好時 (HSY) 2017 Q3 法說會逐字稿

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

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

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

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

Thank you.

Mr. Mark Pogharian, you may begin your conference.

Thank you, Erica.

Good morning, ladies and gentlemen.

Welcome to The Hershey Company's Third 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 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 third quarter 2017 results, excluding net pretax charges of $7.8 million or $0.05 per share diluted, which are primarily related to business realignment costs, derivative mark-to-market losses and non-service related pension expense.

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 the webcast.

In the third quarter, I'm pleased with our performance.

We delivered growth, both in net sales and EPS in a volatile environment.

We continue to feel good about our CMG and snack strategy as most segments within the $100 billion U.S. snack wheel remained strong and continue to outpace center of the plate trends.

As planned, constant-currency net sales increased 1.1% in the third quarter and EPS of $1.33, increased 3% versus last year.

There is no change to our constant-currency full year net sales outlook, and we reaffirmed full year EPS growth at the high-end of our 7% to 9% range.

As discussed previously, embedded in our outlook are important marketplace investments in the business that will benefit the company over the near- and long-term as well as some new challenges, such as higher freight and distribution that emerged in the course of the quarter.

Patricia will have further details, but some of these, particularly, the supply-chain costs pressured Q3 operating profit and are expected to continue in Q4.

We believe investments and our strategic initiatives will enable the business to deliver long-term sales growth, gross margin expansion and operating profit growth or a virtuous cycle over our strategic planning cycle.

Advertising and related consumer marketing expense increased 3.7% in Q3.

Advertising expense was up 10%, partially offset by lower consumer promotions.

There is no change to our full year North America advertising and related consumer marketing outlook.

Although International and Other segment advertising and related consumer marketing is estimated to be lower in 2017 versus 2016, resulting in total Hershey Company spend that will be about the same as last year.

Now let me turn to our measured channel retail performance.

But before I do, I want to note that this summer, we selected IRI as our preferred market insights and analytics provider.

IRI has made significant investments in capabilities and technology platforms, and we believe they are a good partner for Hershey.

IRI's platform will help us target the right consumers in the right channel at the right moment.

Total Hershey Q3 U.S. retail takeaway growth was 1%, driven by CMG growth of 1.4%.

This more than offset some softness in grocery items, such as baking chips and syrups.

Looking at CMG, or candy, mint and gum, the category and Hershey continue to outpace center-of-the-store edibles.

For the 12-week and year-to-date period ending October 8, CMG category growth was plus 2.4% and plus 1.7%, respectively.

Hershey Q3 and year-to-date CMG retail takeaway was plus 1.4% and plus 2%.

Our year-to-date CMG market share is up plus 0.1 points, driven by strong innovation and in-store activity in the first half of the year.

Importantly, within the combined chocolate and non-chocolate candy segment, where we derive the majority of our U.S. sales, Q3 category growth is about 3.3%.

Our core chocolate brands, Reese's, Hershey's, Kit Kat and Kisses, continue to drive growth, and I'm particularly pleased with their marketplace performance.

The combined retail takeaway on these brands in Q3 increased about 5%.

As we've discussed in prior quarters, this was partially offset by planned decline on select chocolate and non-chocolate candy brands as we focus on reducing complexity and improving overall velocity rates at retail.

Therefore, the increase of Hershey's Q3 combined chocolate and non-chocolate candy retail takeaway of plus 1.1% resulted in market share being slightly off.

We are working on plans to improve the performance of our noncore candy brands and look forward to sharing this with you in the near future.

Hershey's CMG and snacks innovation had another good quarter.

It's my goal to ensure that on an annual basis, the strategic lever is a lever that consistently delivers meaningful, sustainable CMG and snacks growth.

We continue to anticipate strong innovation as a contributor to achieve our long-term net sales growth target of 2% to 4%.

Specifically, Hershey's Cookie Layer Crunch, or CLC, and is tracking as expected.

We achieved our distribution target earlier in the year and maintained this level given the repeat velocity at retail.

CLC has been strongly supported by advertising throughout the year on TV, social and online, with continuity media planned through the rest of the year.

As we look to 2018, we'll continue to invest in this product with the launch of Cookie Layer Crunch Triple Chocolate.

Shipments to select customers begin near the end of the year.

Importantly, the Cookie Layer Crunch platform is Hershey's largest launch in recent history and will receive equal support in year 2 as it did in year 1.

The transition from lay-down bags to stand-up pouches on our core chocolate packaged candy products is progressing.

In the fourth quarter, we'll introduce new retail ready packaging at select retailers before a broader rollout next year.

