好時 (HSY) 2016 Q1 法說會逐字稿

Good morning, everyone, and welcome to The Hershey Company's first-quarter 2016 results conference call.

My name is Lindy, and I'll be your conference operator today.

(Operator Instructions)

Please note, this call may be recorded.

Thank you, Mr. Mark Pogharian, you may begin your conference.

Thank you, Lindy.

Good morning, ladies and gentlemen.

Welcome to the Hershey's Company's first-quarter 2016 conference call.

J.P. Bilbrey, Chairman, President and CEO; and Patricia Little, Senior Vice President and CFO will provide you with a review of results, which will then be 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 2015 filed with the SEC.

If you've 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 within GAAP.

Within the notes section of the press release, we have provided adjusted or 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 the 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 first-quarter results excluding net pretax charges of $27.8 million or $0.04 per share diluted, which are primarily related to derivative mark-to-market losses and business realignment charges.

Both of these are defined in the appendix of this morning's earnings release, which is available on our website at www.thehersheycompany.com.

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

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

Thanks, Mark.

In North America, adjusting for the shorter Easter, we were pleased with our seasonal performance; however, non-seasonal candy, mint and gum or CMG business was below expectation.

The non-seasonal softness was more than offset by the timing of some merchandising and programming net sales that occurred in the first quarter that were initially expected to ship in the second quarter, netting to on plan net sales delivery in North America.

Most of you are aware of the soft retail takeaway performance across most of the CPG sector in the first quarter, especially in February.

Easter timing, and the current and the year ago period makes it difficult to properly discern the current non-seasonal or everyday candy trends.

As a result, our full-year net sales forecast reflects a tempering of non-seasonal everyday candy net sales growth.

As I'll discuss in a bit, North America CMG investments including new products, advertising, and increased levels of merchandising and display accelerates in the second quarter, and over the remainder of the year.

Given the quality and level of these investments, there could be upside to our outlook.

In the first quarter, we are pleased with the gains we're making in Mexico and Brazil.

As expected, China net sales declined in the first quarter, and more about this in a minute.

In January, I told you that we continue to look at our total cost structure.

Building on that, today we announced that we increased our annual savings target from continuous improvement and productivity programs from about $50 million to $70 million per year to $100 million per year, for the three years beginning in 2017.

Using the midpoint of the historical target, the incremental $120 million in savings results in a three-year $300 million initiative that should enable the Company to continue to invest in its brands, while also delivering on its earnings objectives.

We're off to a good start, and expect that we'll exceed our initial 2016 productivity and savings target by $10 million to $15 million.

Program savings will be generated from cost optimization across all segments of the business.

Our focus on the cost structure enabled us to exceed our first-quarter earnings expectations, and deliver EPS growth versus the year ago period.

This morning, we also announced that we're building on our better-for-you snacks portfolio expansion strategy with the purchase of the barkTHINS snacking chocolate line.

Since its launch in 2013, barkTHINS has quickly become a favorite snack brand due to its commitment to using simple ingredients, fair trade cocoa and non-GMO certification.

BarkTHINS is a very attractive and uniquely crafted brand that essentially created the chocolate thins category, a new form of chocolate snacking.

We look forward to building barkTHINS by leveraging Hershey scale at retail.

This acquisition builds on our snack strategy, and complements our strong core confectionery portfolio, the heart of our Company.

And it adds strength and diversification to our offerings that allows Hershey to satisfy more consumer needs.

In the current environment, customers and consumers may seem increasingly focused on other snack categories, but the $25 billion CMG category is the largest segment of the $85 billion US snacks market.

Customers and consumers, especially high income consumers, are increasingly looking for snacking alternatives.

However, confectionery remains one of the top selling snacking categories, with household penetration of 94%.

So as you would expect, the majority of our time, efforts, and investments are focused on the CMG category.

For example, we've done some extensive R&D and consumer market research over the last year that will result in a meaningful new product launch by year end.

And the barkTHINS acquisition will give us a chocolate snacking platform, or as we like to call it, snackfection to build upon.

We are focused on organic innovation and growth, as well as acquisitions that meet the needs of the candy loyalist, CMG's variety-seeking consumers who like to try new things, and consumers looking for better-for-you reassurance.

Looking at US marketplace performance, Nielsen retail takeaway for the 12 weeks ended March 26, 2016 benefits from an early Easter.

Recall, Easter was March 27 in 2016 and April 5 in 2015.

As a result, CMG category growth was 8.7% for the 12 weeks ended March 26, 2016 within the [xAOC+ C] channels.

Hershey's first quarter CMG retail takeaway in the xAOC+ C universe increased 8.2%.

Market share performance was in line with our expectations.

Importantly, chocolate market share increased 0.1 point in Q1.

However, this was offset by non-chocolate candy performance.

As a reminder, the April Nielsen data will be impacted by the timing of Easter in the year ago period, therefore CMG and Hershey performance for the April year-to-date will be less than Q1.

Let me now build on my earlier comments, and give you some details on our brand and in-store activity over the remainder of the year.

Where we have already made investments, results have been solid.

Specifically, Reese's market share is up 0.4 point in 2016, driven by new and refreshed television and digital marketing campaigns.

Other brands that we're investing in include Kit Kat, where we launched a Big Kat Kit Kat candy bar that is now available.

And look for some interesting millennial targeted creative TV and digital campaigns using a Big Kat, literally starting the streets of New York.

