The Hershey Company (HSY) Q3 2014 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 2014 Results Conference Call. [Operator Instructions] Thank you. Mr. Mark Pogharian, you may begin your conference.

Thank you. Good morning, ladies and gentlemen. Welcome to The Hershey Company's Third Quarter 2014 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 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 2013 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 2014 third quarter results, excluding net pretax charges of $13.8 million or $0.05 per share diluted related to a noncash trade impairment charge cost associated with Project Next Century, a net gain related to the Shanghai Golden Monkey transaction and non-service-related pension income. Our discussion of any future projections will also exclude the impact of these charges. With that out of the way, let me turn the call over to J.P. Bilbrey.

Thanks, Mark and good morning to everyone on the phone and webcast. As expected, net sales, retail takeaway and market share sequentially improved versus our first half of the year trends. Our U.S. CMG, or candy, mint and gum, retail takeaway in the xAOC plus convenience store channels increased 3.3% and was about double the category growth rate. We gained market share in nearly every 4-week quad during the quarter and across every segment. That's chocolate, non-chocolate, gum and mint. Where we focused our investments, results were good. Last quarter, we stated that there would be increased levels of in-store activity in the convenience store channel. I'll provide more detail in a moment, but C-store merchandising and programming generated 4% retail takeaway in this important channel. I was also pleased with our marketplace performance in large mass and value channels. However, store traffic in the food channel was irregular in the third quarter. Our market share in the food channel increased 0.3 points in the third quarter, but category and Hershey growth was less than the historical growth rate of the category. While preliminary Halloween sell-through in all channels, including food, is tracking with expectations, Halloween orders, merchandising and programming were executed in the marketplace, and we believe it's the right mix of seasonal-specific support that sets the stage for another winning season. However, food channel nonseasonal candy during the third quarter and into October was soft. As a result, unfavorable product sales mix pressured profitability. Similar to what we did in the C-stores, we have food channel-specific activity in the fourth quarter that we believe will improve upon these trends. As was the case last quarter, broader snack category growth and in-store activity was present across many channels, although it tempered in Q3 versus the first half of the year increase. Given this backdrop, I was pleased with the Hershey-specific programs by pack type and channel that was executed in the third quarter, enabling us to compete effectively and generate retail takeaway of 3.3%. As it relates to the pricing action we announced in July, in the fourth quarter, we expect consumers will see higher nonseasonal everyday price points. As such, we expect an initial price elasticity impact to result in lower volume in both the fourth quarter and 2015. We will work with our retail customers to ensure that the implementation of the price increase is supported with greater levels of advertising and the right mix of customer trade promotions and merchandising to reduce the impact of volume elasticity. As it relates to the buy-in, we estimate that about 0.75 points of net sales growth in the third quarter was attributable to volume, which normally would've shipped in the fourth quarter. And I'm excited that we completed the initial closing of Shanghai Golden Monkey. The strength of their portfolio, manufacturing expertise and overall distribution capabilities, especially within the traditional trade, is an opportunity for us to leverage scale to make the iconic brands of both our companies even more powerful. This acquisition will make China Hershey's second largest market by the year-end 2015 with anticipated net sales of around $500 million. Now for some marketplace performance. In the third quarter, Hershey's CMG growth in the xAOC+C channels was 2x the category growth rate. Specifically, the CMG category increased plus 1.6%. Gum continues to be a drag on total CMG performance, and excluding it, candy and mints was up a combined 2.3%. Total Hershey CMG retail takeaway for the third quarter in channels that account for about 90% of our U.S. retail business increased plus 3.3% with market share up 0.5 points. As a reminder, this represents xAOC+C store data consisting of the food, drug, MassX and C-store channels, plus the inclusion of Walmart and Partial Dollar Club and Military channels. Third quarter xAOC+C chocolate category growth was plus 2.3%. Given the upcoming Halloween and holiday season, we expect markedly greater chocolate category growth over the remainder of the year. Hershey's xAOC+C chocolate retail takeaway was 3%, an acceleration from the 2% June year-to-date amount, resulting in a Q3 chocolate market share gain of 0.3 points. We expect to build on our chocolate marketplace performance momentum over the remainder of the year given our strong seasonal plans to launch Brookside Crunchy Clusters and the new look and packaging of Hershey's Miniatures take-home packaged chocolate. While early, the new advertising support on Hershey's Miniatures is showing positive results. Third quarter non-chocolate candy, or NCC, category growth was plus 1.8%. Hershey's NCC retail sales increased to 2.7% with market share up 0.1 point. We're pleased with our Lancaster brand performance. However, we're lapping some Jolly Rancher innovation and the successful year-ago summer Twizzler promotion. Lancaster continues to show very positive results, and after 8 months in the market, is the leader within the soft caramels category. Trial and repeat is in line with expectations, and it's revitalizing the roughly $250 million caramel category that's up about 20% this year. Lancaster sales were solid in the summer, but lower versus Q1 due to seasonality. We expect sales to be strong in the fall and winter as merchandising support is executed in the marketplace. The aforementioned nonseasonal chocolate and non-chocolate activity should benefit the food channels where, as