好時 (HSY) 2018 Q2 法說會逐字稿

Good morning, everyone, and welcome to The Hershey Company's First Quarter -- my apologies, Second Quarter 2018 Results Conference Call.

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

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

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

Thank you.

It is my pleasure to turn the conference over to Ms. Melissa Poole.

You may begin your conference.

Thank you, Erica.

Good morning, everyone.

We appreciate you joining us for The Hershey Company's Second Quarter 2018 Earnings Conference Call and Webcast.

Michele Buck, President and CEO; and Patricia Little, Senior Vice President and CFO, will provide you with an overview of our results followed by a Q&A session.

Before we begin, please remember that during the course of this call we may make forward-looking statements within the meaning of the Federal Securities Laws.

These statements are based on our current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements contained in our 2017 10-K filed with the SEC and today's press release.

Finally, please note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors.

The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.

With that, I would like to turn the call over to Michele.

Thank you, Melissa.

Good morning, everyone, and thank you for joining us.

Our second quarter sales and EPS were in line with our expectations, and we remain on track to achieve the annual financial guidance we shared in April.

In March 2017, I shared with you a vision for transforming our business, and our focus as a company remains on delivering that multiyear strategic plan and driving long-term value creation.

We participated in on-trend growing categories with a portfolio of great brands that resonate with our consumers.

As consumers, their shopping and the retail environment evolve, we will continue to build capabilities and evolve our business as we have done previously when the marketplace transforms.

In the second quarter, we continued to invest in our brands and capabilities for growth while taking measured steps to enhance long-term profitability.

We developed new advertising campaigns on our 2 largest brands, rolled out enhanced selling tools for our retail sales force and made solid progress in our capacity expansion initiatives.

Amplify's marketplace performance remains strong with high single-digit growth resulting in share gains and the integration is proceeding well.

The ongoing transformation of our international business is ahead of schedule.

We delivered solid organic growth for the quarter, completed the successful divestitures of Tyrrells and Golden Monkey and drove year-to-date profit to $34 million, just shy of our largest ever full year profit in this segment.

Constant currency net sales increased 5.3% in the second quarter, including a 590 basis point benefit from the Amplify acquisition.

Adjusted earnings per share diluted of $1.14 increased 5.6% compared to the second quarter last year.

This morning, we also announced the 10% dividend increase and a new stock repurchase authorization, a testament to our solid balance sheet and strong cash flow generation.

Last week, we announced to our retail partners a selective price increase to enable us to maintain strong investment in our business and help offset rising operational costs.

This was a targeted approach and it included a combination of list price increases, price pack optimization and changes to customer terms.

As part of this communication, we also shared packaging enhancements that improved the consumer shopping experience to drive growth while delivering net price realization.

In the past, you've seen us take infrequent large actions across the entire portfolio that were largely commodity-driven.

Our new pricing approach is much more precise, both in terms of magnitude and breadth, it utilizes more levers and will be more dynamic.

This go-forward approach is critical in a fast-changing environment and enables us to balance market opportunity with operational complexity.

On our last call, we discussed our gross margin outlook.

While our margin performance is not yet where we wanted to be, we delivered second quarter results in line with our April outlook and our plans and full year estimate remain unchanged.

This operating environment requires an agile approach to portfolio strategy and pricing.

We continue to take a proactive approach to optimize our portfolio and deliver increased profitability.

Our SKU rationalization efforts are a great example, and we are encouraged by early results.

We have also added resources against optimizing our price pack architecture, improving mix and enhancing planning.

Our investments in capacity expansion, supply chain flexibility and ERP technology all remain on track.

We believe these enhancements, in addition to our price increase, will be important levers to address our recent gross margin headwinds.

We are confident in the strength of the categories in which we compete and our compelling brands.

Our team is committed to making strategic investments in the business to fuel our future growth and success.

Now let me provide an update on U.S. marketplace performance.

Overall, the retail environment continues to change rapidly as consumers blur the physical and digital shopping experience.

Both traditional brick-and-mortar channels and e-commerce are growing, emphasizing the importance of the holistic commerce ecosystem.

E-commerce grocery sales remain robust, as retailers invest in and consumers adapt to new platforms.

In measured channels, snacking categories are still performing well.

Hershey snacking sales grew 0.3% for the 12 weeks ending July 15, driven by strong Amplify growth.

Skinny Pop, ready-to-eat popcorn, grew 8.3% during the same time frame, gaining 1.2 points of marketplace share.

This growth was balanced across class of trade and driven by gains in both household penetration and purchase frequency.

The category remains healthy with growth of approximately 4% year-to-date.

We have good visibility into second half plans and expect both Skinny Pop and ready-to-eat popcorn category strength to sustain as we move throughout the year.

Our expansion to participate in broader snacking will continue to be an important lever in our growth.

Confection category growth of 0.6% in measured channels during the 12 weeks ending July 15 was a bit pressured.

