The Hershey Company (HSY) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Phyllis, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hershey Company's Third Quarter 2013 Results Conference Call. [Operator Instructions] Thank you. Mr. Mark Pogharian, you may begin your conference.

Thank you, Phyllis. Good morning, ladies and gentlemen. Welcome to The Hershey Company's Third Quarter 2013 Conference Call. J.P. Bilbrey, President and CEO; Dave Tacka, Senior Vice President and CFO, and I will represent Hershey on this morning's call. We also welcome those of you listening via the webcast. Let me remind everyone listening that today's conference call may contain statements which are forward looking. These statements are based on our 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 2012 filed with the SEC. If you have not seen the press release, a copy is posted on our corporate website in the Investor Relations section. Included in the press release is a consolidated balance sheet and a summary of consolidated statements of income prepared in accordance with GAAP. Within the Notes section of the press release, we have provided adjusted pro forma reconciliations of select income statement line items quantitatively reconciled to GAAP. The company uses these non-GAAP measures as key metrics for evaluating performance internally. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP. Rather, the company believes the 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 2013 third quarter results, excluding net pretax charges of $5.9 million or $0.01 per share diluted, which were related to costs associated with the Project Next Century program, non-service-related pension expense, and acquisition and integration cost. Our discussion of any future projections will also exclude the impact of these net charges. With that out of the way, I'll turn the call over to J.P. Bilbrey.