This initiative enables product to get on the shelf quicker with less in-store labor, and it improves shopability in the aisle.

Both of these packaging initiatives have an impact on gross margin in Q4 and most likely in the first half of 2018, but we believe this is the right long-term investment for our brands and business as it should result in improved shelf presence and visibility.

In Q3, we also made good progress against our snacks platform.

We expanded our initial Snack Mix and snack bites products with the launch of Hershey's and Reese's Popped Snack Mix and Chocolate Dipped Pretzels, primarily in large format take-home bags.

While early, results are encouraging.

Net sales growth is ahead of plan, and consumer reaction is positive when our brands are merchandised in the snacks aisle.

The velocity of the Popped Snack Mix items is in line with similar competing products while the Hershey-branded Chocolate Dipped Pretzels is outpacing competition.

So we feel good about the progress we're making.

Our power chocolate brands are growing and gaining share, and we're working on plans that should enable other parts of our CMG and snacks portfolio to see gains in the near future.

As I discussed in July, e-commerce is another strategic initiative that we are focusing on.

We continue to work with key brick-and-mortar retailers related to their click-and-collect and omnichannel initiatives as well as with established e-commerce players.

As a result, our year-to-date U.S. e-commerce sales are up about 40%.

We have a dedicated and growing cross functional team responsible for the strategies and execution of our e-commerce plan in developing the next generation of online impulse solutions.

We're working with all the key strategic partners and will be validating and testing concepts in Q4 and 2018 that we believe will lead to a sustainable business model.

Given our strong CMG position in the U.S., we are collaboratively working with our partners to develop e-commerce-friendly portfolios, digital shelf upgrades and alternative fulfillment solutions.

And in September, we went live with a customer on the first ever omnichannel Halloween program.

Initial results are exceeding expectations, and I'm very excited about the potential for our business in this space.

Now for an update on our International and Other segment.

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

Net sales for the quarter were relatively in line with our estimate, and on a constant-currency basis, about the same as the third quarter of 2016.

We're making measured investments in our core markets of Mexico, Brazil and India where we're seeing solid marketplace gains.

Combined constant-currency net sales growth in these markets was 8%, and we're improving on operating income trends at the same time.

In China, we're executing against the Margin for Growth program that -- as we discussed on March 1. This efficiency and effectiveness initiative is progressing nicely and on track.

We're optimizing our in-country supply chain and streamlining the operating model as we strike the right balance between in-country investments and near-term market opportunities.

As expected, due to summer seasonality, the China chocolate category declined by about minus 1% and is roughly flat year-to-date.

Small format stores continue to show growth, outpacing the marketplace performance in hypermarkets.

Going forward, we have a measured and disciplined strategy in China that is focused on the Hershey brand's messaging, continued e-commerce penetration and smaller store format expansion.

So I'm pleased with our progress in this segment, and I expect our focus on profitable growth to result in breakeven or better operating results this year.

Now to wrap up.

Confections is one of the largest segments within the $100 billion U.S. snack market, and we are confident that our brands and consumer-centric business model position us well to deliver sustained top and bottom line growth over the long-term.

I'm encouraged that the broader snacks category continues to grow despite the volatile consumer and retail environment.

Our strong U.S. marketplace presence and solid financial position gives us the flexibility to smartly invest in confectionery and other snacks as well as in the capabilities that give us the competitive edge at retail and with consumers.

We're committed to our marketing mix model in trade, TV advertising and digital media and investments related to innovation, consumer marketing and insights.

This is part of our DNA and why I remain so optimistic about Hershey and the opportunities that lie ahead of us.

As we look to 2018, it's too early to talk about details.

However, we feel good about our preliminary plans.

We believe we have the right level of core brand activity, innovation and programming lined up that will continue to drive category growth despite a shorter Easter.

Hershey's Cookie Layer Crunch Triple Chocolate and upcoming Reese's innovation will bring variety and news to the category.

And I'm also excited with the introduction of Hershey's Gold, Hershey's fourth flavor.

Hershey's Gold features a rich cream that delivers a buttery sweet flavor and a distinctively new Hershey's experience.

Its caramelized cream also includes a combination of salty, crunchy bits of peanuts and pretzels that deliver a creamy, crunchy satisfaction.

The instant consumable pack type will begin to ship to only a few select customers in Q4, but you'll see it in stores more broadly in January as merchandising and program will be tied with the Winter Olympics, which begin on February 9.

We're a growth and EBIT-margin focused company with a goal of increasing margins over the long-term via both cost control, and importantly, top line growth.

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

Thank you, Michele.