This was driven primarily by competitor lapping significant innovation during the same time last year.

Trends for most other competitors were in line with year-to-date performance.

Hershey's CMG takeaway of minus 0.4% resulted in a share decline of 30 basis points during the 12 weeks ending July 15.

Consistent with what we shared with you earlier this year, we expected softer first half performance due to a shorter Easter and promotional and innovation timing.

While measured channels are a little soft, we are seeing growth in untracked channels, as consumers' purchase patterns become increasingly fluid.

Our core franchises grew 1.3% during this period, driven by Reese's and Ice Breakers Gum.

Reese's growth accelerated driven by the limited rollout of Reese's Outrageous innovation and additional media supporting a new campaign.

Hershey's Gold innovation is selling in line with expectations and continuing to help drive the core, which was a key goal for us.

The (inaudible) On core Hershey's branded instant consumables were up 5% during our launch window, benefiting from additional co-merchandising with Gold.

And we continue to expand Gold to the take-home pack type where customer on-shelf timing is a bit slower than we had anticipated.

Now for an update on barkTHINS.

We have applied learnings from recent acquisitions and are building new capabilities to successfully manage and grow our emerging brands.

To that end, we established Amplify as a separate division to nurture and strengthen our emerging and better-for-you brand portfolio.

We have a talented team in Austin with expertise and demonstrated success in acquiring, integrating and growing emerging brands.

The barkTHINS portfolio, now managed within Amplify, continues to perform well with measured expansion and activation helping drive solid growth in year 2 of the acquisition.

BarkTHINS is delivering incremental consumers and occasions to our portfolio and growing approximately 35% over the latest 12 weeks.

Importantly, we are increasing velocity while expanding distribution, a key metric of sustainability.

This is evidence of the results possible when applying these lessons.

We continue to build our digital commerce capabilities.

Grocery shopping today occurs in one holistic retail ecosystem where brick-and-mortar and online are inextricably linked.

We are focused on continuously learning more about shopper needs based on the fulfillment models through which they choose to receive their goods.

Each of these models are for different levels of convenience and have different economics, which inform different strategies.

One thing that remains consistent is the consumer's desire for Hershey's brands.

We have been consistently gaining e-commerce share this year through upgrades in content, search optimization and clear merchandising and marketing strategies that are linked to our physical retail environment activation.

We are also engaged in a full enterprise data and digital transformation program, which includes upgrades to our core digital ecosystem platforms and will allow us to leapfrog in broader digital capabilities across all functions.

These efforts resulted in another quarter of e-commerce growth greater than 30%.

And we are confident this trend will continue in the second half of 2018 and beyond.

I'm excited by the progress we've made here.

While we delivered our commitment in the second quarter, we are not satisfied.

Consistent with what we shared earlier this year, we expect our overall business results to improve in the second half of the year.

An important and unique part of our business is seasons.

We have good visibility into strong seasonal orders.

Our Halloween and holiday outlooks are a testament to the hard work of our teams who were able to not only successfully reduce complexity and increase margins but also improve our consumer proposition and drive growth.

Retail response has been excellent, and we are excited by the opportunity to expand this work to the rest of the portfolio.

We are leveraging our capabilities to secure additional space at key retailers with a focus in our fastest moving, most profitable SKUs.

We have good visibility into customer reset changes this fall and believe this will be a growth driver for us.

Reese's Outrageous is off to a strong start and is an important innovation to drive our profitable instant consumable business.

It is just now starting to achieve full distribution, and we expect additional growth in the second half as it expands to all classes of trade.

And we continue to invest in our core brands.

This translates into new campaigns, sharper positioning, better packaging and robust marketing support to drive velocities.

Now for an update on our International and Other segment.

Last year, we shared aggressive initiatives to reset our international business model.

I am proud of the teams that have delivered on these plans.

Across our international markets, they have exceeded our expectations to set the right foundation to capture growth profitably.

Year-to-date, our international segment has delivered operating income of $34 million.

This represents an increase of $24 million versus the same period last year.

In addition to the significant margin improvement, we have built the right foundation in our key markets to capture growth.

With a focus on our Hershey's brand, we delivered consistent mid-single-digit sales growth during the first half of the year.

This has contributed approximately 0.5 point of overall company growth in the first half.

In Mexico, our business is performing well.

Constant currency sales grew high single digits resulting in continued marketplace share gains.

And through a combination of mix, pricing and continuous improvement, we have also improved profitability.

In China, our transformation is ahead of expectations.

We remain committed to this important market and are optimizing our footprint to focus on core SKUs, provinces and channels.

Sales are stabilizing.

Our core Hershey's SKUs in targeted channels are growing share and our bottom line is improving meaningfully.

I'd like to thank the local team for their tremendous work here.

This week, we also completed another key strategic priority by divesting Golden Monkey.