Thanks, Mark. I want to thank all of you on the phone and webcast for joining us today. Hershey had another good quarter with organic net sales of 6.6%, driven by core brand and new product volume growth, resulting in adjusted earnings per share diluted of $1.04. And I'm pleased with our marketplace results as we gained market share in every major channel within the segments of chocolate, mint and gum in the third quarter and year-to-date period. Specifically, Hershey's CMG, that's candy, mint and gum, xAOC+C-store retail takeaway for the 12 weeks ending October 5, 2013 in channels that account for about 90% of our U.S. retail business was up 5%, resulting in a 0.7 point market share gain. Year-to-date, Hershey U.S. retail takeaway and market share is up 6.7% and 1.2 points, respectively. Third quarter CMG category growth in the xAOC+C channels was up plus 2.5%. However, similar to the last few years, gum continues to be a drag on total CMG performance, and excluding it, the category was up 3.9%. Hershey's Q3 xAOC+C chocolate retail takeaway was plus 5.2%, resulting in a gain of 0.5 points of chocolate market share. Core brands such as Kit Kat and Reese's, as well as Brookside, all gained share. Third quarter non-chocolate candy or NCC, xAOC+C category growth was plus 3.5%. Hershey NCC new products in 2013 consisted of Twizzlers Bites and Jolly Rancher Bites in take-home pack types only. As a result, we did not keep up with category growth. Additionally, we're also lapping very successful year-ago NCC innovations and promotions, hence, Hershey's NCC retail takeaway in Q3 was up less than 1%. This resulted in a market share loss of 0.5 points. As some CPG companies have noted, Q3 FDMx traffic was mixed. However, Hershey's Q3 FDMx CMG growth was 3.4%, resulting in a market share gain of 0.4 points. Here, our results were driven by the food class-of-trade, which generated solid CMG retail takeaway of 5.1%. As it relates to Halloween orders, merchandising and programming, we're executing on the plans agreed upon with our retail partners. Sell-through is on track, and we believe we have the right mix of seasonal-specific advertising, coupons and programming support that sets the stage for another winning season. We will not have a complete read on sell-through for another couple of weeks, but our preliminary analysis indicates that our Halloween market share in xAOC is projected to increase for the sixth consecutive year, and that will build on our 38 share of this important season. In the C-store class-of-trade where there isn't a big seasonal sales impact, Hershey performance was strong, with Q3 retail takeaway up 5.7%, resulting in a market share gain of 0.7 points. Our C-store chocolate and mint retail takeaway was particularly solid, up 7.9% and 5%, respectively. These gains were driven by core brands that were supported by advertising, in-store selling, merchandising and programming. In the U.S. marketplace over the remainder of the year, we have many exciting products, promotions, programs and merchandising in place across all channels, including things like the continuation of the Kit Kat Android K promotion, where consumers can win tablet computers, Kit Kat Minis and other prices. There's a Reese's NCAA Football promotion featuring a game day tailgate prize package and the opportunity to win season tickets. And strong plans for successful Halloween and the holiday seasons are in place. And we continue to feel very good about our brand building. Full year advertising expense is expected to increase 22% to 23% in 2013, greater than our earlier outlook of about 20% increase. This investment should benefit the category and our business in Q4 and enable us to get off to a good start next year. Brookside continues to do well and we've begun to ship an instant consumable 3-ounce pack type initially targeting the C-store channel. In 2014, we expect FDMx channels will also be interested in this pack type for secondary, high-traffic placement. We're still managing, merchandising and programming of the 7-ounce package to ensure product presence remains in the candy aisle of all targeted stores. Repeat purchases are on-track, and we continue to anticipate that Brookside will continue at least 1 point of total company sales growth in 2013. Looking North, our business in Canada continues to build on its momentum. Specifically, our combined candy and mints market share is up 0.4 points year-to-date and about 0.15 points away from becoming the leader in Canada. In Q3, Hershey's, Reese's and Oh Henry! net sales on a local currency basis increased high mid-single-digits. Chocolate retail takeaway remains strong, with market share up 0.3 points. Our sweets and refreshments market share increased 0.8 points, driven by solid Ice Breakers and Jolly Rancher performance. As expected, outside of the U.S. and Canada, international net sales accelerated and were up 14%, led by China, Mexico and Brazil. Export markets also performed well with sales trends nearly doubling in the third quarter versus the first half of the year. Looking at some of the focus countries. China chocolate category growth accelerated in Q3 and year-to-date, the category is up about 12%, the categories developing as anticipated with instant consumable and take-home growth outpacing gifting. Hershey's third quarter retail takeaway was solid and our year-to-date results are in line with our full year expectation of achieving chocolate growth of at least 4 to 5x greater than the category growth. Per Nielsen, our national share is just above 7%, driven by the Hershey's and Kisses brands, which have each gained 0.9 market share points this year. We've carried our retail momentum into the fourth quarter and have begun shipping Hershey's Kisses Deluxe and Hershey's Drops. Additionally, the fourth quarter will also benefit from an earlier Chinese New Year, giving us confidence that we'll end the year strongly. In Mexico, Hershey's Bliss and Kisses are having a solid year. In the modern trade, our Q3 and year-to-date chocolate retail takeaway was about double the category growth rate, resulting in a market share gain of 1.8 points. Our overall chocolate market share in the modern trade is about 21% and the Hershey's franchise surpassed one of our competitors to become the #1 chocolate brand in these channels. Consumer testing and validation of Reese's, primarily in the C-store channel, is progressing and should be a future enabler as we track towards our 2017 goals. Our Mexico non-chocolate candy growth has not kept pace with chocolate; however, we have new product launches in Q4, as well as related marketing support that gives us the opportunity to end the year with momentum. In Brazil, Hershey bars, tablets and Mice are on track. The chocolate category in Brazil is up about 8% to 9% in 2013 and Hershey retail takeaway is about double the category growth rate, resulting in a 0.3-point market share gain. We feel good about the progress we're making in our International businesses and we like the growth outlook and prospects in the markets of China, Mexico and Brazil. Additionally, in a press release earlier this month, we announced that we'll be building a manufacturing facility in Malaysia to support our growing business in the Asia Pacific region. Outside the U.S. and Canada, we expect that our International business will be up about 15% this year, putting us on track to achieve about $1 billion of net sales by the end of 2014. Now to wrap up. I'm pleased with our performance given the macroeconomic challenges that consumers and retailers are facing. As I stated earlier, over the remainder of the year, we have solid merchandising and programming in place to drive core brands and new products in both U.S. and international markets. The fourth quarter has gotten off to a good start. Halloween is tracking as expected. The holiday season is shaping up to be better than last year, and we'll begin shipping some select 2014 new products. Therefore, we expect full year net sales to increase about 7%, including the impact of foreign currency exchange rates. We have good visibility into our cost structure and expect to achieve adjusted gross margin expansion of 240 to 250 basis points that should result in 2013 adjusted earnings per share diluted growth of about 14%. As we look to 2014 and beyond, we will continue to focus on U.S. core brands and leverage Hershey's scale at retail. Our International business continues to progress and we're optimistic about the potential to accelerate our international presence behind our disciplined approach to organic investments and acquisitions or joint ventures. We believe the investments we've made and will continue to make have resulted in an advantaged business model, enabling us to deliver predictable and sustainable results. As a result, this gives us the confidence to increase our annual long-term earnings per share diluted target to 9% to 11%. In 2014, we'll continue to focus on core brands in both the U.S. and key international markets. Additionally, we have a solid pipeline of new products including York Minis, Hershey's spreads, Lancaster Soft Crèmes caramel, as well as some yet to be announced products. And therefore, we expect innovation to contribute meaningfully to our net sales growth in 2014. As a result, we expect 2014 net sales growth to be within our 5% to 7% long-term target including the impact of foreign currency exchange rates. As has been the case for many years, Hershey is a gross margin-focused company. We have solid productivity and cost savings initiatives in place, and while early in the planning cycle, we expect adjusted gross margin expansion next year that will drive 2014 growth and adjusted earnings per share diluted in the 9% to 11% range, in line with our long-term target. I'll now turn it over to Dave, who will provide you with some additional financial details.

