 2015 or is the expectation that it is the same?

I am just trying to understand how it accounts for what seems like just a slower growth generally in China?

We had taken that into account.

As we looked at the -- to your point, as we developed the plan last year and we said, during the January call, that we expected Chinese growth to be approximately the 30% that we grew in 2014.

While we were seeing some slow down, let's call it in December, we weren't planning for as poor a performance.

We know, we think there's a lot of this is cyclical based on what you are hearing in GDP, consumer confidence, things that were already mentioned.

We don't think it is as much structural.

In fact, some of the structural changes we think actually help us in a long run, things like urbanization as well as more of a consumer economy, which is what the government's pushing.

But no, we have lowered, certainly, the overall year expectations.

We'd said we would be somewhere around 30% and that the category would be below the double digits.

We certainly lowered that to high-single digits.

Still think we can do 2 to 3 times the category growth rate, but we certainly lowered that overall year expectation, not trying to make up for the first quarter.

Let me just add one other comment that is really important for the perspective of our Company in China is we continue to be in a brand-building and a portfolio-expansion mode.

Shanghai Golden Monkey is, of course, critical for the distribution build of that.

We believe we have the right brands, the right growth plan.

Markets will moderate, as we're certainly seeing right now, over time, but on a long-term basis we continue to believe our model is a good model.

Obviously, volume is a magic elixir on some of the things, so you also have to manage pace in investment along with that.

But we really believe that we have the right plans in place and over time will continue to grow in China, mainly around distribution and portfolio expansion for the near term, anyway.

Thank you.

Ken Goldman, JPMorgan.

I had a question for Patricia, if I could?

First, welcome to the food industry.

I am curious, and I realize it's still early days, is there anything you are seeing that you might consider low-hanging fruit you would like to pick?

I don't know whether that is in the balance sheets or M&A strategy, really anything.

Is there something you're looking at and saying, you know what, we can and should be doing this differently?

Thanks for the question.

I don't think it is so much that I am going to come in with those kinds of answers.

What I've seen is a leadership team here whose really focused on all of those things, on the M&A, on the cost leverage, on how they manage the brands, on how they focus on growth, both in North America and the key focus markets.

I view my job as to be really a catalyst to help that team bring all of their great ideas to fruition.

I wouldn't say that there is low-hanging fruit that I've come in to see.

What I see is a group that is working on all of those very actively.

Okay.

This is a question, just one more for anyone really.

You are one of the first food companies to report since the Kraft/Heinz deal.

I recognize you've already made significant improvements to your cost base over the years.

I appreciate your more of a growth company than either Kraft or Heinz.

I guess when you read about some of the massive margin improvements 3G is able to implement, I guess on some level do you think to yourself, boy, maybe there's a lot more we can do then what we are currently planning on?

Or do you say this is our plan, we need to balance top-line growth with margins and so forth?

I'm just curious how you react to what seems to be a continued trend here in food?

I think as you rightly point out, we're very focused on growth.

We've investing in our business in both new geographies and I think very importantly in capabilities.

So I can't specifically talk about 3G.

What I do think is very important and as I mentioned on the last call and at CAGNY, we're really looking at how we evolve our business model, how we allocate and reallocate resources against what we believe are opportunities.

You've heard us talk about knowledge and insights.

We continue to believe that's really important and we're investing in different skill sets there than we have.

And so we have to be mindful of the pace of our business.

We have to make sure that the volume continues to be the elixir that makes all things affordable, so you should expect us to continue to take a hard look at the leverage we have against our P&L.

You'll hear us talk of bit more about that.

We're doing a lot of work in that area, but I think for our Company we strongly believe that there has to be an ongoing balance between brand building and P&L leverage that obviously takes costs as one of the key levers but we want to make sure that we maintain the right balance and focus on all of those things.

Great.

Thank you very much.

John Baumgartner, Wells Fargo.

John, as you look to your cost aster here, gross margins are tracking a bit more favorably relative to your last update.

With that tailwind going for you now, do you find that you are still needing to reinvest the incremental benefit in sales force or marketing?

Or, have you reached a position where your SG&A budget is more or less fixed and those costs can flow through more to profit going forward?

I think that there's a couple of things that you are probably seeing and as we raised our gross margin outlook, part of that is around commodities and input costs.

As I said, we want to make sure that we continue to look at the levers that we've put in place.

Yes, we've invested in our selling capabilities and we want to continue to invest in our brands.

Some of that's in our international markets, but it's also, importantly, in our US markets as well, where we get the right C-store level of coverage, where we get the right frequency in stores so that we can win in merchandising.

As we look at our overall business model, we think we've got the right approach.