We believe this will further enable our teams to focus on our strengths for future growth.

In Brazil, our business performed well despite some macro volatility.

While we did experience some impact from the truckers' strike, it was relatively immaterial to overall company sales.

We are confident in our ability to recoup the volume in the second half of the year given our strong marketplace performance and share gains.

We have a strong team in Brazil with a great culture.

So great work there.

Finally, in India.

We remain committed to our strategy of evolving to a higher margin portfolio.

Our core brands, Hershey's, SOFIT, JOLLY RANCHER and Brookside are growing over 50%.

We anticipate these strong segment sales and profit trends to continue in the second half of the year.

In summary, we are pleased with the progress we are making against our strategic focus areas.

We are investing in our brands, our supply chain and capabilities to position us to achieve growth.

We have expanded our breadth in snacking via a high-growth, high-margin acquisition in Amplify, with an experienced team leading our snacking expansion.

We have reset our international business model by divesting nonproductive assets, rightsizing investments and focusing our efforts on key brands, key markets and key channels to drive profitable growth.

We have made meaningful progress in reducing our foundational cost structure and redeploying assets to areas with the highest opportunity, focusing every function on driving maximum commercial value.

And we are on track to deliver a strong year of earnings growth in a challenging environment.

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

Thank you, Michele, and good morning, everyone.

Second quarter net sales of $1.75 billion increased 5.3% versus the same period last year, including a 5.9 point benefit from the Amplify acquisition.

Volume increased 1 point, which was offset by negative net price realization of 1.6 points.

Foreign currency translation impact was negligible.

Adjusted earnings per share diluted came in at $1.14, an increase of 5.6% versus the same period last year.

Income from a more favorable tax rate, acquisitions and volume were partially offset by gross margin declines, consistent with our April outlook.

As Michele stated, there is no change to our full year organic sales or adjusted EPS guidance.

We expect organic net sales to be towards the low end of the slightly up to 2% range and adjusted earnings per share diluted in the $5.33 to $5.43 range.

As we said in our press release, we updated our reported net sales outlook to reflect the strategic divestitures of Tyrrells and Golden Monkey.

By segment, North America net sales increased 5.6% versus the same period last year.

The Amplify acquisition added 6.6 points, and foreign exchange currency rates were a 0.2 point benefit.

Volume was a 1 point contribution to sales growth.

Net price realization was a 220 basis point headwind due to increased -- due to the impact of increased levels of trade promotional spending we planned in support of 2018 programming.

As a reminder, second quarter net sales were impacted by current year promotional shifts, as a lapping of elevated inventory levels during the prior year period.

Organic net sales were relatively flat in the first half of 2018, in line with our expectations.

North America advertising and related consumer marketing spend increased on our scale confection brands in the second quarter.

This was more than offset by optimization and shifts out of emerging brands, as we emphasize more productive initiatives, resulting in an overall decline of 6.1%.

Second quarter total International and Other segment net sales increased 3.1%, including a 1.7 point headwind from unfavorable foreign currency change.

Net price realization was a 3.8 point benefit and volume was up 1 point, driven by solid sales growth in Mexico, Brazil and India, which grew a combined 15% on a constant currency basis, partially offset by lower exports.

Our China team is delivering ahead of expectations on both the top and bottom line.

International and Other advertising and related consumer marketing declined 17%, in line with our expectations as we further rightsize our investments to drive more profitable growth.

Now turning to gross margin.

Adjusted gross profit declined 0.4%, resulting in an adjusted gross margin of 44.5%, a decline of 260 basis points versus the second quarter of last year.

This is in line with our expectations for the quarter and was driven by higher freight and logistics costs, unfavorable mix, incremental investments in trade and packaging to enhance the consumer experience at retail, plus additional plant costs related to new production lines.

Despite incremental pressure from recently enacted tariffs, we continue to expect a full year gross margin decline of approximately 125 basis points.

Given the pattern of last year's inflationary pressures, we expect year-over-year trends to sequentially improve in Q3 and Q4 versus the first half of 2018.

We're making good progress against initiatives to address our gross margin pressures.

We believe our price increase, additional capacity for our core brands, enhanced planning capabilities and SKU rationalization efforts will lead to sustainable gross margin improvement.

Second quarter adjusted operating profit of $339 million was impacted by $10 million of higher depreciation and amortization attributable to the Amplify acquisition and to our multiyear ERP initiative.

This resulted in an adjusted operating profit margin of 19.4%, a decline of 140 basis points.

Gross margin declines were partially offset by marketing spend shifts and optimization as well as continued SG&A discipline.

Moving down the P&L.

Interest expense of $35 million increased $11 million versus Q2 of last year, driven by the Amplify acquisition.

We had a successful bond issuance in May to secure permanent financing for the Amplify acquisition.

The issuance was oversubscribed more than 3x with very attractive spreads.