Thank you, J.P., and good morning, everyone. Hershey posted another quarter of solid results, with consolidated net sales of $1.85 billion, up 6.1% versus last year, generating adjusted earnings per share-diluted of $1.04. Net sales growth in the quarter included 6.6% organic growth, offset by an unfavorable foreign currency exchange impact of 0.5%. The organic net sales growth included growth in the U.S. and international markets that were within our targeted ranges. Core brand and new product volume growth totaled 6.1 points, while net price realization, primarily in the U.S., was a 0.5-point benefit. The Brookside business continues to do well, contributing 0.5 points to net sales growth in the quarter. Note that Brookside's net sales in the third quarter of last year included an additional month of sales as we completed the integration of the Brookside business into our financial and business processes. For the year-to-date period, Brookside has contributed about 1.3 points to our net sales growth. Turning now to margins. In the third quarter, adjusted gross margin increased 300 basis points, driven by lower commodity costs, favorable sales mix, supply chain productivity, cost savings initiatives and fixed cost absorption from volume gains. Input cost deflation of about $33 million was in line with our estimates, and there's no material change to our input cost outlook over the remainder of the year. Given year-to-date results, we now expect adjusted gross margin expansion of 240 to 250 basis points, which is greater than our previous estimate of 220 to 230 basis point increase. Adjusted EBIT increased 11.8% year-over-year, generating adjusted EBIT margin of 20.3%, 100 basis points higher than the third quarter of 2012. This increase is driven by the gross margin improvements. Adjusted SM&A expenses increased 15.2% versus last year as a result of increased advertising spending and higher SG&A spending. Advertising expense in the third quarter and year-to-date period increased 22% versus a year ago. For the full year, we now expect advertising expense to increase 22% to 23% versus our previous estimate of about 20%. We continue to believe that the advertising activities are a key factor in our sales growth and in our momentum in our focused international markets. In the third quarter, adjusted SG&A, excluding advertising, increased 12.3% versus last year, less than our estimate of about a 20% increase due to timing. In the fourth quarter, we expect another meaningful increase in this line item. These investments in non-advertising brand building and go-to-market capabilities in both the U.S. and international markets, will benefit the company in the near and long-term. Now let me provide a brief update on our International business. As expected, net sales outside the U.S. and Canada accelerated in the third quarter, increasing 14.2%, driven by gains in China, Mexico, Brazil and our overall export business where sales trends nearly doubled in the third quarter versus the first half of the year. We continue to make progress in the 4 focused markets of China, Mexico, Brazil and India, which collectively posted solid net sales growth of 22%, driven primarily by Hershey's and Kisses. We expect international sales to sequentially improve again from the third to fourth quarter, given new product launches, core brand growth and our solid seasonal plans. For the full year, international net sales are expected to increase about 15%, continuing toward our goal of $1 billion in net sales by the end of 2014. Moving down to P&L. Third quarter interest expense of $21.8 million declined slightly versus $24.5 million last year. In 2013, we continue to expect interest expense to be approximately $90 million to $95 million. The tax rate for the third quarter was 33.3%, and lower than the year-ago period of 36.1%, due to timing of certain discrete tax items. We now expect the full year adjusted tax rate to be about 34.5%, slightly lower than our previous estimate. In the third quarter of 2013, weighted average shares outstanding on a diluted basis were approximately 227 million shares versus 229 million shares in 2012. Let me now provide a quick recap of our year-to-date adjusted results. Net sales for the company increased 6.1%. Adjusted EBIT increased 10.8% resulted in an adjusted EBIT margin gain of 80 basis points. Advertising increased 22% on a year-to-date basis, relatively in line with the percentage now forecasted for the full year. Year-to-date adjusted gross margin was 46.8% versus 44.0% last year, a 280-basis point gain, driven by lower commodity costs, supply chain productivity, favorable sales mix and fixed cost absorption. Year-to-date, adjusted earnings per share-diluted increased 14.4% to $2.86 per share. Turning now to the balance sheet and cash flow. Net trading capital was flat versus the year-ago period. Accounts receivable was higher by $10 million as a result of increased sales and remains extremely current. Inventory was higher by $36 million and accounts payable increased by $46 million. In terms of other specific cash flow items, total capital additions, including software, were $70 million in the third quarter. In 2013, we expect capital additions to be approximately $320 million to $330 million. As we announced earlier this month, we will be building a confectionery manufacturing facility in Johor, Malaysia, to meet the growing consumer demand for our products in our fastest-growing region. This will be a $250 million investment upon completion in 2015. Included in our 2013 capital expenditure budget is about $35 million related to this project. The majority of the investment, $120 million to $140 million, will occur in 2014 with the remainder in 2015. Depreciation and amortization was $52 million in the third quarter. In 2013, we are forecasting total depreciation and amortization of about $200 million to $210 million. Dividends paid during the quarter were $105 million. Cash on hand at the end of the third quarter was $701 million. We did not acquire any stock in the third quarter related to the $250 million outstanding repurchase program. Now to summarize. We are pleased with our third quarter and year-to-date results. Halloween has gotten off to a good start, and over the remainder of the year, we have plans and investments to drive top line growth. Therefore, we continue to expect full year net sales to increase about 7%, including the impact of foreign currency exchange rates. We have good visibility into our full year cost structure, and there is no material change to our input cost outlook for 2013. Given year-to-date results, full year adjusted gross margin expansion is expected to be 240 to 250 basis points, slightly greater than our previous estimate. This increase, as well as the slightly lower tax rate, will offset the aforementioned increase in advertising expense and SG&A spending. As a result, the company continues to anticipate 2013 adjusted EPS growth of around 14%. As J.P. stated, we have also increased our long-term adjusted earnings per share target to 9% to 11%, based on our expectation of continued strong business performance. As we look to 2014, we have a solid pipeline of innovation in both U.S. and international markets. Additionally, we will continue to focus on our core brands and leverage Hershey's scale at retail. We expect 2014 net sales growth to be within our 5% to 7% long-term target. We have solid productivity and cost savings initiatives in place, and while early in the planning cycle, we expect adjusted gross margin expansion next year that will drive 2014 growth in adjusted earnings per share diluted of 9% to 11% within our revised long-term target. We will now open it up for Q&A.