To make sure that you continue to be reassured that we are mindful about what we can afford and not afford, obviously, we want to make sure that we continue to grow into those investments at the appropriate place.

But I think over the long term, again, we're really committed to our business model.

We also feel good about the markets that we are in.

We think we're in the right markets long term, and we'll have to weather some of the volatility of the short-term up and downs.

We're in this business to stay.

We've been here a long time, and we plan to be here even longer.

Thanks John.

Eric Katzman, Deutsche Bank.

A couple of questions, I guess following up.

Should we read this select input cost strategies as a one time in nature?

Did you just favorably lock-in some hedges or something that makes the gross margin improvements locked in for this year?

I think, Eric, as you know, we look at what we believe are the right strategies to protect our brand investment and our pricing in our brands.

I would just reiterate that we can be anywhere between 3 and 24 months hedged on some of our key commodities.

Certainly cocoa has been volatile, so we've looked for opportunities to price when we think it's a good value.

Then, the entire industry is getting some benefit out of dairy.

While I'm not trying to predict where dairy goes, it feels as though it's in a direction which could benefit.

If you look at a lot of the tree nuts and so forth, those are going up, largely.

And so again we try to look at the overall commodity basket.

We feel pretty good about how we've been able to take a forward view to protect our current plans.

Okay.

Thanks for that.

And then just talking about the US business overall, as I've been traveling around, again it's not a scientific sample, but it just seems like there's more promotion in the market.

I see BOGOs.

It seems like a lot of the pegboard and many products that had been introduced in the past years are on sale a lot.

I think, J.P., you've mentioned in the past, seen more snack-based competition.

Can you just talk a little bit about what you are seeing in market and are those observations a fair appraisal?

Eric, I think what we would say is that across snacking we are seeing that there is a lot of activity out there.

If you look at the overall snacking wheel in the share performance, you can see that there's been some moderation there with the exception that CMG is returning more to a historical performance base.

You see meat snacks, which continues to perform really well.

Obviously, we're encouraged by Krave.

I think we're in an era where this snacking continuum and the occasions of snacking are broadening and therefore consumer choice is greater.

So, we have to work hard at making sure that at the point of sale our brands are winning in terms of merchandising etc.

I tell you the one thing that, as I personally have a takeaway from the first quarter that I feel better about than anything else we probably could talk about on this call, is that we have seen a strengthening in our everyday business.

If you take Easter out and all of the previous quarters and all and you just look at what is the health of the every day business?

We're doing -- our everyday brands are up and importantly, that's always a measure of advertising effectiveness.

The combination of advertising working for us and seeing our everyday business improving outside of that environment, that is a very, very healthy sign.

For me, that is the thing I feel best about in the entire first quarter.

Thanks.

I'll pass it on.

David Driscoll, Citi Research.

I wanted to follow up on two points.

The first one, on Ken's question regarding the cost structure of the Company.

J.P., I think you indicated in the release here that SG&A investment excluding the acquisitions was up about 10%.

I think over the years you guys have really been adding to quote-unquote capabilities within that line.

The question here is, is all of that 10% increased focused on these emerging market opportunities or how much of it is really focused on the US?

Then, how do you think about that in light of Kraft/Heinz and ZBB and all of this commentary regarding the US marketplace where it seems as if folks are really taking costs out of their US operations, not putting them in?

David, first of all, a couple of things.

I would tell you that as a consumer insight driven company, a brand building company, we are going to always be focused on growth and growing our brands.

Cost is a lever, and it's an important one.

Look, if we could all capture synergies in our business via acquisitions and add-ons and making sure that we have got P&L leverage, we absolutely have to be focused against that, because the investments that we make have to pay for themselves.

First and foremost, we have a business model that we want to pursue.

Yes, I think there's some very good reminders in the marketplace that suggest that, listen, you've got to make sure you're not getting fat, but you also have to make sure that along the way to not getting fat you are allocating resources in a way that you can win in the marketplace on a going basis.

So that is important.

If I come back to the first part of your question, we're balancing those investments both internationally and in the US.

We've proven over and over again that the passion of our sales organization, our feet on the street, represent us better than any other choice we could make.

I've also seen some evidence in the marketplace where some other companies are coming to that conclusion as well.

For our Company, we continue to be focused against those investments.

The only way we can grow our brands in these new markets is to forward invest in the capabilities that make them broadly available to consumers, and we'll continue to do that.

But we'll do that in the most effective and efficient way we possibly can.

Okay.

Just a follow up on international.

I think what you guys wrote is that Mexico, Brazil and India were up 15% and that was in line with your expectation, so that seems to be tracking.