Full year 2018 interest expense is expected to be in the $130 million to $140 million range, in line with our previously stated estimates.

The adjusted tax rate for the second quarter was 16% versus 24.8% in the year-ago period, driven by U.S. tax reform.

We continue to expect the full year 2018 adjusted tax rate to be approximately 19% to 20%.

Second quarter other income and expense was $20.8 million.

Full year 2018 expense is estimated to be between $65 million to $70 million, consistent with our previous estimates.

The decline versus 2017 is driven primarily by lower non-service-related pension costs, which as you know, are now included in other income and expense, and we no longer adjust out.

We're continuing with our investment tax credit strategy and expect full year 2018 expense to be comparable to 2017.

Note that we expect most of the full year other income and expense decline to be realized in Q4.

For the second quarter of 2018, weighted average shares outstanding on a diluted basis were approximately 210 million.

The company repurchased $22 million of common shares in the second quarter to replace shares issued in connection with the exercise of stock options.

The company did not repurchase any common shares against the $100 million share repurchase authorization approved in October 2017.

There is $60 million remaining on this authorization.

Additionally, the Board of Directors has approved a new $500 million authorization for a total outstanding authorization of $560 million.

There is no change to our target leverage or cash flow priority.

Business growth, including M&A, remains our top priority, followed by dividends, then share buybacks.

And as we shared before, for the right M&A, we consider changing our leverage target.

This new authorization enables us to make timely choices based on the outlook for M&A and market conditions.

Total capital additions, including software, were $75.8 million in the second quarter.

For the full year 2018, we continue to expect CapEx to be in the $355 million to $375 million range.

Our capital spending is focused on high-growth, high-margin brands and on technology we believe is critical for the future of our business growth.

The additional Reece line we installed in Q1 has enabled a strong seasonal order, as Michele mentioned.

And our new Kit Kat line is on track to start producing volume in Q4 and will be a key enabler of the brand's 2019 growth.

Additionally, we are expanding capacity on our Ice Breakers gum business.

Retail sales there have grown over $145 million over the past 4 years, more than doubling the size of the business to approximately $275 million.

Leading velocities have created additional distribution opportunities that this new capacity will enable us to support.

Our ERP initiative is on track.

We will be implementing our new planning capability next month that will improve analytics to enable us to make better, faster decisions.

It will also free up time for our commercial teams to focus on more value-added work.

To summarize for the full year.

Full year reported net sales are expected to increase towards the low end of the updated 3.5% to 5.5% range.

This includes an updated net impact from acquisitions and divestitures of approximately 3.5 points versus the previous estimate of 5 points, reflecting recent international business divestitures.

The outlook for organic net sales is reaffirmed towards the low end of the slightly up to 2% range.

Full year reported earnings per share diluted are now expected to be in the $4.76 to $4.96 range.

We are reaffirming full year adjusted earnings per share diluted of $5.33 to $5.43, an increase of 14% to 16% versus last year.

Full year adjusted gross margin is still estimated to decline around 125 basis points versus prior year.

The adjusted 2018 effective tax rate is approximately 19% to 20% and CapEx spending is estimated $335 million to $375 million, consistent with our previous outlook.

We continue to return cash to our shareholders with second quarter dividend of $134 million.

This was our 354th consecutive quarterly dividend on the common stock.

And we're pleased to have announced earlier today a dividend increase of 10%.

We're confident in our ability to deliver strong earnings while taking the necessary steps to transform our business model and ensure a healthy, sustainable business in the future.

Thank you for your time this morning.

I'll now turn it back over to Michele for some closing remarks.

Thank you, Patricia.

Our brands are loved by consumers.

And next year, we will celebrate our 125th anniversary.

Each of us at Hershey are extremely proud that we can share a little goodness into the lives of our consumers.

It's one of the things that makes Hershey's so special.

With our success comes opportunity and responsibility that we take to heart.

Our consumers and customers can feel good knowing that as we focus on winning in the marketplace, we are doing so in a way that positively impacts our people and our planet.

Our investors can feel good knowing that this makes us a stronger business over the long term.

We are focused on delivering the back half of the year, but our top priority remains on long-term value creation.

We are making meaningful progress in transforming our domestic and international businesses, and our multiyear strategic plan will continue to guide our investment decisions.

The rapidly changing retail environment is driven by the consumer, and we will continue to drive our business forward by focusing on core brand growth and portfolio expansion, retaining and attracting the best talent to build the capabilities needed to delight our consumers, winning across the total commerce landscape and operating our businesses efficiently and effectively.

Patricia, Melissa and I are now available to take any of your questions.

(Operator Instructions) We'll take our first question from Ken Goldman from JPMorgan.

Patricia, your accounts receivable were up fairly meaningfully, I think, around 20% year-on-year.

I realized last year's receivables levels was unusually low.

But beyond the comparison.

Was there any reason for the sizable increase in 2Q '18?

