好時 (HSY) 2017 Q2 法說會逐字稿

Good morning, everyone, and welcome to The Hershey Company's Second Quarter 2017 Results Conference Call.

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

(Operator Instructions) This call is scheduled to end at 9:30 a.m.

(Operator Instructions) And please note, this call may be recorded.

Thank you.

It's now my pleasure to turn your conference over to Mr. Mark Pogharian.

Please go ahead, sir.

Thank you, Keith.

Good morning, ladies and gentlemen.

Welcome to The Hershey Company's Second Quarter 2017 Conference Call.

Michele Buck, 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 2016 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 a summary of consolidated statements of income prepared in accordance with GAAP.

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

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

These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP.

Rather, the company believes that 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 second quarter 2017 results, excluding net pretax charges of $28.9 million or $0.14 per share diluted, which are primarily related to business realignment costs and derivative mark-to-market losses.

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 Michele Buck.

Thanks, Mark, and good morning to all of you on the phone and webcast.

Hershey's second quarter results were solid, with particular strength in market share and EPS delivery, and we made solid progress against the initiatives that we discussed with you earlier this year.

I was pleased with our innovation performance and solid second quarter U.S. retail takeaway of 4%, driven both by our core brands and Easter, where we gained 1.6 market share points in this important season.

Constant-currency net sales increased 1.8% and were greater than our previous estimate, driven by the timing of new standup packaging as well as distributor changes by several customers.

Gross margin was up nicely in Q2, and we continue to expect it to increase around 50 basis points for the full year.

This will enable us to maintain investments and initiatives that should benefit the company in the near and long term and drive future growth.

Adjusted EPS of $1.09 was greater than our previous estimate due to higher sales, gross margin expansion and the timing of advertising and related marketing investments versus our forecast.

We continue to expect that full year advertising and related marketing will increase versus last year.

The Margin for Growth program we discussed on March 1 is progressing nicely, and we believe the benefit in 2017 will be a little bit better than our initial thoughts.

Importantly, year-to-date adjusted operating income and adjusted EPS increased 13% and 23%, respectively.

This puts us in a position to deliver solid full year EPS growth at the high end of our 7% to 9% range while also enabling important investment in the business.

Our core power chocolate brands, Reese's, Hershey's, Kit Kat and Kisses, continue to perform well, with retail takeaway up 6% and market share up 1 full point year-to-date.

Nielsen's second quarter measures do not encompass the entire Easter season in both the year ago and current periods.

Therefore, the majority of my remarks today will refer to year-to-date marketplace performance for the 24 weeks ended July 8, 2017.

Year-to-date, CMG, that's candy, mint and gum, category growth in the xAOC+

C-store channels was up 1%.

Importantly, within the chocolate and non-chocolate candy segment, where we derive the majority of our U.S. sales, year-to-date category growth is about 2.1%.

Turning to Hershey takeaway.

Total Hershey U.S. retail takeaway for the year-to-date period through July 8, 2017, was up 1.4%, driven by solid CMG growth of 2%.

This more than offset some softness in grocery items such as baking chips and syrup as well as lapping last year's successful snacks performance.

Our year-to-date CMG market share was up 0.3 points, resulting in a market-leading share position of 31%.

Importantly, our CMG nonseasonal retail takeaway and market share, adjusted for Easter cannibalization, increased.

Year-to-date, xAOC+

C-store chocolate category growth was plus 2.3%.

Hershey's xAOC+

C-store chocolate retail takeaway was plus 2.9%, resulting in a chocolate market share gain of 0.3 points.

While we feel good about the progress we've made and strong market share gains, our year-to-date takeaway is lower than we anticipated, driven by the challenges we are seeing broadly across the total box.

As a result, we have updated our full year net sales forecast to reflect this change in shopping patterns and behavior that will most likely continue over the remainder of the year.

We have good visibility into our second half seasonal orders and have strong consumer support that we expect will drive second half retail takeaway of about 1%.

This will outpace second half net sales, which we estimate will be around the same as the year ago period due to the second quarter timing I mentioned earlier.

Our response and go-to-market strategy in this fast-changing retail environment must continue to evolve.

Work is underway to determine how to further leverage our advantaged capabilities and knowledge to enable us to deliver the consistent top line growth that we expect from our business.

We believe the CMG and broader snack wheel will continue to outperform the center-of-the-plate shelf stable part of the store.

CMG and snacks have inherent advantages such as impulsivity, seasons and multiple pack types for usage occasions.

This facilitates merchandising and display within different parts of the box where there is foot traffic, like the perimeter and checkout.

We will keep building on our expertise as we continue to encounter greater levels of competitive snacks innovation and related in-store merchandising and programming.

So we're focusing on 3 areas of our business that we control where we can drive growth.

One, CMG and snacks innovation.

Consistently delivering meaningful, sustainable candy and snacks innovation on an annual basis is an important lever of our overall growth algorithm.

We're testing products and concepts from the snacks demand landscape work, and we're encouraged with the early results.

The demand work is also pointing to an opportunity around branding.

Our core candy brands have appealed to other snack consumers.

However, there remains an opportunity to more effectively target this group.

We'll leverage this work in the near future and look forward to sharing the insights with you.