[Operator Instructions] Your first question comes from the line of Bryan Spillane with Bank of America.

Just a question about the change in your -- in the long-term growth goals. So in going from 9% to 11%, and I guess, maybe even more just looking at the goals you've set for between now and 2017, if I remember it right, you're expecting about $40 million to $50 million annually of productivity and gross margins to be, I guess, a little better than 43% by then. So could you just -- can you talk a little bit about whether that's changed at all? Are you expecting more productivity or better gross margins? Or is the higher growth goal a function of a more optimistic outlook on sales?

Well, I think as we go through it, I think our productivity outlook is still consistent with what we've stated. I think as we're looking forward with our sales growth and we're also looking at the leverage we would be getting in our SG&A, and hence making the change.

Yes. I think -- I would just also add that we believe there'll be consistent top line growth, and that will reflect itself all the way through the P&L, and this is more representative of where we think our results have both been and where we think they'll be.

So is it -- I guess, is it fair to look at this and think that you're starting your outlook for the operating leverage you'll see in this international expansion is pacing a little better than what you were expecting when you laid those goals out about 1.5 years ago?

Well, I think that we're pretty optimistic about what we've been able to achieve around innovation. As you know, in our long-term growth algorithm, we've always talked about it being about 1 point. We found ourselves doing pretty consistently better than that. We would hope that, that would continue to be the case. And then, of course, that innovation is across broader geographies than it has been in the past, so I think those things all lead us to -- we just have confidence in raising the long-term EPS guidance.

Your next question comes from the line of Jonathan Feeney with Janney.

As you put up good volume growth this quarter off a significantly more difficult comparison. I'm concerned looking forward to next year. If you could give us -- first of all, maybe give us a sense how much of the volume growth this year has been Brookside. And looking into next year, like what inning do you think we are in that development. And what factors, maybe especially as you think about the second half of next year, give you confidence that we can sustain a level of volume growth that's like this, certainly above trend? Or maybe it's the case that it reverts back to trend. Any comments you could give me would be helpful.