I mentioned, overall store traffic continues to be mixed. And we continue to do well within the gum and mint categories. Specifically, our Q3 gum and mint retail takeaway within the xAOC+C universe was up 16% and 6%, respectively. As a result, our gum market share increased by 0.8 points, and we now have a 5.1% share of the market. Our mint market share increased by 0.1 points, expanding our segment-leading position to 39.5%. In the C-store channel, Q3 CMG category growth was up 3.4%. Hershey's Q3 C-store retail takeaway increased 4%, driven by solid candy and mint performance, resulting in a 0.2 market share gain in this channel. I was pleased with our C-store chocolate retail takeaway of 3.5%. The programs I mentioned last quarter such as the King of Summer program, the Coca-Cola and Reese's promotion and the 7-Eleven Big Gulp and King Size promotion drove our solid performance. In the fourth quarter and into 2015, we have C-store merchandising and programming as well as innovations such as seasonal-shaped Reese's products and the 2015 launches of Kit Kat White Minis, Reese's Crunchy Cup and Ice Breakers Cool Blasts Chews that should enable us to win in the C-store channel. I'd also like to provide you with an update on our category segment whose marketplace performance is excluded from the CMG Nielsen database. The Hershey's Spreads launch is relatively in line with expectations. Trial is progressing, and in the third quarter, one of our larger retailers, the Hershey's Spreads' instant consumable pack type was the company's fifth-largest SKU at the front end. Reese's Spread in a jar ships in Q4 and the instant consumable will launch in 2015. Our entry into chocolate spreads is driving category growth of almost 20% this year. As a result, we're getting good collaboration from our retail partners. Now moving to international. As expected, similar to last year's profile, third quarter international net sales increased in the teens, up 18.4%. China continues to do well and is the driver of our overall international net sales growth. China chocolate category growth increased 11% in Q3. The category is developing as anticipated with instant consumable and take-home growth both up double digits. Hershey third quarter retail takeaway was about 4x the category growth rate. For Nielsen, our year-to-date market share is around 10%, driven by the Hershey's and Kisses brands, which have gained 0.9 and 0.7 market share points this year. We've carried our momentum into the fourth quarter and have begun shipping Reese's. It's been a milestone year for us in China and we're on track to achieve about $200 million in China chocolate net sales in 2014. Third quarter net sales growth in Mexico and Brazil were slightly below our estimates. In the modern trade, chocolate category growth in Mexico was up about 4%. Hershey Mexico chocolate retail takeaway was up 6%, resulting in a modern trade chocolate market share gain of 0.4 points. Volume has been gradually improving throughout the year as consumers get used to the higher prices. Trends in Brazil have improved versus the soft start to the year with third quarter net sales in both U.S. dollars and local currency up mid-single digits on a percentage basis versus last year. Year-to-date, the Brazil chocolate category, as well as Hershey retail takeaway, is up 1%. Looking at the subsegment of chocolate wafer candy, Hershey's Mais retail takeaway is up 16% year-to-date. We'll look to build on our momentum here as it's a unique form in this competitive market. Over the years, we've also had success in growing our international export business. Our products can be found in over 70 countries in both developed and emerging markets. We have a profitable export business model and targeted balanced growth with an objective of maintaining the right level of distributor inventory so consumers experience fresh product. Given macroeconomic challenges in some of these markets, demand has tempered. Our go-to-market philosophy of shipping to consumption applies to these markets as well. As a result, we now expect full year international net sales growth, excluding the contribution from Golden Monkey, to increase low double digits. We're focused on the long term and believe the aforementioned challenges facing international export consumers is a short-term issue. Dave will provide you with additional financial details of our Q3 results and our full year outlook, so let me now provide you with some of my closing thoughts. Macroeconomic challenges persist, putting pressure on consumers and retailers. Over the remainder of the year and into 2015, we have targeted innovation, advertising, merchandising and programming to address the needs of consumers by channel and pack type. In the fourth quarter, holiday is tracking as expected, and we're excited about the launch of Brookside Crunchy Clusters, Reese's Crunchy Cup and Reese's Spreads. Along with the carryover benefit of our fourth quarter innovation, in 2015, we're bringing a lot of variety, news and excitement to the category with the new product launches of Kit Kat White Minis, Hershey's Caramels, Ice Breakers Cool Blasts Chews, Reese's Spreads instant consumable as well as some other yet-to-be-announced new products. These initiatives will be supported with greater level of advertising and related consumer marketing that's expected to increase in 2015 at a rate greater than sales growth. These initiatives should position us and to deliver against our objectives. I remain optimistic about our future. Globally, the investments we're making in our scale chocolate brands and go-to-market capabilities are having the desired effect. Kisses and Hershey's are gaining momentum and are true global brands with around 45% and 25% of total brand sales now achieved outside the U.S. Reese's is rolling out in a measured and well-supported pace in China, Mexico and Brazil and initial consumer response is in line with expectations. And Brookside continues to post strong double-digit sales growth and tests well in our international markets. So there's a lot to be excited about. We have plans in place that positions us to win wherever we compete. Our brand-building model is evolving and we expect to grow market share across all of our key markets. We remain focused and know what we need to do to succeed and increase shareholder value. I'll now turn it over to Dave, who will provide you with the financial details. Dave?