Leading this effort will be Mary Beth West, who joined Hershey in May as our new Senior Vice President and Chief Growth Officer.

Mary Beth will oversee the company's growth strategy, including insights and analytics, strategy, innovation, R&D and M&A.

She is an accomplished leader who is considered one of the best food executives and marketers in the industry.

Her deep experience in growing some of the world's best-known consumer brands and demonstrated ability to transform consumer engagement will be a tremendous asset to Hershey as we chart [outgrowth] agenda.

Two, we're accelerating our efforts in collaboration with key brick-and-mortar retailers related to their click-and-collect and omnichannel initiatives as well as with established e-commerce players.

This is a fast-evolving and continuously changing space, and we're partnering on digital front-end design to drive category and Hershey growth.

We are making investments over our strategic planning cycle that we believe will lead to solutions to ensure that Hershey and the category remain top of mind with consumers, no matter where and how they shop.

The buildout of this strategy should help ensure that we have a compelling message and product that connects with the consumers of our major retail partners in all channels.

Our absolute annual e-commerce net sales dollars are small, low single digits on a percentage basis.

But it's the fastest-growing platform of our business.

As shopping and consumption patterns change, there's been an acceleration of online snacks purchases in 2017.

We're expanding and further developing our e-commerce CMG and snacks business.

We have a dedicated cross-functional team responsible for the strategies and execution of our e-commerce plans that report directly to Todd Tillemans, President of our U.S. commercial group.

Within our supply chain, initiatives are underway to create more efficient pack types and packaging to accommodate the needs of e-commerce and click-and-collect retailers.

And we'll leverage the learnings from our digital and social marketing teams with the goal of converting every consumer connection into a purchase opportunity.

The seasonal component of our core business gives us an opportunity to engage with consumers and potentially leverage this into subscription-or occasion-based purchases.

While we have come a long way, we believe we're still in the very early innings, with a long runway of opportunity ahead of us in the e-commerce space.

Three, we need to leverage and commercially activate the incremental consumer data that is becoming increasingly available due to technology advancements.

We have advantaged capabilities today; however we need to continue to develop them.

Our analytics and consumer insights have historically focused on traditional methodologies based on qualitative and quantitative shopper feedback.

Predictive analytics, machine learning and big data sets to identify candy and snack growth opportunities is getting better, and we're constantly exploring how to leverage and further our capabilities using this technology.

So there are a lot of exciting growth initiatives underway that we believe will help ensure Hershey remains a top quartile performer.

Now for an update on our International and Other segment.

We are driving growth while meaningfully improving profitability.

Excluding China, our International and Other segment constant-currency net sales are expected to increase mid-single digits this year.

We're making measured investments in our core markets of Mexico, Brazil and India, where we're seeing solid marketplace gains while improving on operating income trends.

Net sales for the quarter were greater than our estimate, although on a constant-currency basis, slightly lower versus the second quarter of 2016.

Mexico and Brazil continue to deliver against plan and achieved constant-currency net sales growth in Q2 of a combined 12%; and in India, where we have evolved our portfolio, shifting to higher-margin value-added products to strengthen our business model.

We're sharing these learnings with our team in China who's focused on doing the same.

In the second quarter, implementation of the Margin for Growth program in China commenced.

We have begun to optimize the manufacturing operations and the related support functions as we strike the right balance between in-country investments and near-term market opportunities.

China chocolate category sales sequentially improved from Q1 to Q2, increasing plus 1.9%.

Small format stores continue to show growth and more than offset hypermarket softness, resulting in a year-to-date chocolate category growth of about 0.5%.

Our e-commerce team continues to make progress, and we estimate that our online market share increased 0.6 points in Q2 to 8.6%.

Going forward, we have a disciplined strategy in China that is focused on effective Hershey brand messaging, continued e-commerce penetration and smaller store format expansion to enable us to capture the opportunity in this emerging market.

Now to wrap up.

We're making progress against the many growth initiatives we outlined when we were with you on March 1. In the second half of this year, we're lapping a solid comp versus the year-ago period.

However, we have a lot of innovation and activity, including the continued rollout of Hershey's Cookie Layer Crunch bars, the late Q2 launch of Reese's and Hershey's Crunchers candy and Reese's Crunchy Cookie Cups as well as solid Halloween and holiday plans, all of which should enable us to achieve our goals.

We have much work to do.

And there are always refinements along the way, especially now, given the consumer and retail environment seems to be changing at an accelerated pass -- pace, I'm sorry.

With this change, I see tremendous opportunity, opportunity to evolve our business model, to advance our capabilities to new heights and to create new vectors to unlock future growth.

As evidenced by the market share gains of our core chocolate products, our brands resonate with consumers in an increasingly competitive environment.

Consumers have an emotional connectivity to this category, and when combined with our go-to-market capabilities and knowledge, I feel we're positioned nicely for future growth in measured and evolving non-measured outlets.

The Margin for Growth program should provide us with the fuel to invest in the initiatives that we believe will create long-term value for our shareholders.

We'll continue to invest in our brands and in the capabilities that give us a competitive edge at retail and with consumers.

We believe our margins are sustainable and are forecasted to increase over our strategic planning cycle.

And our strong operating cash flow gives us many options to grow our business and reward shareholders.