Sure. I think the 2 things that I'd point out is Brookside is about 1.2 -- between 1.2 and 1.3 of our growth in 2013. It was less than that in the Q3 just because of the normalizing of that versus the base versus previous year. And then the other thing that we're very excited about is we're introducing things like Brookside 3-ounce, so that will be an instant consumable item, be largely focused on C-stores. But I would anticipate that, that would also be an instant consumable across other channels, certainly on the front end. We have Lancaster in China. Kisses Deluxe is happening in China. Hershey's Drops. Kit Kat Minis continues to be very, very well and we're on, certainly, the front side of that. We have some new things in our sweets and refreshment area around Jolly Rancher Soft Chewy Bites. That's also coming in, like a cup holder pack, which is a new package format for Jolly Rancher. We've got some new executions around Twizzlers. And then the one that I'm personally excited about is our Hershey's spreads product, which we're introducing now, the 13-ounce jar, and that has had great reception. It begins shipping in December, so we'll get the benefit of that in Q4. And then as that goes forward, we will also have another type of instant consumable pack that will go along with that, it's in 2014. So we have a lot of things that we feel really good about. And then there's a whole group of other 2014 products that I haven't included, but I think we've got a really full plate of things that we could do, and I continue to believe our consumer-centric approach to the business makes all of these things, as we like to say, stickier than we've been able to experience in the past. I think we continue to get better at that than we have.

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

Thinking about, I guess, building on the previous question and just thinking about the 5 to 7 top line target for next year. It sounds like from an innovation perspective, the pipeline is still quite full and perhaps you can still get above the kind of the 1% longer-term target from innovation that you'd like. I mean, thinking about some of the other components of the top line, I'm trying to get a sense of maybe what your expectation would be for category growth next year. Would you still expect some modest share gains as you've been able to do over the last few years in some of your core categories? And I assume pricing, at this stage anyway, given maybe where your visibility is around inputs, not likely a large contributor to next year either. So just trying to get a sense of the sort of the other puts and takes on the top line.

Well, we're not going to, obviously, speculate around any pricing, nor does that makes its way into any of our planning. We continue to have good core brand growth this year. Our expectation is to continue to grow share in 2014 just as we have ahead of the category in '13. And I think that we model that the category grows between 3% to 4%, it's actually grown a bit ahead of that. And I wouldn't be surprised that it's -- we hear in the marketplace, there will be other people who are looking at innovation. I think news in the category is good. And I also wouldn't be surprised if we don't continue to see the overall advertising spend grow in the category. And in an expandable consumption category, that's good for everybody. So frankly, I would not only look forward to that if that happened, but I wouldn't be surprised if it didn't happen. And I think that will continue to underpin the overall health of the category. And don't forget, this is a great category for retailers. They make good money and they have the same vested interest we do in seeing it grow.

Your next question comes from the line of Robert Moskow with Crédit Suisse. Robert Moskow - Crédit Suisse AG, Research Division: I wanted to ask about the $250 million CapEx investment in Malaysia and what regions that plant is going to support. And the reason I'm asking is, I think China is, right now, a growing business, $125 million, $130 million in sales. So is it -- is this plant going to support more than just China? It seems like it's an enormous investment for what is a pretty small business today. And I know China's growing. And I was out there, I saw Hershey's Kisses everywhere. But it seems like your sales growth slowed in the third quarter, and I wanted to know what caused the sales growth to slow currently.

Well, let me start off by addressing the capital. We have had a manufacturing facility, it's a joint venture with Lotte that is in China, and that facility is manufacturing our product for China, as well as for our exports throughout the Asian region. And as we've said, we expect the China business within the next few years to actually grow to our second largest business, and we need additional capacity. So as we're looking at this particular facility, we're looking at having that facility support our overall growth in Asian businesses in the markets outside of China, and that would free up capacity in the existing facility to be able to support our China growth. And also, for certain products for China, it would also be being supported out of this facility. So as we look at the growth expectations that we have in the region, and it is China plus our overall Asian market, we feel it's the appropriate facility and the appropriate location and size to serve our growth needs.