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

Third quarter net sales of $2.033 billion, increased 1.5% versus last year, and includes a 0.4 point benefit from favorable foreign currency translation.

Constant-currency net sales growth of 1.1% was in line with our estimate.

Gains were primarily driven by the North American segment and the success of new products.

Adjusted earnings per share diluted came in at a $1.33, an increase of about 3% versus last year, driven by our higher sales and the positive impact of the Margin for Growth program savings related to International and Other operating income improvements.

Volume was a 0.7 point contribution to sales growth and net price realization was a 0.4 point benefit.

In Q2, we lapped the acquisition of barkTHINS, which is on track with our plans.

By segment, North America net sales increased 1.6% versus the same period last year, including favorable foreign currency translation of 0.3 points.

Volume was a 1.6 point contribution, and net price realization 0.3 points unfavorable.

We were pleased with North America segment sales performance, which benefited from core brand growth.

Innovation, including Hershey's Cookie Layer Crunch as well as the launch of Hershey's and Reese's Popped Snack Mix and Chocolate Dipped Pretzels.

Total International and Other segment net sales for the third quarter increased 0.8% versus last year.

Excluding the 1.3 point impact of favorable foreign currency exchange, International and Other segment net sales declined 0.5% versus the year ago period.

Volume was off 5.2 points due to planned declines in China and net price realization was a 4.7 point benefit.

Turning to margins.

Adjusted gross profit increased about 1%, resulting in adjusted gross margin of 45.3%, a decline of 30 basis points versus the third quarter of last year.

Lower input costs and supply chain productivity and cost-savings initiatives were more than offset by unfavorable sales mix and higher freight and increased levels of manufacturing and distribution costs, primarily related to the packaging initiatives that Michele mentioned and the company's focus on maintaining service targets at faster-growing retail customers.

For the full year, we expect adjusted gross margin to increase about 25 basis points versus our previous outlook of about 50 basis points.

The change is primarily driven by the higher freight, new packaging and customer service costs.

And given our supply chain structure and our focus on strategic customers, this could be a gross margin headwind in the first half of 2018.

Adjusted operating profit in the third quarter of $446.9 million was about the same as the year ago period, resulting in operating profit margin of 22%, a decline of 30 basis points.

As expected, the increase in gross profit as well as SG&A productivity and cost savings at the corporate level were offset by the planned investments in the business discussed last quarter as well as higher go-to-market expenses and employee-related costs.

And as Michele mentioned, advertising and related consumer marketing expense increased 3.7% versus the third quarter of 2016 as advertising expense increased 10%, partially offset by lower consumer promotions.

The third quarter 5.3% increase in North America advertising and related consumer marketing expense was in line with our forecast.

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

On a constant-currency basis, net sales declined 0.5% and was relatively in line with our forecast.

The China supply chain transformation is on track with the majority of the work expected to be complete by the end of 2018.

The reorganization within SG&A functions, which began last quarter, is progressing.

The benefit from this work is evident in the improvement and segment operating income.

Our SKU analysis and optimization efforts are on track, and we'll look to leverage this work going forward as we focus on 5 strategic initiatives that should improve our top and bottom line trends.

Specifically, the team is looking to drive Hershey brand's SKU conversion, Hershey innovation, to optimize channel growth, focusing on small format and focus on key strategic accounts and on e-commerce.

We expect China chocolate category sales in brick-and-mortar to be flat to slightly up for the full year 2017, while e-commerce is forecasted to grow around 15%.

As expected, given our SKU optimization, our chocolate performance has lagged in brick-and-mortar.

However, our online retail takeaway is up for the year-to-date period.

Looking at our other focused markets, we continue to be pleased with our efforts in Mexico, Brazil and India where combined constant-currency net sales in these 3 countries increased 8%.

Third quarter International and Other segment operating income of $16.4 million increased nicely.

It was driven by the implementation of the Margin for Growth program and the timing of select investments and expenses.

Therefore, we expect Q4 operating results in this segment to be similar to last year.

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.

And we expect International and Other segment operating income to be at least breakeven this year.

In Mexico, chocolate progress continues with solid double-digit retail takeaway.

For the year-to-date period, we slightly outpaced category growth and gained share.

Q3 constant-currency net sales in Mexico increased by about 10%, driven by a combination of volume and pricing.

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

Our new Hershey's CHOCOYOGO product continues to gain trial with repeat in line with our expectations.

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

Q3 constant-currency net sales increased 3.3%.

We estimate that year-to-date chocolate category growth in Brazil is about 13%.

Our retail takeaway was about 2x the category growth rate, fueled by both distribution gains and higher velocities, resulting in a market share gain of about 0.5 point.