The Reese's Snack Mix and Hershey Snack Bites instant consumable items are off to a fast start, with industry-leading innovation velocities.

They're highly incremental to our base business, and we're following it up with take-home canisters.

And we're also excited about some of the big in-store programming events such as our classic S'mores promotion, our new Team USA Summer Olympic sponsorship, and Hershey's cross category in-store events, which leverages our mega brand strategy.

In the second half of the year, we'll also begin to communicate our simple ingredients message that will focus on Hershey Bars and Kisses milk chocolate.

And we also continue to gain share in gum, with our category-leading Icebreakers brand.

We've added additional capacity to meet demand, and we'll be supporting it with a new advertising campaign in Q2.

This is just a brief summary of some of the strong activity we have in North America that will grow the business in the rest of the year.

Now for an update on our international business.

Net sales were in line with our plan.

Excluding China, where we knew sales would be down year-over-year as we lapped the slowdown that occurred after the 2015 Chinese New Year sell-in and the discontinued India oil business, constant currency net sales increased about 3.6%.

I was pleased with Mexico and Brazil, where constant currency first quarter net sales increased 4.2% and 9.6%, respectively.

And in both markets chocolate category growth was in the high single-digits.

In Mexico, we're optimizing mix to focus on global chocolate brands, and building on our sigma relationship to accelerate coverage and share in the traditional trade.

In Brazil, we're continuing to focus on the Hershey mega brand milk chocolate tablet bars, Cookies 'n Cream and the Mais wafer product.

Constant currency net sales in India declined versus the year ago period due to the discontinuance of the edible oil business.

The media-invested brands Jolly Rancher, Sofit, and Hershey syrup where we are focusing our efforts and investments, both all increased double-digits.

As we enter the second quarter, a new chapter for Hershey's business in China begins, as we've merged the two teams into one united organization.

Our initial plans impact some of our people and functions where there is some overlap.

Savings here are not material at this point, but we're working towards balancing our business model in China versus our opportunities.

Importantly in 2016, Golden Monkey got off to a good start, with the net sales below last year, but in line with our plans and expectations.

Most of these sales were made to quality distributors who paid cash on delivery.

We are executing against our plans to bring variety, news, and excitement to the Golden and [Munchy] Monkey candy and snacks business.

Confectionery information is focus on milk candies targeting young families, the better-for me-segment, and Chinese classics, while protein-based snacks is concentrated on additional bean curd flavors, and the introduction of a vegan and soy sausage.

China chocolate category sales in Q1 declined about 10%, the low end our forecasted range.

Given the slow start to the year, we adjusted our outlook for the year, but still expect double-digit net sales growth in 2016, as we lap the trade funds that were necessary in the second and third quarters of 2015.

Additionally, over the remainder of the year, we'll be focused on establishing our new [Haushu other] brand message to reengage Hershey's and Kisses consumers.

This is tied into a fully integrated campaign, including TV advertising, digital communications, and in-store merchandising that will bring the brands to life.

While small, our e-commerce business in China continues to do well.

In the first quarter, our e-commerce retail takeaway increased by 45%, driven by Chinese New Year gifting sales.

We continue to outpace the category, and have a plus10% share of the e-commerce chocolate market.

Over the long-term, we expect global economies and category trends to improve, and that the investments in our international business to contribute about 1 point to our overall long-term sales target.

Now to wrap up.

From time to time, there are different confluences in the marketplace that can impact snacks and CMG growth.

Hershey has always navigated and invested in its core CMG business throughout these cycles, and has always ended up in a more solid position.

We are a consumer-centric brand-building Company focus on innovation and growth in every category where we participate especially confectionery, and we want to satisfy the needs of our retail customers, and new and existing consumers.

We take a long-term focus, and continue to believe that investing in our business will benefit the Company this year, and well into the future.

I'll now turn it over to Patricia, who will provide you with details on our financial results.

Thank you, J.P. Good morning to everyone on the phone, and on the webcast.

First quarter net sales of $1.83 billion declined 5.6% versus last year, relatively in line with our forecast, although partially due to the timing that J.P. referred to.

Our adjusted earnings per share diluted came in at $1.10, an increase of about 1% versus last year, due to greater than expected productivity and cost savings versus our January estimates.

Excluding the negative impact from foreign currency exchange rates of 1.2 points, net sales declined 4.4%, and was relatively in line with our forecast.

Price realization on seasonal CMG products was more than offset by increased levels of direct trade, resulting in a net price realization headwind of 50 basis points.

Volume was off 4.3 points, due to a shorter Easter season, and planned lower sales in China.

Net acquisitions and divestitures were a 40 basis point benefit.

By segment, first quarter North America net sales declined 4.3% versus last year, due primarily to the shorter Easter season.

Excluding the 40 basis point impact of unfavorable foreign exchange rates in Canada, North America net sales decreased 3.9% versus the year ago period.

Volume was off 3.7 points, and the list price increase on seasonal CMG products was more than offset by increased levels of direct trade, resulting in a net price realization headwind of 70 basis points.

As we mentioned in January, the direct trade was primarily related to programs in the marketplace.

However, the aforementioned softness of everyday non-promoted items resulted in greater than expected unfavorable price mix.

The combined Allan Candy and Krave acquisitions, as well as the Mauna Loa divestiture were a 50 basis point benefit.

Total international and other segment net sales for the first quarter declined 15.4% versus last year.

Foreign currency exchange rates were unfavorable by 7.3 points.