Yes. Let me build a little bit of that from a commercial perspective. So don't forget that what you're seeing in China today is a relatively limited portfolio. We continue to fan that around our core brands. And to be able to do that, that China manufacturing plant, which today supports exports also in the region, just doesn't have the capacity to do that. So that capacity in China really goes all to China, and we would expect the plant in Malaysia to also help us some there. So one of the things that happened in the quarter is, as we looked at some of our export businesses, we actually pulled some of those exports back, so we didn't supply them out of that China plant and we also didn't have the ability to do that because we don't have the Malaysia plant. So that's a bit in that number. But I think just from a macro level, if you go back and you think about this Brookside being normalized, with 4 months of business in the base in the quarter of previous year, that's 0.5 point. So if you just took the current organic growth and you added that 0.5-point, that's 7.1%. We feel awfully good about that performance. So one, I think in total, Asia, it gives us a lot better opportunity to have the right footprint, it allows us to expand in ways we're not expanding, and it allows us to have a fuller portfolio in China and then continue to build in the balance of the region. But if you put those things back together and you were to look at a 7.1% kind of number, that's certainly a good performance. Robert Moskow - Crédit Suisse AG, Research Division: But John, how are your sales doing in China year-to-date? There's a talk of a slowdown in the consumer. I just wanted to get kind of a check in on that.

We're not experiencing that. And I think, again, it comes back to the fact that the category is growing really nicely in China. Depending on who you talk about, the category is growing at 12% to 15%. We're growing at 4 to 5x that rate. We continue to activate advertising. We're expanding the cities that we're in. So the size of the overall business there is still such that there's a lot of blocking and tackling that yields a very positive result, and these are accessible indulgences. So we're not going to experience the same kinds of things that industrial manufacturers are, and so forth. So people are participating in the category in an ever-growing rate. I think on the last call, I might have made this comment that you go back 5 or 6 years ago, and the category was about $500 million. Today, it's probably about $1.5 billion. And I'm talking chocolate only now. The sugar and confectionary is significantly bigger than that. So there's nothing about our business in China that I would characterize as slowing.

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

I just wanted to follow up on the gross margin outlook for next year. I know it's still early days here, but can you give us any read in aggregate of whether you expect to see modest inflation overall across your input cost profile? And then, just to ask specifically about cocoa. Obviously, we've seen it move up meaningfully over the past few months. Do you view that as more of a seasonal dynamic or should we think about that as sort of a stabilized run rate for cocoa, perhaps, going forward?

Well, kind of 2 things. As we said, we're early in our planning process and so we'll fill out some of the pieces around how much gross margin expansion in that when we talk to you next quarter. But we're far enough along that we're comfortable that we can see the growth rates and that we will be committing to for next year. With respect to the cocoa market, this is a time of the year that's just before harvest and there's a bunch of news that seems to come out every day. I think we'll know a lot more as the cocoa comes to market over the next couple months.

Your next question comes from the line of Eric Katzman with Deutsche Bank.

Two quick ones and then a longer-term question. First one, I think you talked about the export market versus the first half, but everything else was regarding a year ago. So what was the export business versus the third quarter a year ago?

I don't have, Eric, on the top of my head that specific question, but you could give Mark a call and we can get into that. But the way to think about it is that we had some export business last year that we felt was less strategic than meeting some of our requirements in our core markets, China in particular. So it was creating some complexity for us that we felt put some other more important strategic business at risk. And so some of that business, consciously, we started making some selections around. So if you think about our export business -- and those are profitable businesses for us, by the way. But the way that we started thinking about it is really prioritizing where around the world do we believe we ultimately will plant flag, and then some of the other businesses, we made some choices around, just to make sure that we could meet the requirements within our supply chains. But Mark can give you a very specific answer around that.

That's fine. And then you noted some pipeline fill in the fourth quarter. Did you quantify that? Did I miss that, like either what...

I didn't quantify it, but as we thought -- as we have looked at our overall guidance of being around 7%, certainly, those are included. And we have a number of things, as -- I had a fairly lengthy list earlier, things that are happening in the fourth quarter. But certainly, amongst the largest of that is Hershey's spreads, which begins shipping late November, early December.

Okay. And then just, I think going back to Bryan's question, I think it's -- for a company to change their long-term targets, it's a pretty big deal, and so I want to dig into it a little bit more. First off, is there any changes in your long-term assumptions around nonoperating items? So as you get international, are you now assuming the tax rate can come down? Is the balance sheet maybe being used a bit more aggressively to repurchase shares? Maybe that's the first question.

Well, I think as we go through and we look at it, the change is primarily driven by how we see the sales and the SM&A expenses and how we get leverage on that. And then beyond that, as we grow, there could be some changes in the tax rate, but that's not the primary driver.

And then at CAGNY, I think you had actually lowered a bit your expectations for margins coming out in the international EM businesses from a mid-teens target to low double digits, and this would seem to kind of reverse that. At the same time, I think as Matt pointed out, that cocoa seems to be now moving up. So I'm a little unclear as to kind of if -- unless you've reversed that, I mean what -- I don't really understand what is the new driver of the higher-margin expectation.

