好時 (HSY) 2016 Q3 法說會逐字稿

Good morning, everyone, and welcome to The Hershey Company's third-quarter 2016 results conference call. My name is Roxanna 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, Roxanna. Good morning, ladies and gentlemen. Welcome to The Hershey Company's third-quarter 2016 conference call. JP Bilbrey, Chairman, President and CEO, and Patricia Little, Senior Vice President and CFO, will provide you with an overview 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 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 summary of consolidated statements of income prepared in accordance with GAAP. Within the note section of the press release, we have provided adjusted pro forma reconciliations of select income statement line items quantitatively reconciled to GAAP.

The Company uses these non-GAAP measures as key metrics for evaluating performance internally. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP; rather, the Company believes the presentation of earnings excluding certain items provide additional information to investor to facilitate the comparison of past and present operations.

As a result, we will discuss third-quarter results excluding net pretax charges of $72.4 million or $0.23 per share diluted which are primarily related to derivative mark-to-market losses and business realignment charges. These charges 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 JP Bilbrey.

Thanks, Mark, and good morning to everyone on the phone and webcast. Before we discuss the details of our third-quarter results I'd like to add some context to the press release we issued on October 14.

It's been an honor and a privilege to be the 11th CEO of The Hershey Company. I'm proud of all that we've accomplished as a team over the last five to six years, and plan to be fully engaged on a day-to-day basis as CEO over the next eight months or so as we drive the business forward and regain momentum.

I will also continue to work closely with my management team as we review our global go-to-market approach that we discussed in July. We're making progress and expect to discuss these value-creation strategies with you in early 2017.

Importantly, we believe that The Hershey Company will continue to be successful in the marketplace. We have a solid framework in place, related to customer capabilities and consumer insights, especially in the North American segment, that should enable us to execute against the demand landscape work that we've been updating. This is in conjunction with the progress that we've made in our R&D pipeline and faster innovation cycle in our core CMG business and snack initiatives.

As part of our overall commitment to research and development, we're very pleased to announce our participation in the new University of Pennsylvania's Pennovation Center, whose grand opening is today. The Pennovation Center is a bridge that brings together corporations with a need, curious educators and student scientists in the University's new hub for innovation that will focus on research, development, and entrepreneurialism.

Let me add some perspective to our international operations. We've experienced macroeconomic challenges and slowdown in some of our key development markets. With this said, under the right conditions we know our brands can be successful, as evidenced by the market share gains that we've attained where we've focused on our core brand-building efforts.

However, given an uncertain outlook in these markets over the near term, we will continue to assess our investment mix across the enterprise to align with both our long-term strategic intent and best growth and margin-enhancing activities. We believe that it's appropriate to continuously assess market opportunities and evolve the best approach to meet our growth and profit focus. We simply see this as part of our ongoing operating philosophy. We plan to share further details with you at our investor event early in the year.

For now, I can tell you that we're striving for an organization that's more agile, flexible and focused on the consumer, brand-building and cost efficiency across our entire business. This will drive improved gross margin and EBIT margin. Our commitment to growth and cost control will enable us to continue to deliver strong cash flow growth and generate value for all shareholders.

As it relates to 2017, it's a bit early to discuss specifics but we think there is a set-up to deliver top-quartile performance versus the peer group. A longer Easter season and planned innovation, driven by Hershey's Cookie Layer Crunch and barkTHINS acceleration should benefit top-line growth. We have visibility into our input cost structure and $100 million in productivity savings that we discussed earlier in the year that should lead to EBIT margin expansion in 2017.

Third-quarter sales, marketplace performance and operating income were relatively in line with expectations. Earnings per share exceeded our forecast, driven by a lower tax rate. And Patricia will have more on this in a bit.

As we anticipated, US marketplace performance sequentially improved versus last quarter and was within our targeted range. Total Hershey US retail take-away for the 12 weeks ended October 8, 2016 within the xAOC+C channels increased 0.6%, with market share the same as the year-ago period. This represents all Hershey manufactured products sold at retail, such as candy, mint, gum, salty snacks, Krave, chocolate syrup and snack bars.

Importantly, trends in our chocolate business improved due to a shorter Easter and the timing of innovation. Chocolate retail take-away was off about 0.5% in the first half of the year and was up 0.6% in the third quarter, resulting in a market share gain of 0.5 points. We expect that the fourth-quarter total Hershey and CMG performance will continue to sequentially improve.

Our brands responded positively to the investments we discussed last quarter. Specifically, marketplace results in the quarter were driven by our performance in August as in-store merchandising and display activity and on-air advertising GRPs were solid, supporting US Olympics programming and the launch of Reese's Pieces Cups. Our marketing mix for these programs was balanced between direct trade in both TV and digital advertising. You'll see more of this next year as we look to optimize our marketing mix modeling.

Innovation and targeted 360-degree programs where we got our marketing mix right has worked for us so far in 2016. Variety and news on the Reese's franchise, driven by our NCAA relationship, which has been extended to the fall football season, and the launch of Reese's Pieces Cups has resulted in the Reese's brand's retail take-away close to 8% in the third quarter.