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

Patricia?

Thank you, Michele.

Good morning to everyone on the phone and on the webcast.

Second quarter net sales of $1.66 billion increased 1.5% versus last year.

This was greater than the estimate we spoke to you about in April due to the timing of some customer shipments that Michele discussed earlier.

As implied in April, we did not expect a big acceleration in Q2 from a net sales and retail takeaway perspective given the late Easter and the lapping of successful new product launches like Kit Kat, Big Kat and Reese's Pieces Cup in the year-ago period.

Adjusted earnings per share diluted came in at $1.09, an increase of about 28% versus last year driven by the higher sales; by solid gross margin expansion; OI improvements in the International and Other segment driven by our Margin for Growth program savings, which are coming in a little faster than we anticipated; a decline in corporate expenses; and a reduction in the year-over-year tax rate that was in line with our estimate.

Excluding unfavorable foreign currency translation of 0.3 points, net sales increased 1.8% versus the year-ago period.

Volume was a 1.2 point contribution to sales growth, and net price realization was a 0.1 point favorable.

The barkTHINS acquisition was a 50 basis point benefit in the second quarter and is relatively on track with our plans.

By segment, North America net sales increased 2.2% versus the same period last year.

Excluding Canada's unfavorable foreign currency translation of 0.3 points, net sales increased 2.5% versus the year-ago period.

Volume was a 1.7 point contribution and net price realization was a 0.2 points favorable.

The barkTHINS acquisition was a 60 basis point benefit.

Given the level of competitive activity in the CMG category and the timing of innovation and promotions impacting year-over-year comparability, we were pleased with our U.S. market share performance.

However, similar to trends experienced by the broader U.S. food group, 2Q CMG category growth and Hershey retail takeaway was less than our forecast.

The company forecast growth in U.S. retail takeaway and market share in the second half of the year despite the broader industry retail challenges that are expected to persist.

Due to the timing of some Q2 shipments, our net sales in the second half of the year are expected to be about the same as the year ago.

As is typically the case, the company expects full year U.S. retail takeaway and net sales growth to be similar.

Total International and Other segment net sales for the second quarter decreased 3.6% versus last year.

Excluding the 10 basis point impact of unfavorable foreign currency exchange, International and Other segment net sales decreased 3.5% versus the year-ago period.

Volume was off 2.1 points due to planned declines in China, and net price realization was a 1.4 point headwind.

Turning to margins.

Adjusted gross margin of 47.1% increased 160 basis points in the second quarter, driven primarily by lower input costs and supply chain productivity and cost-savings initiatives.

This more than offset unfavorable sales mix and a slight increase in obsolescence.

For the full year, we continue to expect adjusted gross margin to increase about 50 basis points, driven by lower input costs, greater than our previous estimate, and by productivity and cost-savings initiatives.

This is expected to offset second half fixed costs volume absorption due to lower sales, unfavorable product mix and the rollout of new packaging formats.

Adjusted operating profit in the second quarter increased about 16.9% versus the year-ago period, resulting in operating profit margin of 20.8%, an increase of 270 basis points.

The increase was driven by the higher gross profit and lower SG&A, due to productivity and cost savings, both at the corporate level and in China, driven by our Margin for Growth program.

Total advertising and related consumer marketing expense was about the same as the second quarter of 2016.

Our forecast back in April called for mid- to high single-digit percentage increase.

However, given the retail environment, the forecasted second quarter increase in advertising and related consumer marketing expense is now planned to occur in the second half of the year.

The company continues to expect that full year advertising and related consumer marketing will increase in 2017.

Now let me provide a brief update on our International and Other segment.

On a constant-currency basis, net sales declined 3.5% versus last year, although revenue performance was slightly better than our forecast.

Michele discussed our China operations, but let me add that I'm very pleased with the Margin for Growth program work that is underway.

While this is pressured sales, the rightsizing of the cost base is beginning to come through at the operating income level.

Looking at our other focus markets, we continue to execute against our plans in Mexico, Brazil and India, where combined constant-currency net sales in these 3 countries increased 10%.

More on this in a minute.

Second quarter International and Other segment operating income of $8.4 million increased nicely, driven by the implementation of the Margin for Growth program.

As we stated previously, we are driving a strong profit-focused mentality in this segment and are beginning to see the bottom line trend improve in 2017.

And we now expect International and Other segment operating income to be around the break-even area for the year.

In Mexico, chocolate progress continues with solid double-digit retail takeaway that is in line with chocolate category growth.

Q2 constant-currency net sales in Mexico increased 17%, driven by a combination of volume and pricing.

Sales were strong across key brands, particularly Kisses and Hershey's chocolates and Hershey's milk drink box.

Our new Hershey's CHOCOYOGO product is off to a good start.

We continue to build distribution in the modern trade, with repeat purchases and market share tracking with our estimates.

In Brazil, our team is focused on profitable growth despite the challenging operating environment.

Q2 constant-currency net sales increased by 3% driven by about 6 points of pricing.

We estimate that year-to-date chocolate category growth in Brazil is about 10%.

Our retail takeaway was about 2.5x the category growth rate, fueled by both distribution gains and higher velocities, resulting in a market share gain of about 40 basis points.

