HSY
#Thanks, <UNK>, 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 was 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
<UNK> 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 in 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 channels, at the right moment
Total Hershey Q3 U.S
retail takeaway growth was 1%, driven by CMG growth of 1.4%
This more than offsets some softness in grocery items, such as baking chips and syrup
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 non-core 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, this 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, is tracking as expected
We achieved our distribution target earlier in the year and maintain 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 two as it did in year one
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 omni-channel 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 omni-channel 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 as we discussed on March 1. This efficiency and effectiveness initiative is progressive 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 continued 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 break-even 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 a competitive edge at retail and with consumers
We're committed to our marketing mix modeling, 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 caramelize 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 <UNK>, who will provide you with details on our financial results
Thanks, <UNK>
I just want to start by thanking all of our employees for those solid Q3 results that we delivered
As you've 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 remain 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
Question-and-Answer Session
Good morning
So let me talk a little bit broadly, and I'll also talk about Hershey in particular
So first of all, yeah, customer service rates are critically important to our customers in the marketplace right now
And I think, certainly, as there is a pressured 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 fill 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 a couple pressures that we had
So you can see the strong growth that we have in our core brands and have continued to have all year long, has actually put pressure on activity (30:14) 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 multi-component products like Snack Mix, for example, where you're moving 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've probably heard others talk about that, going forward, there are 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
I mean, certainly, we've seen that the C-store retail community has talked about some of the pressures that they felt in their stores and trips not being where they would like them to be
So we certainly sell a lot of instant consumables there
So we are 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 very viable and successful in the marketplace, create a little pressure on mix as well
<UNK>, do you want to talk about that a little bit?
Hi, <UNK>
So, <UNK>, we continue to expect that at the end of the year, our inventory and our retail takeaway will be aligned
Third quarter 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 an 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 that we anticipate them to be fully aligned by the end of the year
Yeah, <UNK>
If you look at our full year plan, our plan was a bit more front-loaded
And particularly, if you looked at C-store, we are lapping an unusually strong period year ago on instant consumable innovation when we had the Kit Kat Big Kat and as well as the Reese's Pieces Cup
And so the category was looking good in third quarter
And we have a tough lap, though, particularly because of the year-ago innovation in instant consumable and that's the biggest thing impacting us
You're welcome
Hi, <UNK>
No, absolutely
So if you think about our total portfolio, if you think about the baking piece of the portfolio, chips and syrup, 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 right-size our snacking portfolio and really focus more in a precision approach, so some of that right-sizing
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
You're welcome
Yeah
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've 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
And you've seen us execute against that over the past couple years
So I would expect that that would continue to be a piece of how we look to deliver that expansion
I was going to say, I think it might just be hard to look at total distribution points because there is 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 stand-up 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 – both of those things going on at the same time that I think is getting muted in the total numbers, too
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 what the season will shake out like
But I think that overall merchandising, we're seeing very strong collaboration with retailers, as we have in the past
So 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
Good morning
You know, 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 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 can bring in more consumers
But I think that everybody's also looking at that in a very balanced way, which is unless price is really driving incrementality, then it's 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
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 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
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, how do we drive the category there and bring incrementality
If I think about the competition, I think national players always tend to be pretty strong wherever they're established
And I think it sometimes more the regional players that experience pressure in those scenarios
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, primarily within the U.S
$100 billion snack wheel
And certainly, are interested in companies that either complement our confectionery portfolio, our snacks business or our go-to-market
<UNK>, anything you want to add to that?
And I think we're just always 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
You know, it's a competitive marketplace and that's about all I would say, right, continues to be competitive marketplace out there from an M&A perspective