And results were similar for the Kit Kat franchise, given the success of the Big Kat new product launch. And Hershey's Kisses up 7.2% in the recent 12-week period is also quietly having a good year, driven by birthday-themed packaging and programming.

We're getting incremental quality merchandising in other parts of the store where wrapping paper and birthday cards can be found in leveraging the emotional connectivity the brand has with consumers. And our Reese's Snack Mix and Hershey's Snack Bites continue to do well and give us confidence that our close-in snack strategy will gain traction over time.

The same successful principles will be applied to Hershey's chocolate, where current brand performance isn't where we really want it to be. We believe the launch and related support of Hershey's Cookie Layer Crunch will re-energize and make the brand fresh. Consumer demand for multi-textural eating experiences across varying snacking occasions is increasing, and this product fills a white space opportunity and should partially source volume from the cookie category.

We're leveraging our iconic Hershey chocolate bar and pairing it with layers of crunchy cookie bits and decadent fillings to offer an indulgent textured snacking experience. This is one of the most anticipated innovations from the iconic Hershey's brand in many years.

Based on pre-launch testing, Hershey's Cookie Layer Crunch earned some of the highest consumer scores of any product ever launched by the Company, and will come in three flavors -- caramel, vanilla cream and mint. Each piece is perfectly portion controlled at 90 to 100 calories and will be available at select retailers starting in December.

So, we're making progress but there's still a lot of work to do as we enter the fourth quarter and look to 2017 where our priority is to restore Hershey's marketplace momentum with the very profitable US market. We believe these initiative and ones that's we've yet to disclose will result in improved and consistent marketplace performance over the strategic planning cycle. As such, we believe that candy, mint and gum is an attractive category capable of solid growth over the long term, when supported with the right mix of customer and consumer markets.

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's syrups and spreads where we're focusing our efforts and investments increased about 20%.

In China, the modern trade hyper market environment continues to be challenging across many categories. Our gross sales in China declined, in line with our estimate, with net sales up about 15% on a constant currency basis. Chocolate category performance in the third quarter was sluggish and down about 4%. Our marketplace performance was in line with expectation with market share off about 1 point.

We're executing against our plan, and over the remainder of the year have a balanced consumer proposition of variety, news, and marketing across the Hershey's milk chocolate, Hershey's Kisses, and Golden Monkey candy and snack brands. Our China e-commerce business has been relatively consistent and continues to post solid results, albeit off a smaller base. We estimate that our e-commerce business has about a 10 share of the market in China and look to build on that over the remainder of the year, driven by Singles Day in November.

Now to wrap up. Despite the macroeconomic challenges facing the consumer, the broader snacks category, including indulgent snacks, continues to grow across retail channels. We're committed to our marketing mix modeling, trade, TV advertising, and digital media, as well as investments related to innovation, consumer marketing and insights that we believe will enable Hershey to deliver consistent and predictable top- and bottom-line growth.

As I stated earlier, we feel good about our preliminary 2017 plans that are still taking shape. We're a gross and EBIT margin focused Company with a goal of increasing margins on an annual basis via both cost control and, importantly, top-line growth. Hershey has many opportunities to leverage its global brands and US scale.

We're optimistic about our future and focused on what we need to do to succeed. Our balance sheet and cash flows remain strong. And our executive management team and the Board of Directors are confident that we'll continue to build value for all Hershey shareholders.

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

Thank you, JP. Good morning to everyone on the phone and on the webcast. Third-quarter net sales of $2 billion increased 2.2%, in line with our forecast. Adjusted earnings per share diluted came in at $1.29, an increase of about 10% versus last year, greater than our estimate, due to shift of advertising and related consumer marketing expense to the fourth quarter and a 280 basis point decline in the adjusted tax rate that was greater than anticipated. More on both of these in a bit.

Excluding the negative impact from foreign currency exchange rates of 20 basis points, net sales increased 2.4%. As expected, net price realization was relatively in line with our estimates and a 70 basis point benefit, primarily due to lower international and other segment direct trade and returns, discounts and allowances as we lapped the year-ago challenges in China.

Volume was a 1 point contribution to net sales growth, driven by our performance in the US. Acquisitions were a 70 basis point benefit due to barkTHINS, which we acquired in the second quarter.

By segment, third-quarter North America net sales increased 1.8%. Volume was a 1.1 point benefit and driven by the US business where volume was up 1.7 points. Canada net sales and volume were off, as planned, as solid new product performance was more than offset by select SKU rationalization.

Acquisitions were an 80 basis point benefit and net price realization a 10 basis point headwind. Total international and other segment net sales for the third quarter increased 5.3% versus last year. Foreign currency exchange rates were unfavorable by 2.2 points.

International and other segment volume was up 10 basis points, as solid Latin America and select export market performance was partially offset by lower sales in China, the discontinuance of the edible oil business in India and a little softness in the global retail and licensing business. Net price realization was a 7.4 point benefit as direct trade and returns, discounts and allowances in China were lower.