We do expect retail takeaway to temper in the second half of the year due to increasing competitive activity from wait-outs and price-driven activities.

Constant-currency net sales in India increased about 2% and was in line with our plan.

Importantly, growth in the brands we're investing behind.

Hershey's branded syrup, spreads and milk booster as well as Brookside, JOLLY RANCHER and SOFIT, increased more than 40%.

The launch of Brookside, primarily in the modern trade, is progressing and on plan.

Our transition of the India portfolio is enabling a higher-margin business, and we are on track to expand gross margins here by 1,000 basis points in 2017.

This is enabling investments in the marketplace that should result in a sustainable operating model.

Moving down the P&L.

Second quarter interest expense of $24.1 million increased $2.8 million versus last year.

For the full year, we continue to expect interest expense to be in the $95 million to $100 million range.

As expected, the adjusted tax rate declined in the second quarter to 25%.

The rate versus the second quarter of 2016 was driven primarily by a favorable rate differential related to supply chain in international operations, some discrete items as well as the adoption of Accounting Standards Update 2016-09 for the accounting of employee share-based payments.

For the full year, the company now anticipates its effective rate to be between 26.5% and 27%.

This is about 100 basis points lower than our previous outlook due to the discrete tax items and slightly higher income tax credits.

Specifically, in 2017, we expect other income and expense related to the corresponding tax credits to be about $60 million versus our previous estimate of $55 million.

For the second quarter of 2017, weighted average shares outstanding on a diluted basis were approximately 214.6 million shares, in line with last year, resulting in adjusted earnings per share diluted of $1.09 or an increase of about 28% versus a year ago.

Total capital additions, including software, were $51.4 million in the second quarter.

For the full year, we continue to expect that CapEx will be in the $270 million to $290 million range.

And during the second quarter, adjusted depreciation and amortization was $60 million.

In Q2, we paid $128 million in dividend.

And earlier today, we announced that we increased the dividend by 6%.

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.

The company did repurchase $100 million of common shares in the second quarter to replace shares issued in connection with the exercise of stock options.

Now to summarize.

As Michele stated, we have a lot of activity over the remainder of the year.

While our second half of the year profile is not as robust as we'd like, recall that we're lapping our strongest period of quarterly sales growth.

Combined with the macroeconomic and consumer challenges at retail, we believe the plans we have in place will enable us to achieve our full year sales target of around 1%, including the impact of unfavorable currency exchange rates of 25 basis points.

As I mentioned earlier, we don't expect input cost inflation and continue to forecast adjusted gross margin expansion of about 50 basis points.

The Margin for Growth program is progressing, and we now expect 2017 savings of about $25 million versus our earlier forecast of about $15 million.

Additionally, our brands typically respond positively at marketplace investments and we continue to forecast that full year advertising and related consumer marketing will increase in 2017.

Although lower than our previous estimate, SG&A, excluding advertising and related marketing expense, is expected to increase for the full year 2017 versus 2016, as our ERP expense will be ramping up in the second half.

Combined with the lower tax rate, we continue to expect 2017 adjusted earnings per share diluted to be towards the high end of the 7% to 9% range.

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

(Operator Instructions) We'll take your first question from Andrew Lazar.

My question is on marketing and advertising spend.

I guess, would you anticipate that the full year spend that you plan is consistent with what you initially targeted, just now concentrated in the back half of the year as opposed to the increase that you thought previously in 2Q?

And then, given that your brands and your business historically have been so responsive to the marketing spend, and you've got a lot of new stuff out there like the Cookie Layer Crunch and you've got some EPS flexibility in the 2Q, I guess I'm curious to get a little more color on why not spend earlier in the year behind some of these initiatives when your brands really are so responsive?

So Andrew, as you know, we are big believers in investment in our brands.

It's a key piece of our business model.

We are fortunate to participate in a category that is very responsive to investment.

So as we look at our investment in advertising and consumer-related spend, our impressions will be up, so we look both at the dollars, but we are also trying to get even more impact from the dollars we spend and our impressions will be up comparably both in half 1 -- in half 2 as they will in half 1. So even though there was a little bit of shifting in dollars, our spending is definitely in line with what we had forecast for the year; in fact, it's up a bit.

And we continue to feel good that what we're getting from that spending is even higher, based on the marketing mix modeling that we're doing.

So we're always making trade-offs and balances as we manage the year in terms of where we think we can get the biggest bang for our buck.

So we are committed to the dollars, but sometimes we will shift it if we see an opportunity or we have some innovation.

We had some in Q2 that actually -- the ship timing pushed out a little bit further than we anticipated, and therefore, we needed push out the advertising.

So I wouldn't think about it as much as a pullback of us consciously pulling back on spending, but more making sure that we're getting the most and aligning it to the activity that we have and the quality is copy, et cetera.

We'll take our next question from Alexia Howard.

So I guess my main question is you had a pretty hefty and clean beat this quarter versus expectations and you're not -- yet you're not raising your formal guidance on the EPS range for the year.

I know you're saying it's coming in at the top end.

Is there anything that's getting tougher going forward than you expected, aside from the uncertainty around the store traffic here in the U.S.?

Yes.

And, Alexia, I would say there's not any one big thing that we are trying to protect ourselves against.