Thank you, J.P. Good morning to everyone on the phone and on the webcast. Third quarter net sales of $1.96 billion increased 5.8% versus last year, generating adjusted earnings per share diluted of $1.05, an increase of 1% from last year. Organic net sales growth in the quarter was 6% and was driven primarily by volume. Foreign currency exchange rates, primarily involving Canada, were a 20 basis point headwind. Sales were driven by strong Halloween seasonal growth, new products and instant consumable items in the convenience store channel. Core brand and new product volume growth contribution to net sales were roughly equal in the quarter. By geography, net sales increase included growth in North America and international markets of 4.2% and 18.4%, respectively. Turning to margins. As expected, adjusted gross margin declined in the quarter, driven by higher input costs, primarily cocoa and dairy; greater levels of trade support for in-store merchandising and programming; and other costs related to executing the price increase. However, the 240 basis point decline in gross margin was greater than our forecast as a result of a less favorable sales mix, higher-than-forecast freight and warehousing costs related to the price increase and higher costs related to aged inventory, packaging material write-offs and the timing of certain fixed cost deferrals. In the fourth quarter, gross margin is expected to increase as the company begins to lap the higher input costs it began to incur in the fourth quarter of a year ago. However, as a result of the higher supply chain costs and expected lower sales volumes, we now expect full year gross margin to decline about 75 basis points versus 2013. Adjusted earnings before interest and taxes in the third quarter increased 1% versus last year, generating adjusted EBIT margin of 19.4%, a 90 basis point decline versus last year. The decrease was due to the lower gross margin. During the quarter, advertising and related consumer marketing expense increased 1%, while selling and administrative expenses declined 1%. As we stated last quarter, GRPs, which are gross rating points or impressions, will be up mid-single digits on a percentage basis versus last year. Now let me provide a brief update on our international business. Similar to last year, 2014 international sales growth is back half-weighted, given the timing of distribution gains, new product launches and seasonal growth. Third quarter international net sales increased 18.4%, slightly below our estimates, primarily in Mexico and certain export markets. Net sales in China were solid and were in line with the retail takeaway that J.P. referenced. Plans are in place to generate similar results in the fourth quarter that should result in full year China chocolate net sales of around $200 million. In Brazil, third quarter net sales on a reported and constant currency basis increased about 5% versus last year. In Mexico, third quarter net sales on a reported and constant currency basis declined about 4% versus last year. Our businesses in both Mexico and Brazil are improving, albeit slowly. As expected, the macroeconomic operating environment in both countries remains sluggish, and as a result, we continue to expect net sales in 2014 to be slightly below the prior year. As J.P. mentioned, fourth quarter order flow and demand in select international markets has tempered given macroeconomic headwinds. As a result, we now expect full year net sales growth outside the U.S. and Canada to increase low double digits versus our previous estimate of about a 15% increase. Note that this excludes the contribution from Shanghai Golden Monkey. Moving down the P&L. Third quarter interest expense of $21 million was about the same as last year. For the full year, we continue to expect interest expense to be around $85 million. The adjusted tax rate for the third quarter was 34.8%, in line with our estimate. For the full year, we continue to expect the adjusted tax rate to be around 34.5%. For the third quarter of 2014, weighted average shares outstanding on a diluted basis were approximately $224 million, leading to adjusted earnings per share diluted of $1.05. Turning now to the balance sheet and cash flow. At the end of the third quarter, net trading capital increased versus last year's third quarter by $224 million, $107 million of which is related to acquisitions. Accounts receivable was higher by $127 million, primarily as a result of the Golden Monkey acquisition and the higher sales levels. Our global accounts receivable aging remains extremely current. Inventory was higher by $138 million as a result of the Golden Monkey and China manufacturing facility acquisitions, together with some higher raw material inventory levels in North America. Accounts payable increased by $41 million, primarily as a result of the acquisitions. Capital additions, including software, were $83 million in the third quarter. For the