Then, all of this international stuff is related to China.

That's where the shortfall is.

Hopefully, I have a correct.

The question here is, 47%, of course every time you read a number like that on a Company like this, you do a double take to make sure that you didn't misread it.

I think the takeaway here, but this is the question, is the 47% decline in the China business, it's an inventory adjustment essentially, so that in 4Q you had massive shipments of product to retail anticipating something like a 30% growth in the first quarter in China.

First-quarter China retail, I think, you guys said was 5% for Hershey products and hence that requires a massive change in the shipment pattern in Q1.

Bert, am I putting all this together right?

To your first point, it is largely China.

There were some other small bits.

There were a couple of our export markets where the dollar is making the product quite expensive.

Example could be an export market like Japan, obviously, which they're actually in quantitative easing, so their currency is going the other way.

There were a few other markets and certainly our export business was impacted, but it was largely a China story in the scheme of things.

You are quite right.

As we anticipated the growth in the first quarter for Chinese new year and didn't see that coming along, we obviously shipped less into the marketplace.

J.P. mentioned earlier in his remarks, we try to ship to where the consumption pattern is.

We don't expect that will be made up in the rest of the year, so we've adjusted down our growth, although we think the rest of our year should be more normalized than what we saw during the Chinese new year.

Okay, then short version here is, is you do the big catch up in the first quarter to get the distribution inventories on track.

And then the remaining three quarters are negatively impacted by a fundamental view that the China growth rate is lower than what you had previously thought.

Is that the right summation?

I think that's correct.

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

Okay.

I'll pass along.

Thank you.

Jonathan Feeney, Athlos Research.

Following up more directly with David here.

If China was down, ex Shanghai Golden Monkey, 47% on 5% takeaway, what were you hoping China was going to do in the first quarter and maybe for the year, approximately by how much did you lower that internal forecast?

We don't talk about quarters.

We did say in the first-quarter call that we expected the China business to grow around that 30% that we grew last year.

I think last year we were up 34%, and so we expected similar growth.

I'll just reiterate, that would translate into a category in the low double digits.

We've lowered that to the high single digits reflecting the first quarter miss.

Got you.

Makes a lot of sense, Bert, thanks.

Of that growth, how much of that is channel penetration of the former Shanghai Golden Monkey -- enabled by the Shanghai Golden Monkey acquisition?

If you can, can you tell us, you looked at the 13.3% impact, I assume that is from Shanghai Golden Monkey, I assume that's this year sales?

Can you tell us what apples to apples, if it is possible, the Shanghai Golden Monkey business is trending?

On the first part of your question, the synergy aspect of Golden Monkey, we are in the very early stages of that, so there's very little of that.

The reason for that is -- as we plan for those synergies, let's take an example, chocolate products through Golden Monkey sales force, we are still in the process of designing different pack types, different price points, which are more appropriate for those markets.

So there's not a lot of miss that's accounted for by not penetrating Hershey products to Golden Monkey.

On a year-over-year basis we haven't given that type of information, but Golden Monkey certainly had a similar impact in the first quarter as you would have seen in our chocolate business based on the same lower new year.

Got you.

Okay.

Thank you.

Do you continue to expect that -- or do you expect that that cross-selling opportunity, once you get to the appropriate pack sizes, remains to be significant?

Very much, it's all incremental to what their business model has been all along.

A lot of that will come toward the end of the year as we design these pack types and we start to launch into the next wave of Chinese new year, if you will, which comes later in the year.

We're fairly confident that we have the right products.

We have to reconfigure them, and they certainly have the capability to get them into lower-tier cities and traditional trade.

Thanks.

I'd just ask one last question.

In the first quarter, clearly, you had it looked like some pretty good North American performance, at least as far as the everyday business and overall.

It seems as if gross margin would have outperformed your expectations were it not for the impact of international.

Can you give us a sense?

You raised the full year's gross margins, so can you give us a sense how much maybe mix or performance in these national business affects gross margin versus if it were just say in -- that extra growth in international you were expecting, affects the consolidated gross margin versus if it where say just the North American business experiencing that 4% plus pricing and modest decline?

Thanks.

John, I guess the way I would thing about it, don't forget that seasonal was about 25% to 30% of our overall North America sales.

That's why it's not up as much as you would maybe have anticipated.

Again, when you go to some of these international markets, the absolute level of gross margin in China for example, would've been down year over year when you think about the 5% takeaway and perhaps how we think about trade there to make sure it all gets out eventually at the end of the day.

So that was a little bit of a drag at the gross margin on the international side.

Okay.

Great.

Thank you very much.

Ken Zaslow, Bank of Montreal.