I actually think what we really want to do is make sure that we have the opportunity to invest into this marketplace.

There are a lot of new capabilities we're investing in: e-commerce, we've mentioned before; continued investments in activating some of the learnings from our demand landscape; work that we're doing around aisle reinvention, packaging updates, investing in emerging brands.

So we're really looking at where are those vectors of shift in evolution in the marketplace and how do we make sure that we are investing appropriately there and also still able to maintain all those critical investments in the core that drive our profit engine.

So that's really what we're trying to do there.

The other thing I'd add to that, Michele, is that -- and Alexia, is really, what I'm pleased about is that we were able to hold our EPS guidance, given that we took our net sales guidance down.

And that really reflects the company's good cost discipline, which is allowing us both to maintain that as well as invest even more in the second half than we plan to.

I agree.

The other thing, Alexia, just as a data point, I should point out, ERP is another big investment.

And as we look at our investments there, we'll actually be spending twice as much in the second half behind ERP as we have in the first half, and that's meaningful.

We'll take our next question from Jason English with Goldman Sachs.

One thing you highlighted, however, that's concerning is just the ongoing softer-than-expected category growth rates.

You also mentioned e-com, the impulsivity of the category.

Presumably ongoing shift to e-com threatens traffic, maybe threatens the category with that impulsivity.

So in context of those -- the realities of store category growth and maybe some risk on the forward, I'm surprised that we haven't heard you talk about your strategic focus on diversification to other snacks.

So can you shed a little bit more light on where you're going.

I know there's chatter and news out there on expansion into ready-to-eat popcorn?

Could you just touch on some of the initiatives, whether or not there's a heightened sense of urgency in context of category?

And what it means, both from an organic and inorganic strategic direction?

Absolutely.

So let me start with first of all, we feel really good about this category and particularly about chocolate.

If you look at the chocolate takeaway numbers that were delivered this year, because the category softness was primarily driven by gum and mint.

And as you know, chocolate is the biggest piece of category.

The way that we think about the business is we need to win with growing customers.

Our goal is always to outperform the marketplace and to gain market share so that if there is softness, we get even more of our growth from market share gains.

And we're heavily focused on that because it's our profit engine.

At the same time, I would tell you, I think about this marketplace as a time where we have a great core business that we're going to continue to drive.

And at the same time, we have some opportunities to evolve, to evolve our product and brand portfolio and also to evolve our channel mix to adapt to the changing marketplace.

So the role that -- snacks is important to our strategic agenda, and the way that I think about it is, we are a large player in snacks by being #1 in the biggest category within snacks.

What we now want to do is expand our portfolio so that we can participate in even more snack occasions and ensure that we have the right portfolio and channel development to maximize those opportunities.

So I would say it is important.

You will see us both doing snacking innovation and also continuing to evaluate and consider M&A as a lever in that growth agenda as well.

Our snacking demand landscape that we completed really helps us to lay out and see the future opportunity, both for confection and for snacks to make sure that we are building our portfolio incrementally.

We'll take our next question from John Baumgartner.

Michele, just to continue with the snacking discussion.

In the first half in North America, there was a 60 basis point differential in your retail takeaway between the total portfolio and then just the CMG business, which grew faster.

So can you speak a bit to some of the performances and observations at Krave and barkTHINS in terms of just distribution and competition?

Sure, absolutely.

So first of all, we feel great about our core brands' CMG performance.

As you know, that's really the stable part of our portfolio.

That is really our profit engine.

So feel great about that.

As I look at the remainder of our portfolio, I'd say that we saw some pressure in 2 areas.

First of all, baking chips and syrup were softer than anticipated, in line with, I think, what we're seeing in center of the store categories.

And then as we go and look at our portfolio of smaller emerging brands, I would say it's a little bit of a mixed bag.

We're really pleased with how barkTHINS is doing.

And as we look at some of the rest of the pieces of the portfolio, we've learned a lot since we made the Brookside and Krave acquisitions and we're trying to leverage that learning along the way.

So we've had to rightsize distribution on some of those brands where we think we overextended both the distribution and perhaps the portfolio a bit.

So we're really self-correcting on that and we're applying learnings to make us even more stronger in the marketplace.

I would view this piece of the portfolio as one that we expect growth from, but I think it's going to be a little bit lumpier and inconsistent as we leverage big learnings and expand along the way.

As part of that snacks portfolio, I would add, we feel really good about Snack Mix and those products that we put in the marketplace, as they've demonstrated a lot of stability and pretty strong growth.

We'll take our next question from David Driscoll.

I had probably just 2 questions that I wanted to ask.

A follow-up here on the sales.

So in the most recent Nielson data, the last 2 quad weeks, either a month ago, it was up 0.6 and the most recent data, up 2.2.

So it actually looked like things were getting better.

So maybe I'm a little surprised that you're thinking net sales will be flat in the back half.

And then maybe when you just talk about that a little bit, the strength in this recent Nielsen data and why it then suggests that things flatten out, can you quantify this -- the impact of the inventory build?

And then to Patricia, can you talk about the margins a little bit?

I think operating margin's up 210 basis points in the first half.

And I think the implied margin would be down 100 basis points to kind of reconcile with where your guidance is.