I guess, really, the larger question is whether you feel your shipments and consumption timing were more or less in line with each other this quarter?

If there'd be any reversal next quarter or so forth?

Just trying to get a sense of that whole environment so to speak.

Go ahead, Patricia.

Yes.

So the biggest reason for the change in the receivables was clearly the Amplify acquisition, as we acquired their receivables.

So that drove that increase.

As we look overall to inventory at retail levels, it's always a changing environment.

We have some customers where inventories are up.

We have some customers where inventories are down.

Those that are up are focused really on service levels.

I think especially this tight freight environment the focus is making sure that they have enough safety stock to get products on shelf in this environment.

And there were some inventory out where there was consolidation.

And besides that, what we saw was sort of the normal patterns of inventory shifting that you'd expect from seasons of promotion similar to what we had last year.

We'll go next to the line of Alexia Howard from Bernstein.

So can I ask about the growth margin trends going forward?

Obviously, you've been under a lot of pressure for the last year.

It looks as though we're getting back to flattish, I guess, in the back half given the guidance for the full year.

What's enabling that sequential improvement as we move through into the second half?

Patricia, do you want to take that one?

Yes.

So some of it, Alexia, is just, frankly, lapping the fact that we saw -- the inflation really start to bite last year at this time.

Especially this was well covered in our call as well as frankly other people around some of the freight inflationary pressures that we had, as well as some of the things that we highlighted in our call around the cost of complexity, some of the logistical costs of that drive.

So as we're lapping those, that's a big reason that we see those sequential improvements year-over-year.

But beyond that, and I think more foundationally, we're really tackling the root causes of a lot of the impacts of what was driving that inflation.

So really working hard on freight optimization, making sure that we're trying to avoid buying in the spot market.

We contract our freight in advance and then really pushing hard on complexity.

So from what we've talked about before with our SKU rationalization but getting it some of that even deeper root causes of planning better, which is something we mentioned on this call.

You think some of our analytics tool -- if we can plan it on a more granular level and avoid some of those costs.

So those are things that we're working on.

And then the third benefit that we really see driving that year-over-year improvement in the very back of the year is a strong improvement in international, which continues, as Michele, I think, really highlighted in her remarks, to drive to profitable growth margin.

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

I think you mentioned that volume in North America was up 1%.

And that's a bit better than I think what we've seen in some of the scanner.

And I also thought last quarter that the SKU rationalization you talked about to start to limit some of the complexity maybe would be a bit more of a drag to North America organic growth in this quarter as well.

So I'm trying to get a sense of whether those things, those programs were the drag that you expected?

Or I guess, maybe it's just the all the untracked channels at the end of the day.

But maybe the differential between what we saw in North America volume with the other aspects I' mentioned would be helpful.

Yes, Andrew.

So I will start, as you know, we said that we expected the first half to be our softer half and second half to be stronger.

Certainly, as we look at Q2, we did see retail takeaway a little softer.

And that was partially offset by strength above what we anticipated in nonmeasured channels, as the consumer continues to be fluid relative to where they're purchasing products.

And that's very important for us to focus on.

I would say that the real impact from SKU rationalization is going to experience -- is really going to go much more forward versus Q2.

So we really just kicked the program off in the middle -- first part of the year.

And so we're going to see more of that impact come later.

I guess as you think about takeaway for the year, what I would say is, as we look to the back half, the key levers that really are going to accelerate growth are first of all, seasons, which you know, is about 1/3 of our business.

We have strong visibility into seasonal orders, as you know, because customers commit way in advance and we produce in advance.

And we have very strong commitments on the season, both Halloween and holiday.

Secondly, we have also visibility to customer resets in the fall.

And we know through our partnership with retailers, we've had a real a focus on making the shelf as productive as possible; and that will lead to some distribution gains for us in the back half of the year.

We also have the launch of Reese's Outrageous, which really just began in June.

But it really accelerates, and we gained full distribution in the second half of the year.

So our instant consumable innovation lap, it's much stronger what we have in place this year than prior year.

And I'd say those are some of the biggest factors.

The only thing I wanted to add on the SKU rationalization is as you'd expect, the first things that we take out are, frankly, SKUs with very small volume.

So they're not the ones that you see a big impact of and we also focused a lot on gross units, so again, you don't see coming through in the scanner data.

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

I wanted to ask some questions just around pricing.

But I wanted to start with inflation.

Could you guys just quantify your expectations for inflation in 2018?

And then one piece of complexity that's a little unusual but I think we need to know is, is how much of the inflation is systemwide or industry-wide versus Hershey-specific?

And I'm really thinking about the stand-up packaging because I know that that's been a big issue.

So there's a question there on inflation and then I'll I have a follow-up on pricing.

Okay.

Patricia, do you want to handle the inflation question?

Yes.

We're seeing -- I guess, if I take it in some buckets.