Turning now to margins, adjusted gross margin declined by 40 basis points in the third quarter, as productivity and cost savings were offset by unfavorable sales mix, some excess packaging, and higher supply chain costs, driven by initial year absorption of overhead related to the Malaysia manufacturing facility. For the full year, we continue to expect that gross margin will be slightly down versus a year ago.

As JP mentioned, we remain focused on our cost structure. The productivity initiatives we've discussed this year are on track and we plan to deliver approximately $135 million in cost savings this year and at least $100 million per year from 2017 through 2019.

Adjusted operating profit in the third quarter increased 7.6%, resulting in adjusted operating profit margin of 22.3% versus 21.2% last year. The increase in adjusted operating profit was driven by an increase in gross profit and lower marketing expense.

As expected, total advertising and related consumer marketing expense declined about 9.6% in the third quarter. This is partially due to timing. Recall, advertising and related consumer marketing expense increased about 5% in the second quarter, and we expect that it will increase in the fourth quarter, as well.

North America and international and other segment SM&A, excluding advertising and the barkTHINS acquisition, declined 5.5%, driven by savings from the previously discussed business productivity program. Unallocated corporate expense increased 3.5% or $4 million, as efficiency and cost savings initiatives were offset by higher employee-related costs, an increase in corporate depreciation and amortization, and JV minority interest expense.

Now let me provide a brief update on our international and other segment. I'm pleased that our total international business delivered on their Q3 plans. As JP stated, we're executing against our plans in the key markets of China, Mexico, Brazil, and India.

Adding to his commentary on China, chocolate category performance in brick and mortar continues to be choppy. Consumer spending still appears to be mixed within the modern trade box. China gross sales are forecasted to decline in 2016. However, net sales are expected to increase, as we don't anticipate the same level of direct trade, returns, discounts and allowances as last year.

Constant currency net sales in Mexico and Brazil increased nicely. International and other segment operating profit increased meaningfully and I'm pleased with the progression. As JP said, we are committed to profitability in this segment.

Moving down the P&L, interest expense of $24.4 million increased $5.7 million versus last year. For the full year, we continue to expect interest expense to be in the $90 million to $95 million range.

The adjusted tax rate for the third quarter was 30.7%, lower than our estimate, as R&D tax credits were greater than anticipated. As expected, the other income and expense line item includes the book expense related to corresponding tax credits that we mentioned last quarter. For the full year, we expect the tax rate to be about 100 basis points lower than last year.

For the third quarter of 2016, weighted average shares outstanding on a diluted basis were approximately 215.2 million shares, down 4.9 million versus last year, resulting in adjusted earnings per share diluted of $1.29, or an increase of about 10.3% versus a year ago.

Turning now to the balance sheet and cash flow, at the end of the third quarter, net trading capital increased versus last year's third quarter by $20 million. Accounts receivable was lower by $1 million and remains extremely current. Inventory was higher by $30 million and accounts payable increased by $9 million.

Total capital additions including software were $64.1 million in the third quarter. For the full year, we expect CapEx to be at the low end of our $265 million to $275 million range. During the third quarter adjusted depreciation and amortization was $61.5 million, and dividends paid were $128.6 million.

In the third quarter the Company did not repurchase any common shares against the $500 million share repurchase authorization approved in January 2016. There is $100 million remaining on this authorization. In addition, the Company did not repurchase any common shares in the third quarter to replace shares issued in connection with the exercise of stock options.

Cash on hand at the end of the quarter was $333 million, slightly lower than a year ago. As JP summarized, over the remainder of the year and into 2017 we have a lot of innovation, variety and seasonal merchandising and programming in the marketplace. We have good visibility into holiday orders and demand related to the upcoming launch of Hershey's Cookie Layer Crunch.

We feel good about our marketing mix modeling investments and believe we have the right balance of spend over the remainder of the year as total trade and advertising is higher in the fourth quarter versus last year. We believe these investments should result in a continued sequential improvement in US retail take-away. For the full year 2016, net sales will increase around 1%, including a net benefit from acquisitions and divestitures of about 50 basis points and the impact of unfavorable foreign currency exchange rates of 75 basis points.

We continue to expect that gross margin will be slightly below last year, due primarily to unfavorable sales mix. Business productivity and cost savings programs are on track with our targets. And, as we discussed earlier, the tax rate is expected to be slightly favorable versus our previous expectations.

As a result, the Company expects adjusted earnings per share diluted for 2016 to increase 4% to 5%, including barkTHINS dilution of $0.05 to $0.06 per share, and be in the $4.28 to $4.32 range versus a previous estimate of $4.24 to $4.28.

Thank you for your time this morning. And we'll now take any questions that you have.

(Operator Instructions)

Your first question comes from the line of Jonathan Feeney with Consumer Edge Research. Please go ahead.