year, we now expect total capital expenditures to be about $360 million to $370 million, lower than our previous estimate of $380 million to $390 million, primarily due to timing related to the manufacturing facility we're building in Johor, Malaysia. Depreciation and amortization was $53 million in the third quarter, in line with our estimates. During the third quarter, the company repurchased $75 million of outstanding shares against the $250 million repurchase authorization that was approved in February of 2014. Additionally, $31 million of common shares were repurchased to replace shares issued in connection with the exercise of stock options. All $106 million of acquired shares were repurchased in the open market. During the quarter, dividends paid were $115 million. Cash and short-term investments at the end of the third quarter of $575 million was in line with our forecasts. Seasonal working capital requirements, combined with closing on the Shanghai Golden Monkey purchase at the end of September, caused us to take on approximately $300 million of commercial paper debt in the U.S. that we will pay off in early November. The balance of the short-term debt increase relates to the Golden Monkey acquisition and the needs in our other international markets. The company remains well positioned to fund our working capital needs, capital expenditure requirements and acquisitions. Now to summarize. We made progress in the third quarter as net sales, retail takeaway and market share improved versus the first half of the year. Halloween and holiday are tracking nicely. The company's chocolate business in China continues to be strong and is the driver of our international sales growth. However, challenges in nonseasonal sales growth, particularly in the U.S. food channel, combined with the pushback launch of Ice Breakers Cool Blasts Chews and weakness in certain international export markets, have caused us to lower our organic sales growth projection for 2014. We now expect 2014 net sales to increase around 4.75%, including the impact of foreign currency exchange rate and the contribution from Golden Monkey sales of about 0.75 points. Given year-to-date results, combined with higher supply chain costs, unfavorable sales mix and lower sales volumes than previously forecast for the fourth quarter, we now expect full year gross margin to decline about 75 basis points versus 2013. Total selling, marketing and administrative expenses will be about in line with a year ago as the company leverages investments made in go-to-market capabilities established over the last few years. As a result, the company anticipates 2014 adjusted earnings per share diluted growth for the full year to be around 8%. The impact of Shanghai Golden Monkey in 2014 is minimal, given the late September closing date. As J.P. summarized, we have a solid pipeline of targeted innovation, merchandising and programming that should drive pack type and channel growth in 2015. Additionally, advertising and related consumer marketing expense is expected to increase at a rate greater than net sales growth. We're focused on the plans and investments to drive top line growth and believe these initiatives will resonate with consumers and be a catalyst that enables the CMG category to increase within its historical growth rate of 3% to 4%. There are a couple of other items expected to impact 2015 sales growth. The company has signed a definitive agreement to purchase The Allan Candy Company in Canada for approximately $28 million. This company co-manufactures products such as Jolly Rancher Hard Candy and Lancaster Caramels for Hershey. It also has other confectionery product sales of around $30 million. The primary goal of the acquisition is to increase capacity and manufacturing capability for Hershey's sweets and refreshment products. The transaction will close upon completion of regulatory reviews, which we expect to be by the end of 2014. We will also make product line changes in India that will negatively impact sales growth by about 40 basis points. These changes include the termination of edible oil sales as our brand license expires. We will also rationalize certain other low-margin products as we focus on our product portfolio. As a result of these, we expect 2015 net sales to increase about 7% to 9%, including the impact of foreign currency exchange rates and a contribution from acquisitions of around 2.5 points. We continue to be a gross-margin-focused company and expect that the previously announced pricing action, as well as productivity and cost savings, will result in gross margin expansion in 2015. We expect increases in advertising and direct marketing expenses to increase faster than sales and continued SG&A cost discipline. The resulting growth in adjusted earnings per share diluted is expected to be in the 9% to 11% range. Thank you for your time this morning. J.P., Mark and I will now take any questions you may have.