We're seeing standard inflation that we always see going through on wages and benefits, but again, what I think is industry-wide throughout the country.

Second, the freight inflation is hitting us, and we do see that impact as well.

Again, that's industry-wide.

In fact, I think our guys have done a really good job of managing that, frankly, better than probably the industry.

In terms of commodities inflation, I think it's a constantly changing landscape out there.

It's not a huge driver for us this year.

We have seen some volatility in some of our input costs like cocoa.

But frankly, we think our hedging program really does a great job of smoothing some of the very short-term swings that we see there.

So those are things that I would say everybody in this industry is seeing: wage, freight, whatever their commodities piece is.

And then you're right, we do have some impacts that are specific to us.

I think the ones that I would call out are some of the inflations that we see is just being driven from some of this complexity that we've talked about, which drive some internal logistics costs as well as the packaging, yes, which we have talked a lot about over last several quarters.

And we think that, that investment that we've made in more expensive packaging though will really deliver, especially going forward a better value proposition and impression on shelf to our consumer.

And then on pricing.

Can you guys quantify the magnitude and timing of the pricing?

And then one question specifically.

I think pricing in the quarter is down.

So Michele, if you could just kind of put this together for me.

We're taking the price increase but yet in the second quarter, pricing was down and it's not even immaterial.

I think it's at 1.6%.

So why is pricing so weak in the second quarter yet there is pricing announcements coming?

It's just a little bit of a kind of seems a little bit off in terms of kind of second quarter results and what they suggest versus what it is that you need.

But maybe you could pick it up and take it from there.

Yes, absolutely.

So let me start with the first part of your question relative to the price increase.

If you look at our total price increase, the weighted average increase of the total of all the actions we took is about 2.5% across our total business.

If you really break that out, as I mentioned in my comments, we've utilized a couple of different pricing levers.

And so the entire portfolio is impacted by terms.

There are select pieces of the portfolio impacted by price pack optimization.

And then about 1/3 of the portfolio experienced just a straight price increase.

So that's kind of how you can think about it relative to across the portfolio.

We announced it this past week.

As is the case with what we've done historically, we do need to price protect for promotions that are already committed to customers.

So really the front benefit of that comes closer to next year.

As you know, there's a little bit of a conversion on the way to realizing the price.

And obviously, we have seasons in the back half of the year that are about 1/3 of our back half where we have prices protected as well.

As you look at the second quarter and price realization there, Patricia, do you want to talk a little bit about that?

Yes.

So as we shared before, we have been shifting some dollars into trade this year to support some incremental in-store activity.

And then I think it's also important to say that there are a number of things going on in our trade line.

Some of it did show through on the scanner to the consumer.

But it was actually fairly small amount.

There's other pieces which really supported more just in-store activity.

And then actually a fair amount of it also was frankly some costs that just shifted from below the gross sales -- the net sales line into net sales for some accounting reasons as well as some prior year true-up.

So it was a mix of different things.

And I think that as we go forward, we just always are looking at our trade, making sure that we evaluate the effectiveness of it versus advertising and working with our retailers and making sure that we're really driving the best value possible from those dollars.

Yes.

Remember, I guess, I would say in our categories, as you know, one of the most important things to generate from our trade is merchandising.

So we continuously balance how much goes into price.

And as Patricia mentioned, there was a relatively smaller amount that really showed up as retail price decline.

We'll go next to the line of Jonathan Feeney from Consumer Edge.

So I wanted to -- you gave us the top line impact.

But a real simple question.

Trying to understand any color you can give us around what Amplify did, both in total or in North America to margin trend year-over-year and the operating profit trend year-over-year.

Because it seemed to be that was somewhat of a positive impact.

Any quantification you can give us there directionally would be very helpful.

Yes.

I mean, we feel good about what -- the profit that we're delivering on the business.

And it is actually ahead of our expectations.

So we are feeling good that we're overdelivering on our acquisition model on the top and bottom line.

And so it's having an impact in line with what we had shared with you earlier relative to -- if you look at EPS accretion, we are in line with the range that we have provided and are seeing strong profitability.

In fact, the team has been focused on really very strong discipline about leveraging the value of that brand.

And actually, spent sometime this year eliminating nonproductive promotions to further focus on profitable growth.

But really, if you look overall, the gross margin impact of that business on our total North America business, just given the size of it is pretty minimal.

And we'll go next to the line of Bryan Spillane from Bank of America.

I've got a follow-up question just on price increase.

I think in the past, when the pricing in the category has been more episodic, retailers side, my recollection of it, it's pretty much applied across the board to everyone.

Where here, it's a little bit more dynamic, I guess, right?

Part of it is list price, some of it is price pack.

So I guess I'm trying to get a sense from your expectations.

Will retailers sort of look at what Hershey is doing in isolation?

Or will they try to sort of apply it across the whole category?

I really could only speculate on that.

So at this point in time, I really don't know.