The international and other segment volume was off 8.4 points, due primarily to the net sales decline in China, as selling related to Chinese New Year season was lower than last year.

International net price realization was a 1 point benefit, and the impact of the Mauna Loa divestiture, a 70 basis point headwind.

Turning now to margins.

Adjusted gross margin increased 20 basis points in the first quarter, driven by greater than expected supply chain productivity and cost savings initiatives, partially offset by unfavorable sales mix and other supply chain costs.

On a net basis, commodity and packaging costs were slightly favorable.

For the full year, we expect gross margin to be slightly down, as greater productivity and cost savings, and a slightly better dairy environment at least for the time being, is more than offset by inflation and unfavorable sales mix, given the update to our non-seasonal and instant consumable candy outlook in North America.

Operating profit in the first quarter was in line with the year ago period, resulting in operating profit margin of 21.5%, an increase of 120 basis points versus last year.

The increase was driven by gross margin gains and lower SM&A, selling, marketing and administrative expenses.

Total advertising and related consumer marketing expense declined about 10% versus the first quarter of 2015 due to timing.

North America advertising and related consumer marketing expense is expected to increase over the remainder of 2016.

SM&A excluding advertising and related consumer marketing declined 9.3%, driven by the implementation of the business productivity program announced last June, and the Company's continued focus on efficiency and cost savings initiatives.

Now let me provide a brief update on our international and other segment.

I'm pleased that our total international business delivered on their Q1 plans.

As J.P. stated, we're executing against our plans in the key markets of China, Mexico, Brazil and India, and making good progress.

Adding to J.P.'s commentary on China, chocolate category contraction was greater than our estimate.

Our updated forecast for the year reflects a return to growth, albeit at a lower level.

If the broader economy doesn't improve, there could be further risk to our full-year China chocolate and Golden Monkey sales forecasts.

Distributor demand and net sales of Golden Monkey items have been consistent for the last two quarters, driven by programs and products that are leveraging promotions associated with the lunar calendar Year of the Monkey.

Given the increased level of in-store programming and innovation, we expect similar results over the next couple of quarters.

Combined with a higher level of trade promotion that we'll be lapping, we're targeting Golden Monkey net sales to increase around 20% this year.

Moving down the corporate P&L, first quarter interest expense of $21 million increased $1.8 million versus last year.

For the full year, we expect interest rate -- interest expense to be in the $90 million to $95 million range, greater than our previous estimate of $85 million to $90 million due to the use of commercial paper related to the barkTHINS acquisition.

The adjusted tax rate for the first quarter was 35%, and in line with last year.

In 2016, we expect to purchase about the same amount of tax credits as we did last year, which had resulted in an adjusted tax rate that's similar to 2015.

In the second quarter, we expect the adjusted tax rate to be about 30%, due to the timing and purchase of tax credits.

For the first quarter of 2016, weighted average shares outstanding on a diluted basis were approximately 217.5 million shares, down 5.2 million versus last year, resulting in adjusted earnings per share diluted of $1.10, or an increase of about 1% versus a year ago.

Turning now 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 $25 million.

Accounts receivable was lower by $[63] million, and remains extremely current.

Inventory was higher by $25 million, and accounts payable declined by $13 million.

Total capital additions including software were $41.4 million in the first quarter.

For the full year, we expect CapEx to be in the $285 million to $295 million range.

During the first quarter, depreciation and amortization was $60 million, and dividends paid were $122 million.

In the first quarter, the Company repurchased $304 million of outstanding shares.

$20 million were repurchased against the $250 million authorization approved in February of 2015, and $284 million were repurchased against the $500 million authorization approved in January of 2016.

Cash on hand at the end of the quarter was $286 million, slightly lower than a year ago.

As J.P. mentioned earlier, today we announced the acquisition of the barkTHINS snacking chocolate line.

We expect that the acquisition will be dilutive in 2016 and 2017, primarily due to the book amortization of intangibles before turning accretive in 2018.

The all-cash purpose price and the near-term earnings dilution is partially offset by about $50 million to $60 million in cash flow net tax benefits associated with the tax amortization of intangible assets in the basis step-up.

The tax amortization provides a future cash flow benefit.

As a result, netting the benefit against the growth acquisition purchase price results in a deal multiple that is similar to other high growth CPG assets.

As J.P. summarized, over the remainder of the year, we have a lot of innovation, variety, and news going into the marketplace.

In-store merchandising and program activity is greater than last year, and advertising and related consumer marketing is expected to increase mid to high single-digits on a percentage basis versus last year over the next three quarters.

Therefore, for the full year excluding unfavorable foreign currency exchange of approximately 1 point and the barkTHINS acquisition of about a 0.5 point, net sales growth is expected to accelerate and increase to around 2%.

This is less from the previous estimate of about 3%, due to the previously mentioned lower than expected US non-seasonal CMG growth, and (inaudible) macroeconomic headwinds in China.

The category, the Company expects gross margin to be slightly lower than last year, due to unfavorable mix related to lower non-seasonal sales.

The business productivity initiative announced in June and the incremental CIP savings are on track, and should result in reduction in SM&A expenses, as we continue to leverage existing resources.

As a result, the Company expects adjusted earnings per share diluted to increase 3% to 4%, including dilution from acquisitions of $0.05 to $0.06 per share, and be in the $4.24 to $4.28 range.

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

We expect constant currency net sales growth in Q2 to be greater than our full-year outlook.