Thanks very much. I wanted to ask a little bit about the Q4 and maybe some thoughts going forward. Obviously, you mentioned a little bit in the script, there's some timing issues with the reductions to SG&A. So, I'd first like you to maybe pars how much of that is reduction in advertising versus maybe structural SG&A that's just going to be lower. And when we think about Q4 and 2017, are there things going on? Can you give us a sense of what's the right level of relative advertising for the business right now? Because obviously you spend well ahead of your peers, you have a launch going on. But on the flip side, a lot of people are maybe looking more critically at the kind of investments that they're making and there's other ways to push and promote right now. Thank you.

Sure, Jonathan. Thanks. What I'm going to do is ask Patricia and Michele Buck, who you know is our Chief Operating Officer, is also with us, so I'll ask the two of them to talk about the fourth quarter because I think that will be something that comes up for several of you. Thanks.

Thanks. Let me start off by talking, first, about SG&A excluding advertising and related marketing. You could see that it was down and has been down as we've gone through the year, both on a divisional level and on a year-to-date level in corporate.

We did have a little bit of an uptick compared to prior year in the third quarter. That really had more to do with some timing issues that we had in last year's third quarter than any change in our fundamental run rate. And I expect to see this focus on cost in our SG&A, excluding marketing and related advertising expense, to continue.

In terms of the advertising and related marketing expense, as I said in my remarks, we've been running above in the second quarter. We dipped below a little bit in the third quarter but we expect to have that back up again in the fourth quarter. And that, combined with added investments in trade promotion we believe will continue to drive momentum in the marketplace.

I'll turn it over to Michele to talk a little bit more about that.

I would say we continue to believe in investing with the consumer and focusing on getting that right balance between advertising and trade that lets us really deliver. in the marketplace. If you think about Q4 overall, we have very good visibility into our holiday orders as those are already sold in to customers.

We'll be shipping Hershey's Cookie Layer Crunch and that will be a bigger benefit to net sales than it will be take-away. You'll see more of the take-away towards the end of the quarter and into 2017. And you can think about that as being roughly 1 to 2 points of growth for us in Q4.

And then, lastly, the balance of our growth will really come from overall take-away across our international and US business. And we believe that we'll continue to see some sequential improvement in Q4 behind the investments that we're making.

Thank you very much.

And we'll take our next question from the line of Ken Goldman with JPMorgan. Please go ahead.

Hi. Good morning, everyone. JP, I know it's early, I know you're not ready to give an exact number yet, but just in terms of, you talked about some potential margin growth coming from some of the unique activities you may be undertaking in the next year or two. People are speculating anywhere from 50 basis points to 400 or 500 basis points. Is there any help you can give us just bracketing what the opportunity might be? I'm sure you're not going to go full 3G on us but any thoughts about the opportunity and how we should think about that would be helpful at this point.

I think there's a couple of things, Ken, that I would say. You're going to continue to see us talk about the importance of being both growth and EBIT margin focused. So, we've got to have the right balance there.

We continue to be optimistic about the category. And the things that we've talked about so far I think we've been transparent about. But what you'll really hear more with greater specificity is when we get together on March 1 at our meeting.

A lot of this work is still in process, I would say. But the way we think about it, Ken, is we really have more of a business model philosophy around how we want to have that right balance. But we also believe that, if you noticed in my remarks I talked about getting the right mix of growth opportunities and where we invest. I think it's just basic that we always have to revisit some of those.

And given some of the macroeconomic challenges I think you'll see us try to get those right going forward. And then again, the greater specificity will come in March. So, if you'll work with us on that, I appreciate it.

I appreciate that. Mark, if you don't mind, if I could ask a quick second question. JP, I think you mentioned that you're looking for, quote, top-quartile performance in 2017, just an early outlook into next year. One, I wanted to make sure that was EPS that you were talking about, just in case I missed it.

And, two, what are you looking at when you're looking at performance? Are you basing that versus 2016? What are you thinking about performance, what will that be on average? I'm just trying to get a sense of -- I guess that's my job in this entire call, is trying to get numbers out of you -- but trying to figure out what those numbers might be a little more specifically.

I think you ought to think about that as both from a growth standpoint and also from an EBIT margin standpoint that will be a significant focus for us going forward.

All right, thank you.

Your next question comes from the line of Rob Moskow with Credit Suisse. Please go ahead.

Thank you. As a follow-up to Ken's question, you'll probably get questions about the sustainability of your gross margin, which is still at close to a peak. I can see a lot of room for SG&A efficiencies, but I'm still curious as to what you think gross margin can do, and if there's expansion from here, given that you're expanding into snacks, which I believe are lower margin. And I think commodities are probably about as low as they can go. They probably can't get much lower. So, what are you looking at in that regard?

Rob, it's Patricia. Let me take a crack at that. I think you've laid out some of the parts to our gross margin that we're very focused on. I agree with you that the snacks and some of the international gross margins are lower than they are in our core US chocolate business. There's not much that does better than core US chocolate in terms of margin. And you see some of that mix impact in terms of what's in the base right now.