Not sure what their plans will be there.

That really rests in their hands.

I guess, as you have factored in elasticities, have you, I guess, thought about that differently maybe than you had in the past?

We always look at where our pricing is.

And in some parts of the portfolio, there's a lot of similarity in our portfolio and competitive portfolio, in some parts of our portfolio, there's not.

So we've continued to do a very detailed analytic, price elasticity models and evaluate all the learnings across.

But we can't really share the specifics behind that.

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

I just had a kind of a bigger picture question on international.

You divested the 2 businesses there, so congratulations on doing that.

But just in terms of overall profitability expectations.

You guys think forward in '19 but say 3 years forward, how should we -- or how would you like the market, to be thinking about the operating margin potential on that segment?

And I just asked because I think a lot of us can remember dating back, let's call it, 5 years, when there was an expectation for low double-digit operating margin on the business.

A lot kind of happened in the interim.

That kind of went away to an extent.

And then in Q2, you're putting up almost 9% in op margin.

And that's, I'm assuming, before some, hopefully, positive effect that would be coming from the divestments.

Sure.

So we feel very good about the profitable growth that we are driving and how we've reset the markets.

And we also see continued opportunity going forward.

So I think without getting into tremendous specificity, I think it would be fair to say that we believe low double-digit margins will be possible -- could be possible going forward.

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

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

Quick clarification.

Just wanted to see whether when you talked about the industry price increases and your price increases.

Are -- across the portfolio, are this in line with some of the peers are doing?

Lindt had commented that Ferrero and some others who are out there in the marketplace also are taking price.

So first question is just I want to say is that pretty much at parity with what you're seeing across the landscape?

I'm not sure that I'm in a position to really comment on others' pricing actions in the marketplace.

I think I'd prefer to stay away from that, and I'm not sure, honestly, that I have full knowledge of what others have done given that actions have been relatively recent.

I know that something out there but -- yes.

And then how should we think strategically about M&A going forward.

It seems like it a few times on the call today, you called out the lower leverage of the balance sheet and the appetite to looking at different types of assets in the marketplace.

Are you seeing anything out there in terms of the landscape that's more appealing today versus what it was 6, 12 months ago whether there's asset prices or anything you can kind of speak to.

We remain committed as we laid out in our strategy in March of '17 that M&A is a critical pillar of growth.

We see that as an opportunity to capture more snacking occasions given our strength and core capabilities in the area of snacking.

And so I would say we continue to be committed and you can look at our activity and see that we're taking action probably at an increasing rate versus perhaps where we were in the past, at least relative to size and scale of assets.

I would say that probably the biggest thing influencing our actions is, I think that we have learned a lot and are applying a lot of lessons from past acquisitions.

And so we have perhaps even tighter screening criteria that allow us, I believe, to move more dynamically to capture opportunity.

We'll go next to the line of Pablo Zuanic from SIG.

This is actually Aatish Shah on for Pablo.

On a more of a structural level for the quarter specifically.

Just want to know if there's a change in attitude by retailers regarding the chocolate category, specifically if you could touch on this by channels, space allocation, promotional environment, et cetera, that'd be helpful.

Yes.

I would say that the chocolate category and the confection category overall continue to be a category that's very important to pretty much all of our retail base because it is a category with pretty high profitability, and it has produced well for retailers over time.

So certainly, in terms of the level of priority and shelf space, that does vary a bit by different classes of trade and different retailers depending on their strategies.

But overall, I would tell you that we have continued to work with key retailers, some of whom are looking to expand space in the category, as they look at other categories in their box and say, how do they best master the space allocation and if you just look at category growth across all the categories in store, you'd know that confection continues to grow faster than many.

So there are certainly many that are looking at that.

And as we know, there are couple who have strategies that headed in a different direction so they probably aren't prioritizing it.

But I would say, overall, we continue to feel good about the roll of this category and how retailers are viewing it.

That's very important.

We'll go next to Jason English from Goldman Sachs.

A few housekeeping details.

I guess, first, the disposal of Tyrrells and Golden Monkey.

What's the anticipated revenue drag both on the tail end of this year and on a 12-month basis?

Patricia, you want to...

Yes.

You can see that's really the delta between the 5 points that we talked about from acquisition down to the 3.5.

Okay.

That math sort of implies if we annualize it that those businesses are about 1/3 smaller than they were when you bought them.

Is that right?

I don't think you can do it that way because for Amplify, Tyrrells is a piece of their business.

But for Golden Monkey, it's been changing dramatically as we go.

And quick back of the math envelope.

We get about a 15, 20 basis points gross margin tailwind from exiting those businesses, reasonable?

I'd have to look quickly.

There's a small gross margin improvement -- but it's very small.

And then last question, I'll pass it on.

You mentioned -- or a 2-parter question.

On the pricing components, can you specify what that 1/3 of the portfolio is, where you took a straight price increase?