Constant-currency net sales in India increased 16% and slightly exceeded our plan.

Growth in the brands we're investing behind continues to be solid.

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 local marketplace that should result in a sustainable operating model.

Moving down the P&L.

Third quarter interest expense of $24.6 million was in line with last year.

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

The adjusted tax rate in the third quarter of 2017 was 30.4% versus 30.7% in the year ago period.

For the full year, we anticipate that the effective tax rate will be towards the high-end of the 26.5% to 27% outlook we discussed last quarter.

In 2017, we expect other income and expense related to tax credits to be about $65 million versus our previous estimate of $60 million.

For the third quarter of 2017, weighted average shares outstanding on a diluted basis were approximately 213.4 million shares, resulting in adjusted earnings per share diluted of $1.33 or an increase of 3.1% versus a year ago.

Total capital additions, including software, in the third quarter and year-to-date period were $64 million and $149 million, respectively.

For the full year, we expect that CapEx will be in the $260 million to $275 million range versus the previous estimate of $270 million to $290 million.

During the third quarter, adjusted depreciation and amortization was $62 million, and we paid $136 million in dividends.

On August 23, the Board of Directors approved and the company announced that it purchased 1.5 million shares of its common stock from the Hershey Trust Company for approximately $159 million or $106 per share.

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.

This morning, we announced that the Board of Directors approved an additional $100 million share repurchase program that will commence after the current program is completed.

This authorization is a result of the company's strong balance sheet and confidence that we will deliver a long-term earnings per share diluted growth of 6% to 8%.

Additionally, in the third quarter and year-to-date period, the company repurchased $41 and $141 million, respectively, of common shares to replace shares issued in connection with the exercise of stock options.

Now to summarize.

As Michele stated, we are focused on our consumer-centric business model and on driving growth and margin expansion with the right level of investment.

And while we're excited about the launch of Hershey's Gold and Cookie Layer Crunch Triple Chocolate, the Q4 sales of these products are not expected to be as great as the Cookie Layer Crunch fourth quarter 2016 sell-in.

Consumer uncertainty persists across several geographies.

We're pushing hard in export markets, such as Asia and the Caribbean, where some Q4 challenges have cropped up.

We believe, however, that the plans we have in place will enable us to achieve our full year constant-currency sales target of around 1.25%.

Exchange rates continue to fluctuate, and we now expect the impact on full year sales to be minimal versus our previous outlook of 25 basis points unfavorable.

As we have implied in prior calls, input costs are lower this year.

However, the supply chain costs I discussed earlier, are greater than our previous estimate.

Therefore, expected full year adjusted gross margin expansion is about 25 basis points.

The Margin for Growth program is progressing, and we continue to expect 2017 savings of about $25 million.

Combined with advertising and related consumer marketing, it should be about the same as last year and a slightly higher tax rate towards the top end of the range, we continue to expect 2017 adjusted earnings per share diluted growth to be around the high end of our 7% to 9% target.

Thank you for your time this morning, and I'll now turn it back over to Michele for some closing comments.

Thanks, Patricia.

I just want to start by thanking all of our employees for those solid Q3 results that we delivered.

As you heard me say before, in an environment of accelerating change, I see opportunity.

And I'm optimistic about our future.

We are focused on what we need to do to succeed.

Our balance sheet and cash flow remains strong.

Our executive management team and the Board of Directors are confident that we'll continue to build value for all Hershey shareholders.

So thank you, and now we will open it up for any questions that you may have.

(Operator Instructions) We'll go first to the line of Ken Goldman.

You had talked about spending more on your customers for maintaining some of their service targets.

Can you elaborate on this a bit?

And the reason I'm asking is we're hearing about Walmart and Kroger meeting with U.S. food companies to really make sure that out-of-stocks are limited.

So, I guess, I'm curious and I know you don't necessarily know what's happening with some other food companies.

But from your perspective, do you think this pressure is specific to Hershey?

Or do you think that pressure, if there is any pressure, really, to maintain these customer service targets, is something more broad based around food that we should be aware of?

Yes.

So let me talk a little bit broadly, and I'll also talk about Hershey, in particular.

So first of all, yes, customer service rates are critically important to our customers in the marketplace right now.

And, I think, certainly, as there's a pressure in consumer retail environment, we all want to capture every sale that we possibly can.

So as a result of that, we believe it was a strategically good decision for us to really focus and up our performance on customer sale even higher even if it meant some additional investments in moving product around a bit more.

So I would say that, that is an overall theme in the industry between retailers and manufacturers that we are all jointly working on together.

I'll also tell you if I speak to Hershey, specifically.