From what we've said in the gross margin, we've really not changed our gross margin view, which is the kind of thing that you would be seeing with respect to the international. I mean, our view is consistent still with what you said that we would expect to be driving to a low double-digit in our international markets. But our gross margin is not changing as we've outlined this.

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

John, I'm just wondering if you could speak a little bit to your opportunities in the U.S. convenience channel. And it's been 5 years of some pretty solid and stable market share gains there. Where do you see the next opportunities for growth in that channel going forward? Either in terms of absolute growth or market share gains?

Well, I think that, we, over the last couple of years, have gotten greater penetration in terms of just total stores covered. I think that continues to be an opportunity for us. And then I think as we look at SKU productivity and we look at being able to get things like Brookside into an instant consumable package, Jolly Rancher getting into what would be thought of as a car cup-type pack, Twizzlers, which has largely been, as an example, a lay-down pack. We've also got some of those, what we call chews, and so forth, that come in a package that hasn't been available in the C-store channel historically. So I think packaging will play a role for us in that channel that leads us optimistic. And then I think our coverage and the way we merchandise in the channel continues to be a big opportunity for us. And then I just think in terms of macro consumer trends, we continue to -- our category continues to stay on the menu of consumers. So even as the format of convenience changes, I think for us, the environment continues to be very, very positive. So I wouldn't expect any kinds of disruption, which allows me to be optimistic about the other things that I just talked about.

And then just one follow up, in terms of long-term guidance in the Malaysian facility. So it seems like it's a pretty big investment. And the way you're discussing the long-term margin outlook, are you not looking for a cost benefit long-term in the manufacturing segment in Malaysia facility? And it seems like you'd get some leverage from that long term, at least in tax benefits. How are you thinking about that in terms of international cost?

Yes. Well, we have expected in our long-term guidance that we would continue to build efficiency in the Asian market, and the Malaysia plant is really just a continuation of what we're expecting to do there.

Yes. In the long-term targets, John, that we talked about last year, I mean, we hinted to needing that facility anyway. So I mean it was already built into that 2017 target.

Your next question comes from the line of David Driscoll of Citi Research.

Wanted just to say first off, congratulations on just continuing to execute the business plan. You guys are one of the few companies that I think just doesn't seem to have any problems. So congratulations on that, and a nice job. My question relates to 2014, and again, just Dave, you've got a couple of questions here on this gross margin. I want to ask just kind of -- I don't want to target a commodity, I just want to hear your thoughts about the commodity basket in 2014. I believe, just given your commentary, the short version of it is that the commodity basket for Hershey would be favorable. Would you agree with that statement? And then, can you guys talk a little bit about price and mix and your expectations in '14?

I guess, what I would say, David, is that as we're looking to 2014. As you know, we tend to take a view of the different commodity markets. And depending on those views, we will hedge from 3 to 24 months in advance. And obviously, we've continued to do that as we go forward. And so as we look at 2014, we will be completing that and we'll give you additional guidance and insight on that when we talk to you next quarter.

And how about the comments on price and mix in 2014? I mean, I think we haven't seen a pricing announcement, so I think that's pretty straightforward, unless I'm missing something. And then the mix issue, it seems like it should continue to be positive, but I'd really like to hear your thoughts.

Yes. I think, David, if you look at -- if you really dig into the data over the last several periods, one of the things you would see is that some of the price -- some of the pricing information would look as though there's greater price realization, and what's happening is it's all coming -- a lot of that is coming out of mix. So the price per pound on some of the new things that we're introducing versus the average of what our line would've looked like, let's say, over the last couple of years, we're really benefiting from that. So even as we dig into the data, we're looking at some things that we're very pleased with we have -- of what the mix impact is. And then the other thing that just continues to hold true for us, and it's really a benefit in retail, but in terms of the percent products sold right off the shelf at full revenue, we continue to see that trend higher rather than lower. So you can read a couple of things into that, trade promotion is more efficient and advertising is certainly working. So those are all very positive things that are going on in the category, and I think that this is one of the benefits of what I would describe, as a more consumer-centric approach across the overall category, certainly, for our brands. But it's making the innovation better, it's filling white space, it's bringing people to the category, and then that is a higher order of mix impact.