I'm assuming it's on the single serve.

And can you give us the magnitude?

And you mentioned investment in packaging.

Could you contextualize that for us, give us a sense of what exactly you're referring to.

So I can tell you that some of the specific price increases were primarily in the take-home pack.

I think that's about as much detail I want to go into that.

And then relative to investments in packaging, that's really about the refresh to create strong impactful packaging graphics and structure at retail to capture shelf impact.

And that's one of the areas where we look at the total value proposition to the consumer and really try and optimize that value proposition.

And that's part of what you see in our broad pricing action.

What's that mean?

Are you -- is that like more retail-ready packaging?

Is that more stand-up pouches, I'm not sure what your comments referred to?

Yes.

So it's across-the-board.

There are multiple components.

A piece of that is retail-ready packaging.

A piece of that is a change in the structure of our laydown bags to be standing up and to have more of an impact from that perspective.

So makes them easier for consumers to use.

Allows for much greater shelf impact.

And as always, when we look at adding value to consumers, we always look at making sure that we're aligning the price value and getting price realization as we invest more into some of our packaging.

And we'll go next to the line of Robert Moskow from Credit Suisse.

A couple of follow-up questions.

Regarding the e-commerce strategy.

It's encouraging to see the sales up 30%.

But I'm having trouble figuring out how to think about the mix impact it might have away from higher margins, single-serve and maybe more towards take home.

Have you done any math to determine if this dynamic would shift, would also be a drag on mix?

And then also, I think you said in the past that you can shift spending from one bucket to another to fund all of these e-commerce investment that needs to take place, but my concern is that you kind of have to invest in both brick-and-mortar and e-commerce at the same time.

Can you elaborate a little bit on those things?

Yes.

So as you look at e-commerce as a channel, we want a bigger business in e-commerce.

And on the other hand, we're somewhat fortunate that food and especially conditioned distribution has been a little bit slower than some other categories.

So we've been able to capture some of the learning that those categories have experienced in terms of really thinking about the packs that we want to sell, the price points and what portfolio looks like in that channel.

And I think that is helpful to us as we look at continuing to drive margins.

And as we look at the investment in e-commerce, we have really had programs underway to look at how we want to reallocate our resources strategically across the portfolio.

So if you look at the increase in profitability that we have in international, that was a choice to improve profitability to be able to fund some of our other critical strategic initiatives.

So that freed up money.

We had a major initiative to reorganize internally to drive even greater commercial value.

We took dollars out of SG&A and our corporate functions.

And that's another source of funds that we could reallocate.

So what we've tried to do is prioritize all commercial value, which is really bricks and mortar and e-commerce as uses of funds.

And then some of those other areas that I spoke to as sources of funds.

And for the final question, we'll go to John Baumgartner with Wells Fargo.

Michele, just on the international side.

The profit recovery has been pretty good.

But I'd like to hear more about your vision for the top line.

And that I guess Brazil,Mexico, India,they're strong but they're pretty small relative to the U.S. So do you see Hershey being more for an America-centric business going forward?

You'd be more in the export business going forward?

Is there opportunity for version 2.0 in China?

How do you think the resource allocation going forward?

So as we think about the international business, our goal is on driving profitable growth.

And as we've talked a little bit about our strategy in the past, we have an algorithm that basically says we want to get about 0.5 point of profitable growth from the international business.

And I think there's a possibility that could go up a bit over time.

Canada and Mexico, scale markets where we have scale positions, strong businesses and that kind of fit one role in the portfolio.

And then as we mentioned, export is highly profitable business.

So we'll continue to run that to leverage our brands in key markets.

And then we're placing some bets when you look at China and India in particular on the huge growth that's going to occur in the future and is occurring in those markets are really focused on building sustainable business models.

And pending the outcome of that, we'll determine how much more investment we put there.

But I think it's clear that we feel good that those businesses have gotten to a point where their profitability is very good.

And we'll continue to make choices as we see the success on individual bets in those markets.

Just given the experience with the Golden Monkey.

And I guess, there's been other example of about JV elsewhere in the world.

I mean, how do you -- what's your appetite for taking on more M&A in emerging markets?

Do you go with a partner, do you do more JVs?

How do you think about that?

I'd say right now, that is not our focus for M&A activity.

Our focus is in the U.S. market.

So we -- I feel very good about, we have enough scale in Canada and Mexico.

And I think that we're making really good progress on our own in China and in India, not ruling out any potential strategic partnerships going forward but feeling good about our focus on the Hershey brand, on a higher-margin portfolio and local talent and doing all the right things to accelerate our business.

And I think we've got good success or good proof points that in the past, when we're stuck with that, it's worked for us pretty well.

Thank you all for joining us this morning.

I look forward to connecting with you all later today to answer any additional questions you may have.

Thank you.

We'd like to thank everybody for their participation on today's conference call.

Please feel free to disconnect your line at any time.