That feels pretty negative given your comments on Margin for Growth and the very flat commodity environment that we're seeing.

Maybe a little bit more discussion on that would be helpful to understand the impacts.

Thanks, David, and I appreciate the question and your perspective on that.

If we look at the 12-week period ended 7/15, it's a little more flattish.

So while I'm really encouraged by the past several weeks, if I look at the 2 quad periods earlier, the marketplace was much softer.

So I think what we're seeing this year is a lot of volatility.

It's difficult to predict the market.

And I certainly am optimistic that those recent trends continue.

But I would say that they do include the July 4 holiday period and I think we've seen more a bit more stability during some of those periods, where there's an anchor season where somebody's coming into the store to make their purchase.

But really, I'd say, it's about volatility.

The first part of the year, we saw some months that were up, we saw some down.

And we're trying to do our best to project what we think that will look like as we go into the second part of the year.

And this is Patricia, David.

You asked about the retail inventory.

And yes, that was a factor in our second quarter.

So we really wanted to have a lot of transparency around that.

We did some pipeline build against new packaging, and we accommodated some of our retail customers who had some changes in their own distribution network, and it was very important to us to meet their service needs so that they could get product on the shelf in a good execution way.

And so when you look at our takeaway, you can see that we need to normalize that retail build over the second half of the year.

And so we're still -- we still believe that retail takeaway will improve in the second half.

But from a net sales perspective, we know that we've got to work through that inventory.

In terms of the gross profit that you commented on, that sales pattern also shows up in the gross profit.

So to the extent that we had higher sales in the first half of the year, that had better fixed cost absorption and that will come out again in the second half of the year as the sales normalize through.

The other thing that we had in gross profit is, as we have reduced our overall full year sales guidance, obviously, that has a mix impact when you look at the mix of products that we will -- we think are most hit by the weaker retail trends.

And then finally, we do have some changes in packaging coming, both on the shelf and as we work with our retail partners for packaging that works in their formats.

And that's also a bit of a headwind for us in our gross margin in the second half of the year.

And, Patricia, just to follow-up, is there any way that you could quantify that retail inventory build?

Just because it sounds like we should take it out of the third quarter, but I don't think I heard you say the magnitude of it.

We didn't put the dollar amount out there, but what I'd say, David, is, what we want to do every year is make sure that our net sales and our retail takeaway are in line together.

So if you look at our overall sales, assume that that's our retail takeaway, I think you can pretty easily normalize out that inventory.

By the end of the year, we would say they'd be in line.

We'll take our next question from Jonathan Feeney.

I guess, following up on Dave's questions, I want to make sure I have these numbers right.

You told us that -- I think you told us, year-to-date, U.S. retail CMG takeaway was 1.4%.

And I think that maps to the 4% number you gave us for the second quarter in the release and correct me if I'm wrong about that.

So a couple of questions here.

First is, am I right?

That means Q1 was down 1.2% on that retail takeaway or something like that?

I know there's seasonality between Q1 and Q2.

And secondly, Patricia mentioned Q2 takeaway was disappointing.

Can you give us a sense of what you had been expecting for Q2 takeaway?

And then related to that, like what kind of takeaway would you expect?

Is this just continued 1.4-ish percent takeaway in the second half for the U.S. are you expecting with this flat sales guidance?

Sure.

So let me start with the first part of your question, which is total Hershey takeaway was up 1.4%.

Hershey CMG takeaway year-to-date was up 2.0%.

So our CMG [performance] outpaced the total.

And that was really as a result of…

The grocery stuff.

Yes, the grocery stuff primarily, that was a bit of a drag on the total number.

And then as we look at the takeaway on a full year basis.

As Patricia said, we're looking for, by end of year, net sales and takeaway to be relatively in line with each other.

And we're anticipating net sales to be around that 1% range.

So that can help to give you a guide of the range of where we think that takeaway may come in.

And, Jon, it's typically, pretty much well -- they're relatively of the same every year.

So we then -- if you go back to our April guidance, around 2%, we meant around 2% retail takeaway as well.

That's helpful.

I guess I'm just trying to understand where the disappointment came in and its order of magnitude on takeaway.

Yes.

And I'd say a lot of that was around every day post Easter was a bit softer than we anticipated.

We'll take our next question from Ken Goldman.

Question, Patricia, your guidance remains, I think for input cost to still just not be a headwind for the year.

But they were a tailwind in 2Q.

And it's obviously impossible to know from our end.

But at least from our basic math, it doesn't seem like that tailwind gets any less strong in the back half of the year.

So I'm just curious.

Is there anything we should be aware of that might be a headwind in the back half of the year?

Or do you expect similar trend as to maybe what you saw in 2Q in terms of just that input cost tailwind?

Yes, they were a little bit better in the second quarter.

And we expect that to flow through to the full year, but not get better.

It's really the drivers that I mentioned earlier around -- because of the change in sales between the first half and the second half, you've got some fixed cost volume absorption.

You've got that mix impact I mentioned, and some increased costs coming through on the packaging.

And that's really what's -- when you look at that against where we came in, in the first -- the second quarter, that's where some of that comes out.

And a follow-up.

Cookie Layer Crunch, you talked, I think last quarter about the real question.