However, the impact of unfavorable sales mix is greatest in the second quarter, and may result in gross margin decline of 50 to 100 basis points.

Additionally, advertising and related consumer marketing is expected to increase the most on a percentage basis versus last year in the second quarter.

This is one of the levers in our marketing mix model that we believe will result in improved pull, our retail takeaway in the second half of the year.

Therefore, we expect that EPS will be pressured in the second quarter.

Thank you for your time this morning, and we'll now take any questions you may have.

(Operator Instructions)

Andrew Lazar, Barclays.

Good morning, everybody.

Thank you.

Good morning, Andrew.

Thank you.

Yes, just one question from me.

I think based on the full-year guidance change on sales that you've talked about, most of which seems to be in North America, I guess, based on just some admittedly back-of-the-envelope math, I guess it seems like North America would need to show --call it, 3% to 3.5% constant currency growth from here on out, versus the minus 4%-plus in the first quarter.

So I guess, the question is just, how do we get from here to there, particularly if the -- I guess, as the press release seems to suggest -- I could have it wrong -- that North America takeaway is expect to be sort of flattish moving forward?

Thanks.

Yes.

So I think Andrew, you're in the right ballpark on the April to December take to make.

If you look at North America, it'd be probably a little over 3% to get there.

So I think you've got that right.

If you look at our plans in North America, they really do accelerate in the second half of the year, so the number of the investments that we've made really against, the combination of innovation and advertising should begin to show up there, lots of solid in-store merchandising.

So I think that's why we're optimistic on the second half of the year.

Thank you very much.

Jonathan Feeney, Athlos Research.

Good morning, guys.

Thanks very much.

I'm trying to understand how the advertising and consumer marketing expense changes this quarter, effected the quarter, maybe the rest of the year.

Am I right, just going through some disclosures for last year, that for the full year I see -- you disclosed advertising, and then it gives us some rates of change, so that advertising and consumer marketing together is about 13.5% of sales.

Does that sound about right?

Yes, John, I think you only see advertising in the 10-K.

So there's other consumer marketing related stuff that we include in the disclosure, and in the release this morning related to consumer promotion and some other in-store activities.

So I don't have that number off the top of my head, but I will try to help you out later on.

Okay.

I guess, and then just one clarification.

Is all that advertising and consumer marketing expense when you're talking about year-over-year change, all of that actually expense?

Or is some of those like net revenue items, like some of the in-store promotion costs that would be recognized as offsets to revenue?

No, that would -- this is Patricia.

That would be in the trade, as a reduction between gross and net sales.

Those comments that we're making this morning are the pieces that are in the SM&A line.

Okay.

So when you say that, when you made that -- separately, when you made the comment, that a little bit more trade spending, it looked like because of some change from quarter to quarter, some products that were initially expected to ship in the second quarter and the first, that wouldn't be reflected in that decline, because the would be trade spending?

That's right.

That would be correct.

Great.

Okay, that helps me out a lot.

Thanks very much.

Eric Katzman, Deutsche Bank.

Good morning, Eric.

Hey, good morning.

I have actually two specific questions, I guess, accounting questions.

Maybe it's for you Patricia.

But I'm a little bit surprised that, unless there some kind of patent or a large foodservice component, why would the non-cash amortization expense be so high on this acquisition?

And then the second, the change in the accounting, I guess, from comprehensive other income to the -- what you're now doing, which is the exclusion of the volatility on the mark-to-market.

So the $0.10 loss that you've excluded, was there a similar type of loss a year ago?

Or how do we kind of treat that, relative to how you've been doing it in the past?

Yes, happy to answer that.

Let me start with that one.

So up until last year, we used and met all the requirements to use GAAP hedge accounting.

That allowed us to put the volatility related to mark-to-market into our other comprehensive income, or essentially on the balance sheet.

It didn't flow through the P&L.

We proactively decided to go off of hedge accounting -- you may or may not know this, but it's very onerous FASB requirement to make, a lot of our peers have done this.

And when we looked at the cost benefit of doing this, we just didn't feel it was worth it, especially since the standard kept getting tougher and tougher to meet.

So what we decided to do, and we talked about this in the third and fourth quarter is go, we would say off of hedge accounting, and allow that volatility to flow through the P&L.

So that the change -- but we also want to call that out for you.

So that you can see that, because it's volatility that's not consistent with the earnings that we use internally, as well as prior period.

So that's why we adjusted it out in our -- adjusted GAAP, or our adjusted earnings.

So when you look at the impact in the first quarter, there was no comparable piece of it to be adjusted out last time.

However, on an adjusted basis, the two numbers are comparable, just we got there by different means.

Going forward, as we lap all those quarters, you'll continue to see it coming out of the adjustment in both periods.

So you're going to exclude it from quarter to quarter.

And then, in the fourth quarter, just have one big number, I guess, that adjusts for the year, or something like that?

No, every quarter is different, and they net out.

You can have a quarter where it's positive, you could have a quarter where it's negative.

What we want to do is match the ultimate mark-to-market that we have on the hedging contract, with the period that we actually by the underlying commodity.

So for example, if we buy cocoa forward, and in one quarter, it might be positive, and the next quarter, it might be negative.

By the time, we buy the cocoa, we want -- that's when we want to recognize the net impact of that volatility, so that it ties to the time that we're actually buying the cocoa, and we get the net overall hedge price for the cocoa.