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

So I guess, the question, just looking forward into 2015 and trying to get a sense for -- there's a lot of moving parts and just trying to get a sense for how aggressive your underlying plan is for next year. So if I kind of think about headwinds and tailwinds this year, probably the biggest hurdle was that gross margins came in below expectations. And even though you had sales softer than expected in nonseasonal, now in the food channel and you've had some softness in the export business, the biggest sort of hurdle from an earnings perspective was gross margins coming in below expectations. So can you just kind of frame for us, as you think about high end, low end of your guidance range for next year, some of the puts and takes that are important in terms of getting you to the top end versus the low end and whether this guide for '15 maybe has some more flexibility or some more caution into it than maybe what you were looking at when you started '14?

Okay. Well, Bryan, I'll start with that. When we look at the gross margin and the issues for this year, the biggest issue really wound up being around our commodities and the dairy costs and we've really addressed that with our pricing action that we've taken. In addition, we did, here in this quarter, have some additional issues around some obsolescence things and we'll be able to fix those. I mean, essentially, we didn't adjust to some of our production schedules as quickly as we probably should have in light of how the sales were changing. So fundamentally, overall, we continue to be on track with our productivity initiatives, and so we expect that we'll be able to continue to improve gross margin in 2015 and stay true to our business model where the margin will also increase enough to be able to be increasing our advertising faster than our sales growth next year, which is part of our plan to support the price increase.

Bryan, I would just add to what Dave said that I think one of the learnings we have from this year is really around how we executed by channel and some of the specificity of what we were seeing in channel. So I think from -- if I were able to change one thing this year, would really be around our quality merch on a channel-specific basis. So we're going to be doing more precision marketing as we go forward. And what you saw in the third quarter is the place is based on planning cycles where we were able to do that as we knew we were going to sequentially improve through the year in North America. We saw good results from doing that. So I think you'll see us ensuring that we're getting the right merchandising levels by channel to be able to win in the marketplace.

So is it fair to say, as we kind of look into '15, that your plan doesn't assume that there is going to be a real imminent reacceleration of growth in the food channel? You're still expecting that the export business in the next year will be soft. I guess you're expecting gross margins will expand, but it's -- you're not -- some of these issues that sort of have hit you, especially in the second half this year, it's not like you're expecting an immediate reacceleration incorporated in the guidance that you gave us.

No, I think the things that are in our control, we will be doing what I hope to be a better job of making sure that we've got the right support by channel to continue to win share, which we're doing that. I think there's caution globally around just the consumer environment in general. So there's probably some of that in our thinking, but I think we'll be executing very aggressively.

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

So I guess following up a little bit. So if I read you right, you have 4.5% to 6.5% organic net sales growth for next year, which, if I'm getting the -- and correct me if I'm wrong here, if I'm getting the price contribution, if I look at the list price, the region that's in, that's essentially looking for no volume growth for next year? And the last time you implemented a price increase, you did see volumes drop off, as to be expected, but maybe a little bit less substantially. I guess, in light of a little bit better consumer spending situation now than in, say, 2011, if you could just -- first of all, let me know if I have my math right about that for 2015, and I guess, a little bit more detail on why that is.

Yes, I think as you think about 2015, what I tried to point out in the comments is that we're doing some product line changes in India that have about 40 basis points headwind into the sales growth. So I think overall, in organic, without that, we would still expect to be in about that 5% to 7% range. And so I think for next year, what we're looking at is we're looking at price to be about 6.5%, and we're probably -- depending on how the sell-through and the conversions go, we would expect to have volume declines against that of somewhere from 0% to 2%. And of course, we would be being helped with that with some of the innovation and with the advertising and the other things that we would be typically doing to respond to the price increase.

Got you. And I guess that leads into -- the last time you took a big price increase in '11, '12, you raised ad spending over that period pretty dramatically, yet -- I mean, relative to sales. But that was off a much lower base and we've talked about how maybe you're at a more sustainable level now. Do you -- would you see ad spending as a percent of sales growing next year?

Well, I think that what you would see is that we'll continue to probably spend in a range of, call it, 2x sales growth. If you remember, when we were growing advertising in the previous price increase, it was off of a very low base. As you point out, we feel as though, at our current level of spending, we're probably at the right level to support the brand. So we always model these at about a 1:1 ratio. That's how we've modeled this one. We've done better in some of these, but that's how we model it and that's how we build it into our plan.

And just one last, detailed question. That little impairment you took, what brand was that? Or what region did that come from at least?

What -- we have to do impairment tests on our intangibles each year and this is particularly related to the Mauna Loa macadamia nut brand.

Your next question comes from the line of David Palmer with RBC Capital Markets.

You hinted that Hershey will be pushing back against the competitive in-store merchandising you're seeing, particularly in C-store channels and particularly with the instant consumables. There was king-size display activity you said you're rolling out, your limited editions. How would you say this incremental merchandising is working for you so far?