There are couple pressures that we had.

So you can see the strong growth that we have on our core brands and have continued to have all year long, has actually put pressure on (inaudible) to the across our system, and we have made decisions to move product around a bit more to make sure we don't lose any of those sales as we invest in manufacturing capacity to expand our capabilities on those brands.

Some of the innovation that we've had on our business as well has necessitated a few more touches and a few more additional shipments that drove some cost for us.

Some of the multicomponent products, like Snack Mix, for example, we're removing multiple ingredients to make the products.

And then also some of our packaging initiatives that we believe are critically important in the marketplace, which on a temporary basis, create some additional inventory across the system.

And then, I think, you're aware, you probably heard others talk about that going forward, there's some additional pressures just across freight given tightening capacity.

In the short-term, there were some weather-related issues and over the longer-term, I think, there are some trucking related, trucker availability issues and capacity that are emerging and starting to impact as well as some new regulatory changes that we believe is going to create pressure on the availability of truckers as well.

Very quick one for me.

Can you talk a little bit about -- you talked about the sales mix maybe hurting your gross margin a little bit.

How much of that, if at all, was related to some weak C-store trends we're seeing, not necessarily for you, but across the board?

Yes.

I mean, certainly, we've seen that the C-store retail environment or the community has talked about some of the pressures that they've felt in their stores and trips not being where they would like them to be.

(inaudible) we certainly sell a lot of instant consumables there.

So we're always anxious to have strong trips into that environment.

So, certainly, that has an impact.

I would say there's a few other places where we're expanding the portfolio across snacking that also have a lower margin than our core items.

And, certainly, things like, Snack Mix, which I think have been very viable and successful in the marketplace, create a little pressure on mix as well.

Yes.

And, Ken, just one more point here.

Remember, we did talk about the top line in the second quarter and would have reflected on the trends we were seeing in the C-store at that time.

We'll go next to the line of Rob Moskow.

I could be modeling this a bit off.

But I'm trying to figure out what your guidance implies for operating income in fourth quarter.

It looks to be down double-digit if I got the tax rate right.

So did I get that right?

And is there anything specific about fourth quarter on the comparisons that cause that?

I know you had a tough comp to last year's Cookie Layer Crunch launch.

Yes, thanks.

Yes.

We -- I think that's the biggest impact you're really seeing is that cost of comp to last year (inaudible) impact.

That's really the biggest driver that we have.

We also have (inaudible) time when we typically spend a fair amount of advertising in China as well.

That's year-over-year -- that's always a fourth quarter drag on our performance.

And we do have really strong advertising performance that we're expecting in the fourth quarter of -- on U.S. business related to our new product innovation.

Okay.

So it's higher advertising?

That's what makes this quarter different from the other quarters?

Well, and the sell-in on Cookie Layer Crunch.

That's why -- that's the implication in your model, sales are, obviously, down in the fourth quarter.

We planned it that way, Rob.

Going back to July, as we stated in the remarks, you have some of these gross margin pressures in the third quarter.

Certainly, you'll have for all of the fourth quarter.

Some of -- lot of -- you'll also be seeing more of the packaging that we talked to ship more in the fourth quarter than the third.

If third is high, we're leaning, obviously, more towards Halloween.

Can I ask a follow-up about 2018?

I know it's early but we're all watching cocoa commodity costs and seeing all this deflation, hopefully, benefiting your business.

It seems to me that, that benefit could be quite a bit bigger than the drags you're talking about on freight and on mix.

Maybe it's early to talk about those things.

But could you give us a sense of just broadly whether you're still thinking about gross margin expansion in '18?

Patricia, do you want to talk about that?

Yes, we always want to expand our gross margin.

In terms of commodities, in general, as we'd like to remind you, we hedge out 3 to 24 months.

So we're not going to ever see -- completely follow the market on cocoa.

We're going to lead that in over the next couple of years.

And, in fact, we already have said that we had lower input costs this year.

So we've already captured some of that reduction in cocoa.

We see other commodities that continue to actually be up so that mix basket is certainly moderating that reduction in cocoa prices.

We'll go next to the line of David Driscoll.

I wanted to ask a little bit more about the retail inventory levels.

I believe that on the last call, you talked about second quarter shipments coming in ahead of consumption.

I think, we estimated that as something like 2 percentage points.

In the quarter, it doesn't look like there was a big difference between shipments and consumption.

So I'm just wondering about the inventories at retail.

Do you expect this to have a negative impact in the fourth quarter relative to your shipments?

Just where do things stand?

So, David, we continue to expect that at the end of the year, our inventory and our retail takeaway will be aligned.