I think this is true for all new products, right, is where repeat purchases are going to be.

Can you help us understand where they have come in versus your expectation?

And the reason I'm asking is, at least in Nielsen data, which I know is not always precise when it comes to new products, but what we're seeing is, the max ACV, the weighted average ACV, they both peaked a few months ago and have trailed off a little bit since.

I just wanted to get a better sense from you guys what you're really seeing with that brand and how happy you still are with it?

So we're very pleased with Cookie Layer Crunch performance.

Trial and repeat are exactly in line with our expectations.

And so we feel great about that, especially in a world and a marketplace where there are a lot of other big innovations in the category this year as well.

So we particularly feel well that we hit those goals despite that.

So we continue to be bullish on the initiative as well as on some of the other innovation like Crunchers and some of the recent innovation that is out there.

We'll take our next question from David Palmer.

First, a follow-up on the acquisition comment you made.

I think it was Jason's question.

Are you looking across all snacking as fair game?

I ask because, at times, Hershey has ventured into other aisles and has done perhaps a little less well.

And you seem to be signaling a little bit of a closer-in approach with that term snackfection where seemingly you're trying to leverage a little bit more of the core with what you extend into.

Any comment there would be helpful.

And I have a follow-up.

Sure.

So we really are looking across the snacking landscape.

We have identified a couple key areas that we have the most interest in.

For competitive reasons, I won't go into the details on.

I will say, when we think about that, that we do think about how we can get scale wherever we're going to make an acquisition, either by buying something that's large enough to give us scale or by either looking at a section of the store we can get scale or a segment -- a category segment where we can get scale to ensure that we get the benefits of having a profitable business and the organization's focused in one spot.

So I'd say we're looking across, but we have distinct areas of focus within.

And just to follow up also in your comments in the prepared remarks.

You seem to be calling out a need for at least a subtle repositioning or a revived focus on the core in some way.

You said something about insights work you're doing and stay tuned.

Is that a comment about everyday nonseasonal chocolate?

And maybe you can give us a hint as to what sort of general opportunity exists for improvement and the timing of any tactical changes you can make there.

Sure.

I mean, what the snacking demand landscape really gives us is a even deeper view of where each of our brands plays and where there is opportunity to sharpen our positioning to capture new usage occasions or to be more relevant to new users and also to take our portfolio and appropriately spread it to cover the landscape to minimize any overlap.

And so what you'll see on some of our brands we recently started investing in, Twizzlers and PAYDAY, and we're leveraging some of the landscape insights in the messaging and the media strategy and we're actually seeing some really nice results.

And across many of our brands, we're seeing some of that sharpening focus.

So I'd say, in terms of timing of when you would see that, I think you would start to see it like on a Twizzlers and a PAYDAY, for example, right now.

I think on some of the bigger brands, we should see some benefit from that, I'm going to say, mid- to perhaps late into next year.

Maybe around midyear next year perhaps.

Is that helpful?

Yes.

We'll take our next question from Robert Moskow.

Michele, I think I thought I heard a bit of a change of tone today regarding the sense of urgency to get bigger in e-commerce.

You mentioned click-and-collect and also with pure-play e-commerce providers.

And I think what I hear from investors about their biggest concern on Hershey and other confection companies is that just the number of cash registers, the number of opportunities for impulse purchases are now structurally declining.

So have you decided internally to kind of shift more of your resources towards that e-commerce effort?

And is that part of what you're kind of signaling today.

And maybe give me a little bit about what they're thinking about doing to duplicate that impulse occasion online?

Sure.

So I would start with the fact we're encouraged as we look at our business this year, we had pretty strong performance across impulse and our take-home business.

So despite that accelerated shift in e-com, we've still been able with our retail sales force and the power we have in store to capture and grow that piece of the portfolio, and innovation's played a key role on that as well.

That said, I think it is fair to say that we are dialing up.

We've been focused on e-commerce, but we are doubling down a bit more than we had in the past with the dedicated team, our reinvestment of additional resources and really partnering closely with our customers.

One of the biggest changes I've seen in the marketplace is a lot of our bricks-and-mortar partners are now really dialing up their efforts on omnichannel.

Those click-and-collect and multiple forms of home delivery and then, of course, there are the pure plays out there.

So I guess, I think about that business in 2 ways.

One, I think that we have an opportunity to say, how do we capture the planned nature of how consumers purchase in that channel and dial that up and really capture that on our business.

And at the same time, several of our retail partners have come to us and ask us to partner with them in terms of figuring out how to optimize impulse in an e-commerce world.

I can't tell you I have the answer to that right now, but I can tell you, I think we are in a good position to really be partnering with our retailers on that.

We'll take our next question from Steven Strycula.

Two questions.

The first would be on gross margins.

Just to follow-up on Ken's question.

Can you help us unpack a little bit of the -- some of the tailwinds or headwinds in the back half of the year?

It just seems like the full-year guidance is conservative where you're tracking year-to-date.

Can you talk about the mix comments you were discussing, whether that's channel mix or more product mix and elaborate a little bit more on the packaging investments that you're making?

That'd be helpful.

Sure.

Thanks for the question.

So I think it helps to just stand back and say that whenever we're going to reduce our overall net sales outlook, it's going to have an impact on our gross margin.