You mentioned commodities. Commodities will go up and they'll go down, and we keep our eye on them and we always look to have some visibility going forward in our commodity expenses so that we can price accordingly and respond accordingly.

But I don't subscribe to the fact that there aren't improvements we can make in our gross margin. And I want to call out one of the things that our US plants are doing here in terms of a methodology we call lean, which is really wringing even more costs out of the production process. And that's something that we're in the process right now of, we have in several of our plants, and we're rolling out to more plants.

Another thing that we can look at is really on our SKUs and making sure that we have the best, most optimal SKU mix in our portfolio. So, while I agree with you, there is a little bit of a headwind in terms of the portfolio evolution, I think that we wouldn't want to say that there's nothing that we can do about it. We need to remain enormously focused on gross margin.

I would build on that. We also believe we have some opportunity relative to the work that we're doing on revenue management and optimizing trade, as well as price mix that could help us, as well.

JP, congrats on your retirement. Looking forward to March 1. Thank you.

Your next question comes from the line of David Driscoll with Citi. Please go ahead.

Great. Thank you. And good morning. I wanted to ask a little about the Cookie Layer Crunch. You gave some nice comments in the opening. Can you discuss just why this product is so important? And how incremental do you expect it to be to Hershey and the category? Let me just start there and a follow-up, if I may.

Sure, David. It's Michele. I'll take that one. As we've talked a bit before, we really view our competitive landscape as being that whole snacking world. We know that snacking is growing faster than the total food market.

And within that we're seeing a lot of growth in indulgent snacking and we think it's a real opportunity for us to leverage our trademarks and play as broadly as we can. And what we've seen is a strategic opportunity to source revenue more broadly, and also to provide some incremental texture that we're seeing based on our consumer demand landscape that certain consumers are looking for, so that it really expands the footprint of our Hershey trademark.

So, as we've mentioned, this is an area where we do a lot of testing. We did a bases test that looked at concept, product delivery, as well as our marketing investments behind the proposition. And all signals have indicated that it is a big, nice, scale platform opportunity for us, and that's why it's really important. It's going to help us to refresh the Hershey brand, to bring relevant news and capture new snacking occasions.

Then a follow up with a question that's a little bit bigger picture. When you guys look over the last couple years on innovation within the US chocolate category, how do you grade it? And do you consider that to be the primary culprit resulting in the much lower and slower category growth that we've seen? And then is Cookie Layer Crunch one of the key components to reaccelerating the category for Hershey?

David, what I would say, as we think about the key priorities that are necessary for us to drive the business and maximize our results, they really focus on portfolio, which does have a lot to do with innovation; on marketing mix -- we've talked about this category as a very responsive category, so getting the right balance between advertising and trade and also within advertising, how we spend our dollars; and then, of course, cost control, where we have always been focused and, as you know, are focused on some additional platform work going forward there.

So, I would say that innovation is absolutely key. Scale platform innovation has proven to be one of the greatest drivers for our category. I'm encouraged about some of the innovation that we had this past year and I think that we've seen the results of that in the marketplace. A lot of that didn't launch until the second half, but Big Kat, Reese's Pieces Cup has done incredibly well. And Snack Mix was also a great innovation that drove incrementality. Of course it wasn't shared to the confection category, it's actually housed in salty snacks.

So, it is a key lever. And having that sustainable big platform innovation gives us sustaining innovation over a multi-year period of time. And that's one of the biggest focuses for us, is making sure that we have sticky innovation so that it doesn't just launch and come out.

But I agree with you that as we look to next year, both in terms of our business, as well as the category, we think that the level of innovation is really going to help to drive CMG category growth and bring consumers to our category. So, we're really excited about that.

I really appreciate the answer. Thank you so much.

Your next question comes from the line of Matthew Grainger with Morgan Stanley. Please go ahead.

Good morning. Thanks everyone. I wanted to ask about the margins in the international segment. It's the first quarter in about two years you've been profitable there. I don't expect you to comment on longer-term targets for where you see that at the moment, but just if you could walk a bit more through what contributed to the improvement and the profits turning positive in that segment. And do you feel you've turned the corner and are now at the point where you can sustain positive margins and positive operating profit in international over the next few quarters?

I'll take a crack at that. Let me start by saying that you may recall last year we had a lot of issues in China with trade where we really had to readjust our inventory out in the trade to market conditions. So, a lot of what you're seeing is the non-recurrence of that.

We have some great results in our Mexico and Brazil operations that I feel really good about. In Brazil we're having a very good year as we've taken over from our Bauducco JV and have now control over our distribution and are seeing great results from that, even given the difficult operating environment in Brazil. So, great job from the Brazil team.

In Mexico we've increased distribution opportunities using our Sigma distribution partner, so great result there. India has been taking care of some products that are lower profitability, and you can really see that helping our margin and we need to continue to do that going forward.

I think China will continue to be a work in progress as we assess our opportunities against the marketplace that we have there, whether that's in chocolate, which has been a little bit weak, or in the more traditional candies that we have with our Golden and Munchin' Monkey brands. We are focused on gross margin there, and getting to healthy gross margin is a big part of the story, returning that whole segment to profitability.