And that's the most common approach now in CPG, in terms of the complexity related to commodity hedging.

Okay.

And then, on the second piece, on the barkTHINS.

Oh, yes, the barkTHINS, sorry.

So yes, we basically, we called out the fact that there is some very specific tax things related to the barkTHINS acquisition.

If you net that out, you would find that we're paying, really in the same kind of multiple for a high-growth CPG asset, that we as well as others have paid in the past.

Typically, that's a 3 to 4 time.

And that, of course, is what you're buying in all of these companies essentially is the brand, creates the amortization of intangibles going forward, as well as other costs related to integration.

But it's primarily the intangibles which get amortized over periods that the accounting requires [so too], and that's what leads to the Lucian.

Okay.

All right.

To save time, I'll pass it on.

Thank you.

Chris Growe, Stifel.

Hi, good morning.

Good morning.

I just had a question for you.

If I could just talk about the new or incremental cost saving programs.

The level of incremental savings coming through, is that meant to offset inflation?

And should I say, are the overall savings meant to offset inflation, with the remainder then reinvested back in the business?

I'm trying to get a sense of how much of this can flow to the bottom line, and how of this can be available for you to reinvest?

And maybe, if I could ask just related to that, you talked about I think $10 million to $15 million of incremental savings in 2016.

Again, is that earmarked for reinvestment?

Just trying to understand how those incremental savings are going to be used this year?

Yes, it's Patricia again.

So the way I think about it is this.

We've had always about $50 million to $70 million of productivity that's come through primarily from the supply chain arena, and those guys that have done a terrific job offsetting underlying COGS inflation.

So we end up with flat or good margin expansion based on their efforts.

What we've done, starting in June of last year, is we also had a productivity program that we announced and have been executing on, here more in our corporate functions.

And we got some benefit of that last year, and we're going to get another $40 million of benefit from it this year.

That's at the high end of the range by the way, of what we announced.

We've been over delivering on that.

And then what we announced today is incremental savings, again in the SM&A category of $10 million to $15 million.

Now, as you know, most of our costs in SM&A besides specific costs for advertising are salary-cost related.

And we do have inflation, salary cost inflation and benefits inflation that hit us every year.

Think of that as being about 3%.

So what we would like to do is be able to offset that.

But in general, we're focusing on taking that discipline and continuous improvement mindset that the supply chain guys have done so well, and really migrating that over to all of our corporate functions to help them, and help all of us offset the inflation the same way that the supply chain guys have done.

And yes, I would say that that actually gives us the fuel to have those marketing and other advertising expenses that we need to ignite the market, and push that second-half growth that we're looking towards this year.

So it's absolutely a big help for us in achieving that.

Okay.

Just to be clear then, Patricia, you have a -- you mentioned $40 million this year from a productivity program.

And then, is it $10 million -- so is it $40 million, and then $10 million to $15 million on top of that?

That's right.

Well, no, actually -- we get the $50 million to $70 million of normal productivity, Chris.

So at the high end of that $70 million, there's $10 million to $15 million on top of that, plus the $40 million, $35 million, or whatever it is from last year's June initiative as well.

Okay.

So think of it totalling $120 million to $125 million.

But also pointing out that the $70 million is at the high end of what we've typically gotten every year, whereas the other two are specific to this year, and less comparable to prior year's activities.

Okay.

That's very helpful.

Thank you for your time.

Bryan Spillane, Bank of America.

Good morning, Bryan.

Hey, good morning, everyone.

Just a question, follow-up on the cost savings initiative, or the expansion of it, that you announced this morning.

Think in the press release, or maybe in the prepared remarks, you talked a little bit about, how maybe some of that might be related to China.

But I guess, it just seems like, given how different the sales -- the revenues are in that business now versus the original expectations, that maybe there might be a bigger opportunity on cost savings?

So could you talk about, I guess, how much of the expansion of the -- in the savings program is related to China?

And I guess, is there a potential that there'd be something even above and beyond, as we look out in the future?

So let's -- both Patricia and I'll take that.

First of all, as we continue to look at our China business.

You heard in my remarks that we want to balance our investments there, with what we see as the opportunities.

We know that the market right now is certainly challenged.

But at the same time, we're in the midst of working through our integration.

We want to make sure that we make good decisions there for the long-term.

And as we continue to get familiar with our overall go-to-market strategy, and how we brought the two businesses together, we just want to be prudent, in terms of making sure we're making good decisions.

At the same time, we do believe that there's opportunities within our China business to go further than we have at the current point in time.

So I'll let Patricia, if she wants to add any additional perspective.

The one thing I would add to that is really pointing out the progress that's been made in bringing the two organizations together.

While there were clearly some disappointments in our acquisition of Golden Monkey, the fundamentals of why we bought it are still there.

We really like the access to the traditional trade, and we really like the two brands that they bring to us as Golden Monkey and Munching Monkey.

And we think that's a very good complement to our strength in the three brands that we have in the chocolate business in China, and our focus there on the modern trade -- a little bit over-indexed to hypermarket, which we can certainly see in our results.

So the team there has done a nice job of bringing that together.

While that's generated some cost savings, and frankly, we're still looking, and I think we'll find some more, I think the really important thing is bringing the two businesses together to exploit the strength that they each individually have.

And that's what J.P. -- and I would add to J.P's remarks about balance.

That's the part that we're balancing.

Okay.

Thank you.

Robert Moskow, Credit Suisse.

Good morning, Rob.