Two follow ups, one is, I think this is what you said is, but the incremental gross margin expansion for your guidance is entirely related to the commodity environment or is it anything operational you are doing to increase that?

I didn't get that full answer.

I think what I said is, is that a meaningful piece is really related to the commodity improvement on our input costs and our outlook there.

You also have the benefit of mix as you get through the year with the pricing that really begins to show up in the US business as well.

So you've got a combination of things that are helping us there.

Then as the US business continues to perform well, there's always a positive mix effect that happens there for us, and I made some commentary around the everyday business on one of the earlier questions.

I think you've got several factors.

Ken, there's no change -- if you think about the initial 135 to 145 bps, it's all about the pricing.

The incremental 20 basis point increase is related to the commodity strategy.

Okay.

Great.

My second question is, tier two cities, when you think of them in China, does the long-term growth opportunity as well as margin opportunity compared to tier one cities, or are they significantly lower?

How do they scale up over time?

No, they're, from a margin perspective, they are very comparable.

There are some slight benefits, as an example, advertising rates are a bit lower as you spread into lower tier cities.

But there's no penalty in terms of pricing as you go into tier two and to tier three.

The further down you go, obviously, the pack types change and there's more traditional trade as part of the mix, but that doesn't cause a margin penalty.

The other comment I would just make to that, and I come back again to the long-term perspective, the category growth in China in brand building is still the biggest story and what happens with their pace of urbanization.

Obviously, everybody wants to participate in that.

At the same time, you have a large disbursement of people.

That's why we feel good about the acquisition of Shanghai Golden Monkey and the ability, then, to put both of the brands of the two entities across our entire distribution chain.

What would make you more -- for 2016, what would create -- Chinese growth to be restored to last year's growth level in, say, 2016, what would you need to see that would change that would make you think that 2016 could compare to 2014 in growth?

We haven't started to talk about 2016 yet.

I think that's a little premature.

What I mentioned earlier is that, certainly, what we see in China today, feels more cyclical in terms of what is going on with GDP, what's going on with consumer sentiment.

You've seen the government react to some degree, last weekend, I think, the Central Bank lowered reserve rates in order to put more monies into the economy, particularly for small business.

I think the structural changes favor CPG categories in terms of organization, which J.P. mentioned, as well as a more consumer-oriented economy versus export.

So I do think you're going to see that evolution where structural, I think, helps us.

Then the cyclical right now, we'll all have to hold hands and see how soon that gets resolved, but I do think that is more cyclical than structural.

Great, I appreciate it.

Thank you.

Operator, we have time for one more question.

We want to be respectful of other peers that are reporting today.

Alexia Howard.

Can I ask about the everyday items?

You mentioned that you were encouraged about how that was trending.

Could you give us some numbers around that, about the progression there, maybe first-half last year, second-half last year?

Then, what you've seen this latest quarter and what do you think is driving that?

Are you seeing better traffic in the stores?

You mentioned advertising effectiveness was another piece of it.

Thank you, and I'll pass it on.

Alexia, the thing that I would point to and I'll try to give you a couple of things here.

If you look at the quarter, Reese's was up about 0.9 of a point, Hershey's up 2.4%, Kit Kat was up 3.6%, Kisses up over 9%, and Brookside was a big number and because it is a new brand it may not be meaningful to talk about it, but it was a big number.

For me, the fact that the everyday business ex Easter was healthy, and so all of our core brands grew.

That's the piece that I was feeling so good about.

The first quarter last year was -- so some of the comparables in terms of the total CMG may be a little bit harder to look at.

The first quarter of 2014 last year, I think, was up 4.6% or so.

A lot of that was driven by non-chocolate products with Lancaster and some big Twizzlers type promotions.

So, if you really isolate our biggest brands and those core brands and look at their performance, that really shows you.

Remember, we talked about we were going to try to be very focused against merchandising against our core and big brands, making sure they were available to consumers.

That appears to be working for us.

To answer your trips question, Alexia.

I would say it looks pretty -- the trips in by channels, I think our performance in category performance looks pretty similar to last year where C-store dollar in one of the largest retailers in the country continue to really shine.

Alexia, I would make one other point, just broadly, as I have been out and about talking to retailers and have listened to other manufacturers is, people are saying that they believe the basket is more constructive than they have seen for a while, so that strengthening of the basket is also probably a really good sign for the overall industry.

That's in North American comment as well.

Great, thank you very much.

I will pop it back to you.

Thank you.

Thank you very much for your time today.

I'll be available for any follow-up questions that any of you have.

Thank you.

This concludes today's conference call.

You may now disconnect.