Okay. And the restructuring that's going on in China, are we seeing the impact of that flowing through? Or is that being largely offset by some of the category challenges still?

Matt, we've done some initial integration work with Monkey with. We didn't say anything about any restructure work under way. So, I don't know if that's what you're referring to. There's, again, a broader assessment going on right now, as JP referenced. It's really a global review across all functions in all geographies. We'll come back to you with further details on the where and the how.

Okay. Great. Thanks.

Your next question comes from the line of Bryan Spillane with Bank of America. Please go ahead.

Good morning, everyone. A question for Michele. Can you just give us a little bit of color in terms of how business is performing in the US, instant consumable versus future consumption. I know the instant consumable has been a bit of a drag over the last year or so, but it sounds like some of the innovation or some of the work you've got going into the market next year is going to address that. But if you could give us some color of the difference between the two, would be helpful. Thanks.

Sure. Instant consumables is always a priority for us, given its strong profitability. So, as we look at the past couple years, we are really focused going forward on how we can continue to drive instant consumable a little bit harder.

There has been a bit more competition in that area from some healthy instant consumable offerings. But where we feel good about where we're making progress is the results we've seen from some of the innovation that was instant consumable focused, both in terms of our Ice Breakers gum capacity expansion and then the Reese's Pieces Cup and Big Kat. And then you'll see that with Cookie Layer Crunch, as well, and some other offerings into next year.

We've also focused on optimizing some of our merchandising strategies in a way that we think will continue to drive instant consumable a bit harder. So, it's certainly a key focus for us.

In terms of how it's trending right now, is it still lagging your future consumption business?

No, it's not.

Okay. Thank you.

Your next question comes from the line of Jason English with Goldman Sachs. Go ahead.

Good morning, folks. Thank you for the question. You mentioned earlier about innovation to try to rejuvenate next year and the platform optionality. Tactically I was hoping you could elaborate a bit more on this Crunchers product and how it fits in in terms of that, and maybe some specificity on what and when is coming on that.

And then stepping out beyond innovation, when we crunch some of the numbers over here, it looks like another big source for the category weakness has been just a crowd-out in terms of merchandising display and display space, quality merchandising space within retail. If you could elaborate a little more, what do you think is driving that? And what do you think could try to reverse the course of that one. I appreciate it. Thank you.

I'll address both of those. First of all, as we look at Crunchers this fits right in the strategy we've spoken to you a bit about around snack section, which is thinking broadly about where our core confectionary trademarks, which are so powerful, can play to bring in new users and be utilized across even more snacking occasions with consumers.

So, if you look at Crunchers, you can see the product has our great trademarks and great chocolate but very different eating experience, which is much more of a munchable, crunchy product, which will put those propositions in a whole different consumer usage occasion. So, it really fits in that strategy of expanding snacking occasions across the broader marketplace. And you'll see that in the marketplace sometime mid first half of the year. But we are really excited about that.

Relative to your broader question on some of the other factors at play in the category, one that I would bring up is just the timing of Easter is always a key factor for the category, and certainly some years that's a benefit and some years it's not. This year is one of the shortest Easters. Next year we have that going in our favor so we're excited about that.

And relative to display, there has been some pressure on the category as some of the biggest retailers have gone to clean floor policies. And given how much floor space confections has received, I think this category has taken a little bit of a bigger hit than some other categories potentially.

We believe that we're now behind us with lapping a good piece of that. And we believe that having great innovation is one of the best ways to gain display and space. And we're feeling good about some of the initiatives that we've put in place for holiday where we're seeing share gains, and also the share gains that we saw in Q3. And display's been a piece of that.

Thank you very much. I'll pass it on.

Your next question comes from the line of Andrew Lazar with Barclays. Please go ahead.

Happy National Chocolate Day, everybody.

Thank you, Andrew. What a coincidence that is.

I must admit I was not aware that was a thing but I did figure that out today, so that's good. JP, just a quick one. I'm curious on your thoughts on all the activity in the space this coming year. We've got a new chocolate launch in the US by Mondelez. You're got Mars and Wrigley now better able, in theory, to better integrate their efforts more fully in a category that remains relatively slower versus historical run rate.

So, I'm trying to get a sense if you think all of that is enough to accelerate the category growth rate in 2017, and obviously if what Hershey has planned, both what we know and don't yet know, is enough to either hold or gain share in that sort of more active environment.

Sure. As we look at 2017, we believe the category has indicators that it will continue to expand. I wouldn't describe that as a planning stance that says it's a hockey stick, but I think we can see that there's firming in the category. Consumers are in stores. And I just think overall at the macro level we think people are, across all income cohorts, beginning to spend a little bit more confidently than they had before.

What I think of that I'm very optimistic about is if you just look at the total snack wheel, snacking continues to progress. I think it's largely driven by occasions. So we have to compete and do well against those new occasions that exist in the market.