Good morning.

Hey J.P., the article in the Wall Street Journal today, and also your comments and your acquisition point to a lot of strategic efforts to expand snacks.

But the comments on the call are about slowing category growth in candy, mint and gum.

And I am just wondering, it seems like a pretty critical time for the category.

You say that you need to re-accelerate the growth.

Can you give us a little more color on this meaningful launch that you've talked about in the back half of the year?

What's the marketing objective of that launch?

What's the risk that you're taking, the investment that you're meaning to make?

And are you worried that your core operations might take the eye off the ball a little bit, if all the efforts are on snacking?

Thanks.

So first of all, thank you for the question, and I'll try to add as much perspective as I can on some level.

I'm not going to go into as much detail as you'd like, just for competitive reasons.

But let me put it in perspective, that snacks today, if you look at the pure snacking type stuff outside of confectionery, and outside of our grocery businesses is really only 2% of our total business.

If you put in those other pantry type businesses, spreads, et cetera, it's about 9% of the business.

So confectionery is at the core of who we are, and what we do.

What we've seen as we've continues to do some demand landscape work, is there's an interesting area around what we call snackfection.

And if you look at, some of our recent -- like the Reese's Mix and Bites products, those have been terrific for us.

They don't show up in our market share, because they are actually captured in snacks, but we're very pleased with how we've progressed there.

So I think that, what you should take away is that, we are very focused against our core, innovating around our core, and executing against the fundamentals in a very competitive and changing snacking environment.

But we really see an immediate opportunity in this area of snackfection for the Company.

And then, as -- you look at how consumer's relationship with food has changed.

We recognize that the snacking continuum has grown.

And so, products like Krave, which we're learning a lot from, and are very pleased, will always be part of our test and learn and grow strategies.

But it doesn't take away from our core focus.

And so, around [portability], one of the things that you see is there is new users and consumer occasions that are in -- that we see as a big opportunity.

So confection has always been a part of snacking.

I think there's been some confusion around.

When we talk about snacking, it's as if it's something different than confection.

And the fact of the matter, is confection has always been snacking, where the biggest part of the snack wheel.

And so, as these new occasions arise and new opportunities arise for the Company, we want to be able to take advantage of them, succeed with the brands we have.

And then also be able to expand in some of these new segments.

And there's a significant blurring across this total snacking category, that we think has added some of the lumpiness and challenges for the category, as you see so many new items and choices for the consumer.

And I think as that all sorts out, the single most important thing for us, is to continue to build on our brand relevance, and why consumers have relationships with our brands.

And that's why we like to talk about being a consumer-centric and brand-building Company.

We don't think we've lost anything there, but we certainly would tell you that there's lots of opportunities, and we have to be at our best to take advantage of them.

Can I ask a quick follow-up?

Brookside Farms, the data hasn't looked very good.

Can you tell us what's happening there?

Well, I think there's a couple things, and I'll let Michele join in here as well, if she has anything to add.

But as we look at the Brookside brand, we've been really pleased with the growth of the brand.

It's done terrific, in terms of establishing itself as the number two or number three, the dark chocolate brand in the category.

It's got great repeat purchase, of somewhere in the range of like 50%, which is really, really high.

It's ahead of our acquisition strategy.

Now we have lost some distribution in the club channel.

We also believe that as we have expanded it, we need to continue to work on the brand positioning some.

And you'll see that we've got a whole new advertising effort there.

And then we also, probably would tell you that we have expanded some of the offerings, maybe a little bit of ahead of ourselves, and we need to make sure that we just continue to work on the base brand proposition.

So as we do that, we continue to have a lot of confidence in the brand.

I don't know if Michele wants to add anything, but those would be my comments.

I think you covered it pretty well.

Thank you.

David Driscoll, Citigroup.

Good morning, David.

Great, thank you, and good morning.

I've had a couple follow-ups and then a question.

Just to be clear to Chris Growe's question, will the incremental cost savings be reinvested back into the business in 2017 through 2019.

So forget the 2016 numbers.

You answered that well, but I'm not clear on the 2017 through 2019 period.

Yes, it's a big part of -- I guess, I'd say it in this way, it's a part of our long-term EPS guidance.

But at the base of that long-term EPS guidance is an investment philosophy about growth in our core and adjacent categories.

That's the fundamental driver.

So I would say, yes, it's absolutely part of our whole algorithm.

It needs to be a balanced algorithm between sales growth and cost discipline.

I mean, it's not a small number.

I mean, at the high end, it's 3.5 points of EPS growth.

So I appreciate that, but it's a large number.

Second follow up is on China.

When I just do some rough math, I mean, it feels like that business is losing like $30 million in the quarter, to something like that.

I mean, I think all your other business are profitable, so it's quite a large loss.

You mentioned J.P. that you would align the costs to the opportunity.

But really simply, are the savings that you would expect to happen in the China operations, are they embedded in this new cost savings program?

I'll start with that, and then maybe J.P. can give a little more color around China.

Yes, it's part of $10 million to $15 million incremental savings that we announced.

And I think as we've also made clear, we're continuing to look at balancing the cost structure against the opportunities in the market.

And that may result in further savings going forward.

But that's a work in progress, and not something we're going to talk about, or announce today.

With that, let me turn it over J.P. to talk about how he sees the overall long-term opportunity in the market.

Yes.

I think, David, there is a couple of things that I would say.

First of all, China is for us, is probably an invest market for a period of time.