Yes, I think we're very pleased with the results we got in both 3Q in C-stores. We saw it in Mass and a couple of other channels where we were able to increase our quality merch. We got really good results. The planning cycles there and our ability to respond are shorter than some of the other channels. So if we go back and analyze the first half of the year and some of the areas where, frankly, we -- you could say we got beat or we didn't merchandise at the levels we thought we should, we didn't get the results we wanted. And so we're really correcting for that and we felt really good about the results we were able to get. And so we're building that into our plans going forward. And then of course, as you know, in the first half, we weren't as chocolate-driven as we are in the second half and that's made a difference as well.

And one final question. On the resealable pouches, it seems that Hershey, over several years here, has been rolling out the -- that pouch-packaged Minis and Pieces and putting some advertising and merchandising activity behind that per brand. York has been the most recent benefit of this. Do you see that packaging rollout continuing to hit more and more of your business? Or is that benefit perhaps running its course as you get across the brands?

Well, I think one way to think about it is we see package innovation that can support occasions as a really important insight. So I think what you'll see from us is that we have a number of package innovations that we're testing and looking at that we -- we're pretty excited about. So yes, the pouches have been successful for us. It gets good price realization on the sizes, and it gets us into some places we haven't been, and we're going to continue to pursue some of those innovations.

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

A couple of questions. I guess, a year ago, you raised your long-term growth target on the bottom line and a lot of things have gone against you since then. Now you're kind of not surprisingly kind of suggesting that the global markets, emerging markets are a bit more challenging, but you've got a lot of incremental, let's say, EBIT coming from those emerging markets if you, in fact, make your, call it, 10-plus percent margin goals. And so I'm kind of wondering how that all fits together, granted it's like a 2017 question. But is that -- are there things at risk here given that international is that much more challenging and that's a pretty big part of what grows your EBIT over the next couple of years?

Well, I think where we're at, Eric, is our goal continues to be to get to the 10% level in international. And as things sit in 2014, our biggest issue was really around the commodities and then some other costs that sat in the gross margin that I talked about earlier. I think we've taken steps to get those into line. With respect to the international growth, our China business continues to do very well. You're right, we're a little bit behind where we were tracking as we wanted to do that with respect to India and Latin America. So we may be a little bit later depending on the levels of investment that we continue to make and how we're able to kind of work through those couple of markets. But overall, I don't see any of those as being big risks to the overall corporate targets that we expect to hit in 2017.

Okay. And if I can just -- one follow-up. I think it's on -- maybe kind of following up on Bryan's question earlier in 2015. It seems like the one input that you can't really control is dairy and some -- there have been some players in the market who have suggested that dairy may come down. Others are less optimistic. Kind of how are you thinking about dairy costs into next year and in your plans for gross margins being up next year, have you basically assumed that dairy kind of remains where it is? Or did you expect some possible benefit in that?

Well, I guess, I don't want to really get into our specific view of individual market -- of individual commodities, but what I would say is we've taken our best shot at what we believe the market would do. And also, I alluded a bit earlier in the inventory discussion that we have taken on a little bit of additional inventory and some of that is also to help us with our dairy cost visibility for next year. So we think we've taken our best shot at where we're at, but you're right, there'll be an element of risk to that as we go through 2015.

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

Just as we think out to 2015, a key part, obviously, of your sales growth will be a category returning back to that sort of historic 3% to 4% level that you mentioned in the prepared remarks. In the third quarter, I guess, the CMG category seemed, from your numbers, to decelerate sequentially, even when you exclude the gum portion. And that was with, I think, some incremental activity in innovation and whatnot that you brought to the market in the third quarter. I'm just trying to get a sense, what drove that? And obviously, what bends the trend, as you see it, to get back to a 3% to 4% category growth rate next year? And then I've just got a follow-up.

Yes. Andrew, before J.P. jumps in, I don't know if you're looking at Q2 or year-to-date, but Q2 certainly would've been impacted by the late Easter.

Right. I think I was comparing 3Q versus the first half that you talked about on your second quarter conference call. The overall category sequentially decelerated in the third quarter from the first half level.

Well, if I look at 3Q, I think what we're saying for CMG was up about 1.6 points. If you look at us, we were up about 3.3 points. So I think that...

And I'm talking about category here.

Yes, yes, that's what I was talking -- yes, that's what I'm referring to there. If you look at chocolate in particular, it was about 2 to 3 for the category, we were at about 3. So again, I think one of the key differences for us was really around the acceleration of merchandising and winning in the store every day. We had a bit of a different lag in the food channel and a lot of that was that we didn't -- we weren't able to get into the planning to be able to get the kind of incremental coverage and merchandising that we did in the other channels. So I think that was a key difference. There was a difference in trips and so on, some of the everyday items. One of the things that we're observing is as you look at advertising effectiveness when you have trips that decline, that instant consumable piece of your business also doesn't have the same effectiveness as it would before. So it's really important for us to be able to get the right merchandising to get those brands to be responsive as well. So I think all of those things are happening. I think on the good news side, for snacking in general, there's elements of that in total, which I think continues to do very well. Consumers continue to eat on the go. They're looking for different alternatives there. So we continue to be very optimistic from that standpoint. I think our view is that we just have to execute well on a by-channel basis, maybe better more so than we have -- did in the first half.