Your next question comes from the line of Ken Goldman with JPMorgan. Kenneth Goldman - JP Morgan Chase & Co, Research Division: You're holding a decent amount of cash still on your balance sheet, right? And I appreciate some of this is for the Malaysia plant. But even including that cost and after the plant is built, you'll probably, at least by my numbers, still have a lot of cash. So I know you've talked about this a little before, but can you add a little bit of color? What's your comfort level with this amount on the balance sheet versus the decision to maybe deploy a little bit either toward growth or returns to shareholders? And I think you said you didn't buy back any stock this period as well.

Well, what we've said and how we consistently look at this is we think that we have good growth opportunities, and so with our cash levels, that's how we would intend to deploy it. Some of that will be capital expenditures, and as you noted, the Malaysia plant. In addition to that, we continue to be working toward M&A activity that would fit our strategies and help us support our growth, and that is our primary focus at this point in time with the cash. Next, we did do a 15.5% dividend increase last quarter, and we've talked about our long-term target being about a 50% payout ratio in our dividends. And then beyond that, our next level would be to be looking at some share buybacks, but that's not our priority at the moment.

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

A couple of questions still standing, I guess. Malaysia, the plant you're building, should we expect any tax benefits on the back of this?

Yes. As part of that -- as it's up and operating in a couple of years, it will have a favorable tax impact.

Any chance you can kind of frame that up for us in terms of magnitude?

Probably won't do that at the moment. As we get closer to where we can see it, we'll talk about it more.

Okay. I'm going to stick on CapEx for a minute. You -- I think you said around $320 million or $340 million next year with $35 million in Malaysia. It was just a couple of years ago that you were talking about CapEx stepping down to $140 million to $150 million by this year. I know you revised it at your fiscal '12 Analyst Day. But bigger picture question, what's caused the high -- the rising capital intensity of this business if Malaysia is only $35 million next year?

Well actually, the $35 million is for this year in 2013. What we've said is that we -- that there's another $130 million -- or another $120 million to $140 million that will likely be in next year. So that's just clarifying the years. But fundamentally, what's happened with the capital is that we are having additional investment in growth with the volume growth that we've had and with the international growth that we've continued to invest in that, as well as we've had investments that are supporting our productivity programs, and also to continue to focus on enhancing product quality.

Thanks for the clarification there. Sorry, I must have misheard. Last question, and I'll pass it on. Competitive dynamics in North America. We understand that Nestle's North America business is under new leadership. Mars looks like it’s gotten a little more promotional the last couple of months. Maybe it's just timing-oriented, but what are you guys seeing on the ground in terms of competitive intensity?

Well, if I think that I go back to the comment I mentioned earlier, we would have a sense that there's going to continue to be innovation in the category. Some of that, our competitors have announced some things that they are doing. And I would also continue to believe that there'll be investments in more communication with the consumer around advertising, digital, et cetera. So I think it will continue -- for me, it never feels like it's not competitive. But I would expect that the category continues to behave in a rational way and people invest in their brands. And as I said, in an expandable consumption category, that's always a good thing.

Your next question comes from the line of Ken Zaslow with BMO Capital Markets.

Andrew Strelzik for Ken. Following up on the last question, one of your competitors is entering the peanut butter cup category and supporting it with fairly meaningful advertising. Just wondering how you think that will impact the category, if we should expect any response from you. And if you could point to any similar events in the past and how that's played out.

Well, as you might expect, we'll continue to show up every day and execute the best we possibly can against the brands we have. And this wouldn't be the first time that a product similar to what's being introduced has been introduced in the market. But as I said before, competition is a good thing. News within the category is a good thing. And we'll all have to show up and do the best we can. I know that's what we're going to do.

Your final question comes from the line of Alexia Howard with Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: Can I ask about your acquisition plans in Asia and how they're evolving? And does the announcement of the Malaysia plant mean it's more likely that you're thinking about going it alone in the region or you're still actively looking?

Yes, Alexia. We continue to be active and looking at what we think are opportunities that give us the capabilities to accelerate the growth of our business. Things that seem to give us either manufacturing, distribution, brand, certainly. All are things that we look at. As you know, while there's a number of the companies, they're not all for sale, but we're certainly active in thinking through and assessing what we think might be good for the Hershey Company. The good news is that on a parallel path to that, we have plans that we believe will enable us to continue to grow and we really have to be able to -- we have to have the capacity that this Malaysia plant gives us the flexibility to grow in the region and also develop new markets, as well as meet the demands of our China business. So you should just take all of these things as reflective of our optimism around our future.

Thank you for joining us for today's call. We'll be available to take any follow-up calls you may have at the conclusion. Thank you.

This concludes today's conference. You may now disconnect.