While that profile may change, I think that will for some period of time, be in a brand-building type mode.

Let me just take a step back, and maybe clear up a couple things, in terms of how I view, what we're currently doing in China.

So the first most important thing we needed to do following the recent acquisition, was just gain control of the business.

As we've all been quite open and talked about, there were some surprises there, and things that we weren't very pleased with.

But we feel very good about the efforts that the team has made, and that we've gained control of what we have there.

And we're in the process of creating a solid foundation.

It's around org structure.

It's around the systems we need to run the business, and a big piece of the integration.

And so, that creating the foundation is really where we're at.

And then, the third phase is that, that we have to execute against the business we have.

Unfortunately, it's volatile market, with some uncertainty right now.

So when I talk about being balanced, we have to make sure that we can afford the organization structure, and our go-to-market strategies there.

But listen, we believe in a emerging middle-class.

We believe in urbanization.

We think these are markets that are over time, we want to be in.

So from a quarter to quarter basis, it may be tough to make some of those strategic decisions.

And if we execute well, results come.

And we'll be able then to do the things we do well, and grow our brands in the market, and grow with the category, and overcome some of these, what I would believe are more short-term challenges.

That's really, I think importantly, that's how I think about it.

And so, that's the best way for I think, you guys to think about it as well.

If I can sneak in one last clarification in.

You mentioned, in both your script and in the press release, there's the potential for upside to the outlook.

J.P., it's kind of unusual, when a company is reducing guidance, to then mention upside to the outlook.

And so, I feel like you're really trying to tell us something here, but it's not that clear to me.

Are you saying that Q1 trends are just kind of not representative, and that you really need to get into the rest of the year to understand where the sales growth is?

And you've taken it down, because of what Q1 has done?

But it's almost like you don't believe it or something, with this upside to the outlook comment?

Can you help me out?

Yes, I think David, what I would tell you is, is that as we look at the marketplace, and what we see is happening Q1, that we're being prudent in the comments that we're making.

We're optimistic within our plan, that we always want to grow share ahead of the market, and that's what we're going to be challenged with.

And again, if-- we also believe that we deliver against some of the other cost initiatives and things that we have, that we'll be able to meet the guidance that we've given you.

So I don't want you to take that comment differently than what we've said with regard to our guidance, other than we have some optimism.

And I'll let Michele talk a little about the second half, and give you sense of how she's thinking about it as well.

Sure.

As we look at the year to go, we have a lot of activity.

As you know, the [EMUs] were not up versus prior year in Q1.

So we've really lined up a lot of our investment with what's to come.

We're rapidly expanding gum behind the capacity expansion investment we made last year, and the advertising with a new campaign that's is going on air now.

Snack mix and snack bites, we've actually been constrained, and not actually even able to service enough.

We've had to cut off all merchandising because of how well the items have done.

So we're really going to be able to get behind that, in a bigger way as the year goes on.

Big Kat just launching.

We're a sponsor at the Olympics, which is going to be huge from a merchandising perspective.

And as we told you guys last year, when we started to see some softness in share at the end of the year, we made a decision to invest to be more competitive.

And just given the time line it takes to get those dollars in the marketplace, that really kicks in beginning in May.

We have the birthday execution that's really going to expand, so just lot of activity coming in the back part of the year, that we have a lot of confidence in, and we're cautiously optimistic about some of the potential anomalies we may have seen in Q1 in February.

But we want to be prudent about the marketplace, and balancing that with the aggressive programming we have for the rest of the year.

Thank you.

Matthew Grainger, Morgan Stanley.

Good morning.

Good morning.

Hi, good morning.

Thanks for the question.

Patricia, I just wanted to better understand the approach toward trade spending.

Over the balance of the year, you've talked about direct trade that was already in place, and that's seems to be a headwind to pricing, but not necessarily a material source of support on the non-seasonal side.

So given that, are you comfortable with the returns you're getting on incremental promotion?

And how does this play into the outlook for trade spending, specifically on promoted price points over the balance of the year, not on the new product offering?

Yes, we are comfortable, of course, we're always looking at that.

Of Michele and her team do a great job of balancing out the right ways to do trade promotions, merchandising, advertising.

I mean, it's really -- it needs to be a holistic marketing model, and I think she's doing good job on that.

I'll have her talk a little bit more about how she's thinking about trade promotions.

Yes, one thing on the math.

Sorry, Patricia, it's Mark, Matt.

One thing to think about though.

I think in the release and in the remarks, I think you'd got to tease out -- hopefully, you teased out that some of the programming that we thought was going to ship in April, shipped in March.

So with that comes some typical promotional, not discounting, but typical promotion.

And because that replaced what we thought at the time was going to be everyday or non-promoted prices, that's the negative impact you're seeing on the price mix.

So it's not because there was a lot of trade because of deep discounting or anything.

It was just that mix that ended up happening in the first quarter, that had price being negative at the end of the day.

Go on, Michelle.

No, no, that's okay.

And as I think we mentioned on the prior question, the incremental investments we made to really drive against merchandising began middle of Q2 to hit the marketplace, and a lot of big events like the Olympics, et cetera, that we're investing and the ability to merchandise snack mix as I mentioned.

So I think we've covered that.

Okay.

Thanks, everyone.

Ken Zaslow, BMO Capital Markets.

Hey, good morning, everyone.

Good morning.

I had two follow-up questions.

One, is what is the opportunity in barkTHINS in terms of -- it's $65 million to $75 million.