Got it. And then one last one. It looks like, at least by my quick math, you need about 100 basis points of gross margin expansion in the fourth quarter to hit the down 75 basis point gross margin look for the year. Is that just a combination of a little bit of the pricing kicking in and lapping some of the higher sort of incremental costs from last year? And is that...

I think you've got it pretty well.

Your next question comes from the line of Matthew Grainger.

Two questions. First, just to come back to gross margins. I definitely appreciate that dairy stayed higher for longer than anticipated and that creates some challenges when volumes are weak and you're waiting -- and pricing is such a structured process. I guess what I'm wondering is, when you run into problems meeting your gross margin target due to sort of persistent higher prices in a discrete commodity, does this call into question whether you maybe should be pursuing more aggressive productivity initiatives on an ongoing basis so you have greater flexibility to work through discrete issues like this as they arise?

Well, I mean, I think that our productivity efforts -- our goal is to try to be getting as much out of them as we're able to. So to hold a little bit in reserve in case we miss the commodity guesses or the commodity forecasts probably isn't how we would really like to operate. We certainly push forward and we certainly did, in 2014, put additional focus into productivity. We've put additional focus into SG&A discipline, and we also took a closer look at our DME. So I mean, I think we did that across the P&L, but the amounts that we had were just more than we could reasonably deal with this year.

Okay. And so for 2014, just in terms of quantifiable productivity, is that going to end up being higher than what you would've sort of targeted on a long-term basis?

Well, in terms of if you look at it strictly within gross margin, it's going to be about in line with what we were looking at on a long-term basis. But it actually hurt a bit because of the volume changes, that we weren't able to get quite the level of benefit from some of the productivity things we were implementing. And then similarly, some of the shipping patterns and that around the price increase also had some adverse impacts.

Okay. And then just a follow-up on the C-store trends you highlighted. I just wanted to get your thoughts on the broader consumer environment, the acceleration you saw sequentially. Would you chalk most of that up to an improvement in quality merchandising? Or is there a portion of that, that you would, based on what you observed across the channel, would consider just a macro tailwind from gas prices, something along those lines?

Well, to talk about gas prices, we tend not to try to allow fuel costs get into our forecast, if -- we've seen a lot of different things happen over the years. When fuel prices were really high, sometimes you saw that the consumer put half a tank of gas in and they still went inside the store, and in some instances, we benefited from that. With gas prices being lower, you could say that we benefit because people aren't spending as much at the pump and they're going inside. So we actually don't try to derive too much from the cost of fuel. We really look at what's happening from traffic. So I think you continue to have a bifurcation of the consumer. I think the people at the top, if you will, are experiencing what I would call more normal kinds of times and habits and then I think you have folks that have kind of adjusted to their circumstances. So they may not necessarily have the job they want but they have one but yet they recognize this is how things are going to be and they've adjusted for that. So you see promotion effectiveness being lower from a price standpoint because people don't necessarily always have the cash to buy forward and take advantage of that or they believe something will be on sale at some point in time. So a lot of the things you've heard discussed in the CPG space, we certainly see as well. The big thing for us is really being in front of the consumer, making sure our instant consumable piece of the business is working hard for us. Consumers have costs that they didn't have before. The good news is health care is available but yet that's a cost maybe some people didn't have before. We all saw the impact of SNAP and we've also seen fewer trips, but yet, the good news is basket size seems to be holding up, and in some cases, growing. So I think we're just going to have to continue to work our way through here. So I'm not sure we have a lot of new insights to add, but we're certainly seeing a lot of things we're hearing our peers talk about as well.

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

First off, just an observation. For a company that's growing its EPS at 8%, several hundred basis points above the group, this is one of the tougher years that I've seen from you guys, just given these fairly constant reductions in both the revenues and the gross margins outlook. I think Bryan nailed it when he asked you guys what's your confidence in 2015. And J.P., if I could just push you a little bit on this thing, do you have real fundamental confidence that the outlook has a robust nature enough such that we're not going to be going through this every quarter? There's margin problems, revenue problems, that we're not on the bleeding edge of the forecast. Can I just start there? And I mean, it's the #1 question we're getting from everybody this morning.