But I think innovation will be an important driver. It's good for the category, if you think about it within the total snack wheel, that we have great competitors. So, frankly, if there's good innovation, I think it just reminds consumers the relevance of CMG in total. So, I think that's good for all of us. And then we of course have to win, as well.

What I think you'll hear from us as we get more specific about 2017 is we're optimistic about some improvement in the category, growth rate as relative of total snack wheel. We think occasions certainly benefit us, as well. And then we have to win market share. That's why we're focused against an overall business model that helps us win as a part of the top quartile of our peer group. And then we also want to win market share obviously within our specific categories.

So, I'm pretty optimistic about 2017 and those are some of the reasons why. Michele, importantly, talked about the competitiveness in store. That was all true. But, listen, we're all in the business of growth and meeting the wants and needs of consumers, so we're going to be very focused against executing. We're going to win every day from a market share standpoint and then the category growth rate should take care of itself.

Great. As it relates to in-store competitiveness -- you may get into this more at your meeting in March -- but where do you think Hershey stands now with the in-store effort, or the feet on the street? You've made a lot of investment there over the last couple of years. Is that in the right place or does there need to be maybe some additions and further investment on that part of it?

In my comments I talked about being flexible and agile, and that's something that we look at all the time. We're constantly reviewing where we think the opportunities are with our organization. We believe strongly in the resource that we have and the effectiveness of our sales organization, our overall go-to-market effort. So, you would continue to see that as something we just view as really important to winning every day.

Thank you.

Your next question comes from the line of Alexia Howard with Bernstein. Please go ahead.

Good morning, everyone. Can I ask about how you're thinking about the acquisition strategy from here. I'd love to hear what your views historically on the Brookside acquisition and then Krave were. And I'm focusing on North America here.

As you think forward, are you thinking about larger-scale opportunities? And how are you thinking about diversification maybe in the direction of Krave and more into the non-sweet snacks area? Or is it going to be more of the bolt-on barkTHINS, Brookside type of activity? Thank you.

Michele and I will both talk about that. Let me take the more macro piece of that. We believe that we want to grow and we look at acquisition as an important piece of that. Obviously, if we can find large meaningful assets that align with the categories that we're in, we're very open to that.

As we've talked about before, we are very aware of all of the different things that exist. We look at a lot of things. At the same time, we believe we have a great business model and we don't want to do anything that doesn't really help us build there.

I think that when you would see us do smaller things, it's because we believe they fit within a larger platform or have a brand positioning that we can really build around. I don't think we're going to be in the business of just getting a lot of disconnected, small things that we can't figure out how to knit together. So we're very thoughtful about how we think the emerging consumer trends are and does that help us get into some of these different places.

M&A is an important thing for us. At the same time, we want to be very thoughtful about how we approach that. I'll let Michele talk a bit more about Krave and Brookside and some of her thoughts there.

We feel good about each of those acquisitions, if I look at Brookside, Krave, as well as barkTHINS -- though that one, obviously, is early. And, really, our strategy there is looking at how we can expand our portfolio to either bring in new users or new usage occasions, something that we perhaps aren't able to do with our current existing portfolio of brands. So, we really think about buying a brand and a full proposition.

As I look at Brookside, we've been really pleased with how we've delivered against that acquisition model over the years, certainly have grown the business. It continues to be important strategically in terms of delivering and getting us more into the mass premium space. And right now we're focused on consumers love the product, we have great repeat, and our next wave of growth there needs to be to continue to drive incremental trial and bring in additional users to that product that folks love.

Krave we're feeling good. And if you looked at all three of these acquisitions, as we create value we certainly start by creating value by expanding distribution. That's been the clear first piece of the model, by achieving cost synergy and then, third, by unleashing and expanding the brand. That's really the model we think about each one.

Krave, we have nearly doubled the sales on that. Likewise, nearly dubbed distribution. And are feeling good about where our velocities are in the marketplace and the innovation pipeline we have behind that. And we're seeing similar results, though it's early, again, but on barkTHINS. So, we feel like we've got a model that is helping us to continue to have a portfolio that meets the growing expanding needs of consumers.

Thank you very much. I'll pass it on.

Your next question comes from the line of David Palmer with RBC Capital Markets. Please go ahead.

Thanks. Good morning, everyone. And congratulations, JP. As a follow-up on an earlier question, how would you compare the new cookie-fused products to past innovation, maybe in your consumer testing or the trade buzz, it can be compared against, like the platforms like Mini's Pieces or Reese's stuffed with Pieces, or Hershey Caramel? And I have a quick follow-up.

First of all, all the different things that we look at there, we believe, they're consumer tested and we want to make sure that they're meeting a need. We've done a lot of demand landscape work that helps us think about where these products belong. And I would tell you I think the rigor we have and the new demand landscape work that we're doing is pretty exciting and it gives us some real insights into some of the things we're doing in our R&D work.