How big could it actually become, and what are your thinking about the possibility for that?

And what are the avenues for growth for that?

I'm just trying to figure out where -- is it distribution.

What is the actual outlook for that business?

Yes, we think we have the opportunity -- I mean, it's a very viable consumer proposition that's grounded in the very on-trend area of clean label and fully sustainable profile.

It's a less sweet kind of taste profile.

So, yes, we think we have the opportunity to take a great proposition, and leverage our Hershey muscle and scale to expand distribution, to make it more available, and also to increase brand awareness.

I would liken it somewhat to Brookside, and what we did with Brookside when we purchased that.

It allows us strategically to expand into mass premium, to have a product that -- is very well-liked by millennials, and to capture that opportunity to just expand beyond that.

And then, my next question just is, how do you decide on what you think is structural versus short-term issues, and what evidence do you have that says some of these issues are short-term?

I'm just trying to figure out where you guys are coming from, in terms of how you -- have your long term growth strategy in terms of your sales?

But you keep on saying, there's some headwinds and they're short-term.

I'm just trying figuring out how you think about them as being short-term versus structural, and what evidence do you have?

Well, I think that if you look across what's happening in the total space, I think these are more cyclical versus structural issues.

We continue to have a lot of enthusiasm for all the advantages of the category that we're in.

I think, if you look at the history of I'll call it, snacking as well as confectionery, it's always been changing.

You've seen a number of different types of trends and things in the market.

I think one of the events that makes this current period of time unique, is the amount of choice that there is in the market, relative to what I think we have historically seen.

That means the trial has moved around a lot.

At the same time, you have some different things impacting retailers, and we've come out of a period of time of some uncertainty in economies.

And so, I think all of those things have made it a more challenging environment, but I don't think those are structural things that, where major changes have taken place.

Now you've heard me talk about consumers have a changing relationship with food.

So much of that is really around transparency, as much as it is around anything else, where people are wanting to understand ingredients better than they ever have before.

And as manufacturers, we are all responding to that.

Certainly, we are as well.

But as I take a step back, and just look at the overall industry, as well as the category that we compete in, I think many of the things that are happening are far more cyclical, than I would think about them as structural.

Okay.

Thank you.

Alexia Howard, Bernstein.

Good morning, everyone.

Hey, good morning, Alexia.

Hi, so are you able to estimate the underlying CMG category growth in North America?

Or if you flush out all the timing shifts and so on, are you able to get at that number?

And as a quick follow-up, can you comment on how you're planning to respond to Vermont requirement for the mandatory labeling of foods containing genetically modified ingredients that's due to come in, in July?

Thank you very much.

Sure.

So I will start with the latter, and then go to the first part of your question.

So we have products -- so I will speak specifically to Hershey.

We have products that will need to meet the Vermont labeling requirements of contains GMO ingredients.

And then, we have some products that don't need to be labeled.

So appropriately, we will abide by what's happening in Vermont, and label as appropriate.

And then, I hope that at the federal level, there is clarity brought to this question.

Because it becomes an interstate commerce issue, if you have different states taking different approaches would make a very confusing for manufacturing, manufacturers.

And so, I do hope that there is some clarity around how labeling happens, if it's required on a broader basis.

And then as you know, we've committed to transparency.

We're very big supporters of Smart Label, which gives consumers the ability to engage with our brands, and understand what our, in the ingredients, et cetera.

So that's how we'll deal with Vermont.

And then, on the category growth rate, I'll let Michelle talk to that, with regard to North America.

Yes.

So we're estimating that the category growth rate in North America would be between 2% and 2.5%, which is about where we've seen it over the past couple of years, a little bit on the lighter side.

If we go down to the 2% range, we anticipate that our takeaway will be greater than that, such that we will -- gain a little bit share.

And obviously, with the Easter timing issue that occurred on a year-to-date basis, and some of the softness we saw in Q1, we are still waiting to see how that plays out.

But that's our long term estimate is 2% to 2.5%, and that's what we're thinking it will be for the year.

Great.

Thank you very much.

I will pass it on.

Operator, we have time for one more call, and then we will call it a morning.

John Baumgartner, Wells Fargo.

Good morning, John.

Good morning.

Thanks for the question.

J.P. or Michelle, just sticking with the trade promotion, bigger picture.

If I look at your promotion as a percentage of sales, in 2015 it wasn't much higher than the levels you were spending seven or eight years ago.

If the broader category, snacking environment is much more competitive, I mean, how would you assess your current levels of trade spend?

And maybe your thoughts on the notion that Hershey is maybe under investing a bit in promo, given the impulse nature of the category?

Well, again we can kind of tag-team this, but I do think that we are seeing a more competitive environment than we have seen for a period of time.

We know that in 2015, we probably lost a little bit of quality merch, versus where we'd have liked to have been.

And so, as we look at the opportunities and landscape in 2016, we don't want to have that happen to us again.

One of the comments that I would just make is that there is less space as retailers have cleaned floors.

So the competitiveness to get that space, is not just within our category, it's really across multiple categories.

And that's put a premium on the cost of -- I'll call it, doing business in some classes of trade.

Great.

Thanks, J.P. Thanks for the question.

Thank you.

Thank you very much for joining us this morning, and the IR team will be available for any follow-up calls that you may have.

Ladies and gentlemen, this does conclude today's program.

You may disconnect at this time.

Thank you, and have a great day.