Both because we are going to have fewer products to absorb our fixed cost and also because as sales come out, those are typically our very high margin, best mix products.

And that's just a natural impact.

So what you're seeing is -- so first of all, that's the pressure down.

In addition to that, this year, especially in the second half of the year, we are making changes to some of our packaging, both as a way that the consumer will see it and also the way the retailer will handle it in store.

And that has some cost as well.

So those are the headwinds that we have on a full year basis.

You do see this sort of first half/second half dynamic driven by the change in sales profile between the 2 halves of the year.

I think the fact that in that lower sales world, we were able to hold our gross margin.

Overall margin is actually a positive story.

It shows that we do have slightly lower input costs and also that our productivity is very strong in that area.

That's really helpful.

And then, 2 quick modeling housekeeping questions.

The $60 million other income that you were speaking about that I think was ratcheted up about $5 million for this year, is it fair to model that $60 million going forward?

Or is it just kind of that onetime extra $5 million is a bump this year versus forward years?

Great question.

We want to have a sustainable tax rate.

So we look each year at investment tax credit opportunity.

I think that that's as good a forecast as I would have right now for next year is, again, because we're looking at a sustainable tax rate.

Got it.

And then given the mechanics of what you said for the third quarter gross margin, the volume deleverage because of the timing of the shift, does that mean that EPS on a year-over-year basis is more pressured in third quarter versus fourth quarter?

Or are they pretty comparable on a year-over-year basis?

They'll come in the way they do depending on the pattern of our sales.

And we're really not giving that level of quarterly guidance.

I'd just think about it right now as a second half impact.

We'll take our next question from Chris Growe.

I just have a question for you if I could on -- when I look at the stronger gross margin performance and the lower SM&A in this quarter, it's not clear to me that you are investing.

You've talked about investments in go-to-market capabilities.

Is that inherent in these stronger performances?

And then, I'm just trying to understand going forward then, is that also part of the pressure, if you will, on the second half performance of the business?

Yes.

I think that's a great question.

Thanks for the question.

We talked about the amount of savings that we wanted to deliver through our Margin for Growth program.

That's coming in a little higher than we expected.

And that's given us the opportunity to both maintain our bottom line as well as incrementally invest in the second half of the year on a couple of things.

First, against the advertising and related marketing spend that Michele talked about.

Second, about the capabilities that we talked about in the first half of the year -- in the first part of the remarks.

So when Michele was talking about things like unlocking the demand landscape, using analytics against our consumer or growing our e-commerce capabilities, those are investments that we're making.

So we are ramping up those capabilities in the second half of the year.

And then finally, as Michele mentioned, we do have a new ERP system going in.

And that spending is also starting to really ramp up our SG&A in the second half of the year.

Okay.

And just a quick question for you on China.

It's becoming a smaller and smaller part of the business.

Much of this quarter looked like it was self-inflicted.

Is that sort of decline rate going to continue?

Are you rationalizing SKUs to a point that we got to lap this, if you will, over the next year?

Yes.

I think that's a good way to think about it.

As you know, we've put a real focus on rightsizing and rationalizing our China business.

It's one of the first pieces of the Margin for Growth area that we focused on and where we'll see some of the early wins.

We are seeing those wins.

And inherent in that is a lot of moving parts, including looking at the SKUs and making sure that we're going to market with the most productive and profitable SKUs.

It means rationalizing where we participate in the market in terms of channel mix as well as geography.

And so all of that is having a planned impact on our overall sales.

And we knew that would happen, but it's resulting in a more healthy business and that was our goal.

And we're very pleased with that.

We'll take that question from Matthew Grainger.

If I could just ask 2 quick follow-ups.

First, I just wanted to ask about the seasonal outlook for the second half of the year.

You had extremely strong share trends in the first half, during the Easter season.

So just curious how the discussions with retailers around second half holidays have been progressing?

Their level of excitement around the CMG category specifically?

And whether you expect similar or still sort of clearly positive share trends during the upcoming holidays?

And then the second one.

All the reinvestments you've talked about, the impact on second half margins, could you talk a little bit more about why you expect a pullback in international margins?

And which investments are specifically focused in that segment?

Matthew, we feel good about the seasonal outlook in the back half of the year.

We anticipate that we will grow business -- our business in both of those holidays.

And as you know, we have very good visibility into what our retailers are purchasing in those holidays.

Right now, I would say we are feeling good that we should gain share during the holidays in the back half of the year.

And I'll turn it over to Patricia to answer the second part of your question.

Yes, so great question and I think you make a good point, which is, year-to-date, we are positive in our -- slightly positive in our International and Other segment.

So when I say around breakeven, it would sort of encompass that.

We do recognize that with a lot of moving parts going on in China in particular, there are a certain amount of things that we want to protect against in that world.

And so that's a little bit of my maybe conservatism on that piece of the business.

We also mentioned that some of the trends we think will be a little pressured in Brazil in the second half of the year as well.

But we're talking about -- when you're this close to breakeven, we're talking about plus or minus pretty small numbers.

Thank you very much for your time today, and the IR group will be available for any follow-up questions you may have throughout the day.

Thank you.

And this will conclude today's program.

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