Third quarter is a really -- has been a little bit of a messy quarter relative to all those weather impacts that occurred.

And actually, even being able to get the available data from a Nielsen or IRI to really feel confident given some of the stores that have been closed down, et cetera, and then also with seasons.

So, I think, the best way to think about it is we anticipate them to be fully aligned at the end of the year -- by the end of the year.

Yes.

And looking at your [jinx] to make, David, for the fourth quarter, well, it won't mirror this -- won't look like the third quarter at all on the top line.

We expect takeaway to be positive in the fourth quarter.

All right.

That's really helpful.

A follow-up on the C-stores.

Our data actually does show that C-stores have been weakening for Hershey.

And I'm just curious if you could just develop a little bit more why is it just -- I think you were talking about trips before.

Is it just trip issues?

Or is there anything specific to your products in C-stores?

And then just do you have any...

Yes, David.

If you look at the -- our full year plan, our plan was a bit more front-loaded.

And particularly, if you look at C-store, we are lapping an unusually strong period year ago on instant consumable innovation when we had the Kit Kat, Big Kat as well as the Reese's Pieces Cup.

And so the category was looking good in the third quarter.

And we had -- we have a tough lap, though, particularly, because of the year ago innovation in instant consumable and that's the biggest thing impacting us.

And we'll go next to the line of Steve Strycula.

A quick question for gross margins.

I just want to clarify against the cocoa benefit that you guys will be facing.

You also commented about incremental headwinds related to supply chain persisting into next year.

When we net the 2 together, should we still think of like a similar type of gross margins trending lower when you mentioned pressure for the first half of next year?

Or should we just expect more muted gross margin gains?

I think -- this is Patricia.

I think that we always want to be [near] gross margin.

But, yes, we do see them as being more muted based on the points that you made.

We'll be giving our guidance next year with more specificity.

Steve?

That's it for me.

And we'll go next to the line of Jonathan Feeney.

Just one.

Patricia, could you give us a more detail on what are the mix factors out thereby channel or product that you called out in your commentary and your approximate magnitude as far as your impact on gross margin, both this year and going forward?

Yes.

I think we've touched on a few of them already in the call.

So first of all, we are seeing some impacts from our expected and very successful Snack Mix products or similar products like that, that have pressured gross margin.

Nothing is as profitable we always say as our core of our core products.

But we do need to expand our portfolio.

And then also some of the things that we've already touched on around the general mix between instant consumable and other types of -- between seasons instant consumable is also a little bit of a pressure on us as well.

Is it about in that order of magnitude?

And are there any other channel impacts going from C-store, which is presumably underperforming, as Dave and you mentioned (inaudible) to other channels.

I think of it more as an instant consumable impact, frankly, than a channel-driven one.

We'll go next to the line of Andrew Lazar.

Of some of the negative impacts to gross margin, as you talked about that might persist a little bit into 2018 freight, packaging, some of the service targets mix.

I was hoping maybe you could dimensionalize those a bit if there are ones that are of larger impact versus some of the others.

And maybe if there's any way you could help quantify a little bit their impact in this quarter, it can help us a little bit with the way we think about how '18 can play out.

Yes, Andrew.

I mean, for various competitive reasons, I'm not sure we want to get into the magnitude of each one of these.

We all have different levels of investments with customers and how we service them.

As you look to 2018, certainly, we started the initiatives you're seeing here in the third quarter.

So you'll have -- you will see in the first 6 months of 2018 a pressure on gross margin.

I'm not saying gross margins are not going to be -- I'm not saying gross margins up or down in the first half of 2018, we'll give more specificity, obviously, in January.

Commodities, we have deflation this year.

You know there are some that are going to be up all the time even as it relates to next year, some that are going to be down as it relates to next year.

We're a gross margin-focused company.

We need that to work to keep investing in the model and get the virtuous cycle that Michele referred to.

So, I mean, I think, we, overall -- we feel pretty good about our long-term outlook.

Got it.

And then, Michele, you had mentioned some of the other noncore chocolate and candy brands are the ones that you'll be talking a little bit more about going forward.

But maybe you can give us a little insight into -- maybe what some of the issues are with some of those brands?

Was it just lack of appropriate innovation or effective innovation?

Or maybe what some of the issues have been around why those have been a bit more of a drag?

No, absolutely.

So if you think about our total portfolio, if you think about the baking piece of the portfolio, chips and syrups, I think, saw some of the similar trends that we've seen with other center of store categories.

So some pressure there.

We spoke earlier this year relative to us having a focus to rightsize our snacking portfolio and really focus more in a precision approach.

So some of that rightsizing.