I would just tell you we're very confident about the things that you'll see us working on as we go forward. And I'm sure that in March we'll reveal a little bit more of our demand landscape work and you'll see where we're positioning some of these products. We've always been thoughtful and we're always optimistic, but we just try to get better every year, and we're pretty excited about the things we have in front of us.

With regard to SKUs, back in 2015 I think you were talking about SKU rationalization being part of the plan. Earlier in the year it looked like SKUs were flat. Now they're coming back up again. Are you in a good place with the trade on SKUs and velocities? Or how are you thinking about that as you enter into 2017 and have new products coming on shelf? Thanks.

We know that it's a highly competitive marketplace and I think we're always trying to achieve that balance between having the right amount of news to fulfill both consumer and retailers' needs and be competitive in the marketplace, but also balance that with being very disciplined and really making sure that we've got the right focus on profitable SKUs that allow us to deliver the best margin. So, I would tell you that we've got a lot of focus on that right now, we have continuing focus on that, and we'll look to continue to optimize there.

Thank you.

Your next question comes from the line of John Baumgartner with Wells Fargo. Please go ahead.

Good morning. Thanks for the question. Michele, just in keeping with the theme of generating your own growth in the US, how much more can you maybe lean into the seasonal businesses, whether it's in C stores or other channels? That seems to be a reasonably incremental segment that maybe Hershey hasn't executed against significantly in the past.

We think very broadly about seasons. Seasons are really celebratory occasions. So, we certainly look to max out each individual traditional season opportunity. But we really try and think more broadly about how we can apply that model more broadly.

For example, the S'mores occasion is a great opportunity of almost of S'mores season. And then more recently we built the birthday opportunity, which we just started shipping in the marketplace in the second half of this past year. It's one of the reasons why Kisses is doing so well, because we've now found a way to get that Kiss and some of our chocolate products into a new occasion where we really help create and shape that occasion for consumers and the need for our product during that occasion.

So, we see that as one of the big opportunities, is to continue to expand on that occasion-focused strategy, in addition to winning the traditional seasons, and continuing to uncover you new insights that allow us to do that.

Thank you.

The last question will come from Steve Strycula with UBS. Please go ahead.

Hi, good morning everyone. Two quick questions, one for Michele and one for JP. For Michele, I think I heard you say earlier in the call that Cookie Layer Crunch, which you're excited about, should be about a 1 to 2 percentage point lift to baseline sales in the fourth quarter. Is that right? And if so, should we expect it to endure through the first half of next year as you bump up that baseline into 2017?

For competitive reasons, I don't know if we want to get into that level of specificity yet. Obviously, the fourth quarter you're backing into it so it's a little bit different. But a lot of this, it's a big brand, a big launch, and we hope to get trial and repeat, and, as JP loves to say -- repeat of repeat. We'll certainly provide more color there. But it's the biggest news on the brand in a long time, so let's put it that way.

Great. And then, JP, a quick follow-up. You commented earlier on the call that you're seeing broader-based spending habit pickup across income spectrum, it seems like, because you said traffic seems better in the stores. I think this time last year talking down, saying traffic was a little bit of a pain point in some of your occasions. So, can you explain the evidence as to why you're seeing a broader-based pick-up in your core consumer and even the category? Thanks.

First, you have to step back and remember with our brands we have very high household penetration, we have high market share, and therefore we can see across -- and we have ubiquitous availability. So, as we look at all of the different channels and how consumers, our foot traffic into stores, and then how they're spending per trip, is all things that we follow pretty closely. So, imagine that some retailers probably have relatively stable traffic on a going basis, and then others, depending on who their income cohorts are, might see a bit of a different traffic pattern.

What's happening is, is, first, you begin to see people come back into the stores, and then you begin to see the basket broaden a little bit. I just want to be cautious that it's not as if everybody's out high-fiving. But, as we talk to some of our retailers and as we follow those metrics, there's evidence that the consumer on a more broad base is having a greater frequency in the store. And then we follow what I would simply call the breadth of the basket or the value of the basket, and we're seeing some improvement there, as well.

It's different by channel and you would see some retailers having different experiences. Some retail segments still talk a little about volatility that they're seeing. But again, the good news is that fairly broadly we're seeing an uptick in trips.

And then as the economy, I think, continues to firm a bit, there will be some confidence around the spend of those consumers. And that's part of what makes us optimistic about 2017, is if you think about the three elements of our business -- seasons, the everyday business, and then, of course, instant consumable -- instant consumable is very much influenced by people obviously being in the store. We've got to have our products on the floor when they're in the store.

When our advertising's working hard for us you see that everyday business, which is a wonderful margin business for both us and the retailers do well. It really comes back to these elements Michele talked about earlier for us -- strong innovation, making sure we've got the right marketing mix modeling, and then the business model that we've talked about -- and we'll explain more when we get together in the spring -- are really going to be the three buckets of focus for us as a Company.

Congratulations on a good quarter.

Thank you very much for joining us today. The IR team will be available for any follow-up questions you may have.

This does conclude today's call. You may disconnect at any time. And have a wonderful day.