And then, as it comes to what we call our variety chocolate brands and sweets, we've been working on optimizing our consumer communication and investments there to stabilize and get some growth out of those brands.

And we'll go next to the line of Jason English.

I actually have 2 questions.

First, a bit more strategic, and then one a bit more tactical.

Patricia, I think you referenced, and Michele you've referenced many times your portfolio diversification strategy.

And if I go back to your Analyst Day, there is quite a bit of focus on trying to spread your wings beyond just your core CMG space.

And you've done a little bit of innovation.

Where do we sit on that now?

Where do we sit in terms of the ambition, the progress?

And you've mentioned your clean balance sheet, should we -- could we expect to see you utilize that to try to accelerate some of those initiatives outside of the core CMG space?

Yes.

So we remain committed to our strategy of being an innovative snacking powerhouse and really a focus on capturing more snacking occasions and appealing to new users within snacking.

And, yes, I think we're continuing to execute against the strategies that we laid out relative to innovation, leveraging our core brands in areas like Snack Mix, which we're really pleased with the results.

BarkTHINS, which is up, I think, 50% this year, which has also been a nice addition.

And as we look at our priorities, overall, we've always stated that M&A is a key piece of that.

You've seen us execute against that over the past couple of years.

So I would expect that, that would continue to be a piece of how we look to deliver that expansion.

Okay.

So turning quickly to the second question.

You mentioned some sort of top line drag from SKU rationalization, portfolio optimization, cleanup, et cetera.

We don't really see evidence in the data yet.

As a matter of fact, your total distribution points are up overall.

They're up in chocolate.

They're up in non-chocolate candy.

They're up, bake and gum.

So I guess the question there is one of cadence.

Has this been a sort of a reason for us that maybe hasn't yet shown up in the data?

And, therefore, is likely going to be a drag on the go forward?

Yes.

I mean, Jason, this is Mark.

I mean, I think, you've heard us referenced some of this in March 1 as well.

I mean, I think as a matter of practice, we're always doing this and you're seeing selective SKUs come out, not every piece of innovation that we have will be on the shelf for 3, 4 -- 4, 5 years.

So there is a cycle onto (inaudible) some of this comes off.

We have something there to replace it.

And -- but sometimes, the velocity of what it's replacing versus the velocity of what's coming in isn't always -- always equal.

And you may see some of that play out over time here in the next year or 2, as you look at the velocity of some of the snacks out in CMG.

When you think...

I was going to say, I think, it's also -- it might just be hard to look at total distribution points because there's so much noise in those distribution points.

So we've had an active SKU rationalization program where we are eliminating merchandising SKUs, many smaller things.

At the same time, we have our standup packaging initiative in the marketplace, which put new SKUs in place, which we think are very productive SKUs.

And so there's a little bit of both of those things going on at the same time that, I think, is getting muted in the total numbers too.

We'll go next to the line of Rob Dickerson.

This is Kanika Goyal on for Rob.

I just have a quick question for you.

We recently heard a larger confection player state in their recent earnings result that there has been a retailer push ahead of Halloween.

So I just want to get a sense of what do you make of that in terms of the overall, I guess, promotional backdrop?

Was there more promotional activity?

Are retailers trying to drive traffic even more so this year, particularly, with branded candy?

And do you expect this to persist going into Q4?

So I think that we always see retailers really try and leverage seasons as a destination to bring consumers into their store environments.

And I think that this year is no different from that perspective.

I would say, I would remind you that we have continued to see over the past several years a lot of compression around the holidays.

So with Halloween being on Tuesday, it's hard to get a total feel for how -- what the season will shape out like.

But I think that overall merchandising, we're seeing very strong collaboration with retailers as we have in the past.

So we've -- I can't say we've seen a really big change there.

I think we see the retailer continuing to use the seasons as they have.

And we'll go next to line of Alexia Howard.

Can I ask about the pricing dynamics in North America?

Your pricing is down, I think, 0.3% in the region this quarter.

We've been hearing about it being more challenging out there with retailers pushing back on pricing.

I imagine that, that's either a mixed effect or maybe tweaking promotional activity year-on-year.

Could you just comment on how competitive things are out there?

And maybe even if you can't comment on exactly pricing strategy from here, how you expect the shape of that to develop going forward?

We have had a continuous focus.

As we've talked to you before about building strategic revenue management capabilities, our big focus has continuously been being even more effective and efficient with our promotional dollars.

And so, I think, the movement that you would see in the marketplace, at least from us, would be around us really trying to get tighter about the best promotional programs and price points that maximize driving top line, but at the most profitable levels so that we're not getting ineffective deflation but we're losing -- using price to maximize revenue.

And, I think, that continues to be a focus for us.

Certainly, I think in a pressured environment, some elements of the market are looking at whether price we can bring in more consumers.

But I think that everybody is looking at that in a very balanced way, which is unless price is really driving incrementality than its deflation that has no benefit.

So, I think, that's what we're really seeing in the marketplace and our focus clearly is on making every dollar count, getting smarter about what really drives the performance.

We'll go next to the line of John Baumgartner.

Michele, just curious in terms of the retail landscape.

You mentioned that some of the snacks section is being merchandised in the snacks aisle.

So, I guess, first off, do you have a sense from your consumer segmentation work or from retail observations are the salty snacks categories where share is kind of being sourced to make way for this -- the snack section?

So as we look at our broad snacking strategy, clearly, the goal of expanding occasions is to drive incremental purchase and to source more broadly across that snacking wheel.

And, yes, I would say we do research and analytics to try and understand how we can best develop propositions that will add incrementally to our portfolio.

So that's definitely a key area of focus for us.

And can you speak to the promotion and some of the merchandising protocols in that snacking aisle?

How are the interactions different with the consumers and retailers from confectionery?

It seems that, that salty snacks space is a lot more fragmented.

So, I think, where we are gaining some placement, it is an area that's more fragmented, and certainly, one approach that we're trying to do is to leverage the strengths that we've built over the years around category management to help the retailers to make that section as productive as possible to bring some of the great innovation that we've been known for in the confection category and provide news and exciting propositions in that segment to generate interest and bring new shoppers there.

So our focus is really just as it is within confection and how do we drive -- drive the categories there and bring incrementality.

When I think about the competition, I think, national players always tend to be pretty strong wherever they are established.

And, I think, it's sometimes more of the regional players that experience pressure in those scenarios.

So are you finding the shelf space is a bit more expensive in that snacks aisle?

And that's part of the negative margin mix of the snacks section business?

I mean, I think, nothing was -- Patricia has always said, nothing's going to ever be as profitable as a candy bar, if you're looking at absolute margin.

So, I mean, as it relates to everything else in that aisle, I would probably say, no.

But as it relates to our portfolio, obviously, nothing is as profitable as a candy bar.

So that's more than the mix around shelf space.

It's not a shelf space issue.

It's just a fundamental value proposition all the way through our chain.

And we'll go next to the line of Ken Zaslow.

Most of my questions have been answered.

I just want to understand the CapEx.

You reduced it a little bit.

Was there something to think about there?

Is it just a refinement?

Is it putting projects into next year?

And then can you just talk about some of the key capital projects that you have?

Yes.

This is Patricia.

I'll take that one.

So as we've told you, we're embarking on a multi-year replacement of our ERP system and some associated projects.

As is typical in the early days of refining that, we just moved some money out on that.

It really is related to making sure that we're putting the right resources against those systems and fine-tuning the best way to do that.

That's really the biggest impact of the CapEx reduction.

Okay.

So there's no -- nothing to read into it.

I appreciate it.

No.

Just the normal adjustments of big systems projects, I would say.

And we'll take our last question from Erin Lash.

In light of -- I kind of want to touch on capital priorities, cash priorities, particularly, in light of a major confectionery player looking to rationalize their or pursuing strategic alternatives for their confectionery offerings in the U.S. And just kind of get your sense.

I know you won't comment specifically on that transaction.

But just your sense for the overall acquisition environment, the multiples that sellers are looking for and basically your appetite to do a deal.

Well, I would just say, we've stated before that M&A is a piece of our capital strategy.

We're particularly interested in companies with accelerating revenue growth within the -- primarily within the U.S. $100 billion snack wheel.

And, certainly, our interest in companies that either complements our confectionery portfolio or snacks business or go to markets.

Patricia, anything you want to add to that?

No.

There's really been no change in our (inaudible) capital perspective in terms of investing in the business, invest -- and making sure we return capital -- cash to our shareholders through dividends and share buybacks.

There's really been no change in that approach.

And I think we're just looking for propositions that are -- everything we do is around creating shareholder value whether it's on our base business or M&A.

So that's always our lens.

To the extent that you have looked at deals up till now, do you feel like the premiums being proposed by sellers are reasonable or inflated?

Any sense there would be helpful.

It's a competitive marketplace and that's about all I would say, right?

It continues to be a competitive marketplace out there from an M&A perspective.

Thank you for joining us today for the third quarter conference call.

The Investor Relations group will be available for any follow-ups you may have.

We'd like to thank everybody for their participation.

Please feel free to disconnect the line at any time.