Yes -- no, David, I'm optimistic about our business model. I don't think there's anything fundamentally wrong. Obviously, we learn. We have to adapt. You can't do the same thing forever and expect to continue to win. But I think the visibility we have on our brands, the things we're working with retailers, I feel good about. Even though we've talked about the export markets, look, those are prudent business decisions. I mean, we could have pushed into some of those businesses, but you put at risk what your results will be then following from that. So I think we're being wise and prudent around some of those things we can't see around the corner well on. But the things that are within our control, I think we have good plans. I think we've got a ton of runway and our strategies were, I'll call it, doubling down on China, if you will, in terms of what we think is possible there. So I feel good about things. And I think that we want to give ourselves some space here that we don't have surprises. We've got good visibility, I think, as best we can in terms of commodities. I'm glad to see that milk prices have -- dairy has softened some here. But I don't know if that's short term, long term, but we'll sure take it while we've got it. And from a cocoa standpoint, we've had a little bit of easing there. So there's some of the things on the cost side are good. We're rigorously looking at our operations all the time in terms of where we can find productivity and yet we continue to -- we're at a historic point in time for the company where we're investing in our future. So I'm not going to be overly concerned with a quarter that we may not be hitting our long-term aspirations but, boy, I believe that we're in a very good place in terms of the company's long-term outlook and potential, and we're going to continue to execute against that.

David, what I would add is as we look at '15 versus '14 gross margin, yes, I think we had some issues in '14 and really the persistent dairy cost and not adjusting quickly enough to some of the volume changes put some costs in there that I think we've taken steps to address. So I think we're rightly positioned for 2015.

Two other quick ones. On the fourth quarter revenue build, I think the implied organic number is somewhere around 4.5%, and I think it should be kind of mostly price. But first off, do I have that right? And is that an actual deceleration from where the organic growth was in the third quarter? If so, can you just talk about the kind of the pressures quarter-to-quarter? I don't mean to be too crazy about this, but Andrew, again, another good question, trying to just get an understanding on the sequential movements and if there's a softening into Q4. I think it deserves maybe just a little bit of explanation.

Yes, I mean, I think the -- excluding the Shanghai Golden Monkey, the fourth quarter growth that's implied is around the 4%. And so within that, we are expecting about 5% of price.

And then comparison to 3Q, I mean, do you see it softening a little bit?

Well, I think what we've said is in the fourth quarter, given the export and some of the softness in the food channel, that, that's kind of the thing that's been taking down the -- it is the reason that we took down the full year guidance.

Okay. Final question. The inventory obsolescence charges, quite honestly, I had kind of hoped to never hear those words again on your calls. I had the visions of the 2005 and '06 periods when all those limited editions were being -- inventory obsolescence charges that seem to never end. Is this a minor issue? Is this just some planning that went on in the -- or I think you mentioned changeovers or you didn't respond quick enough. Is this inventory obsolescence issue that you called out for the quarter, is that something that spills into Q4 and Q1 of next year? Or is it pretty much wrapped up here?

There could be a little that would carry over into Q4, but it won't carry beyond that.

Yes, it's very internal, David. It's not a marketplace issue at all.

Right.

Your next question comes from the line of Robert Moskow with Crédit Suisse. Robert Moskow - Crédit Suisse AG, Research Division: I'll keep my questions to one question. Shanghai Golden Monkey, I believe when you closed the deal, you said it was $205 million in sales in 2013 and that appears to be the forecast for '15 as well. I think when you originally announced it, the expectation was that it would be $225 million. I'm just trying to really understand why the reduction in the size of sales and why no growth expected for 2015, unless I'm getting my math wrong. And then maybe how are you integrating the business?

Well, yes, I think there's probably 2 things as you go through that. First, as we started on this, there was -- there's some adjustments between sort of how they keep their accounting in U.S. GAAP that had a little bit of impact in terms of where the sales were. But then in addition to that, just as we're basically working to be generating the synergies and actually take over the business, there's just some changes in the business that caused us to just want to make sure we're being cautious in terms of how we're defining how we get started. Because in terms of working with the distributors and how we're working with what products will be sold in what channel, what of our stuff is going to be through Golden Monkey's channels and what of theirs through ours. Robert Moskow - Crédit Suisse AG, Research Division: Are you rationalizing the SKU count? Are you reducing inventory...

There is some of that also.

Your final question comes from the line of Chris Growe with Stifel. Christopher R. Growe - Stifel, Nicolaus & Company, Incorporated, Research Division: Just made the cut here, so I'll be very brief. The first will be in a bit of a follow-up to the fourth quarter. And really, as we look through the year, you did talk about some sales pulled forward into the third quarter. Does that mean those come out of the fourth quarter, if you will? I think related to that, or in addition to that, would be what your FX assumption is for the year, if I could, please.

Well, with respect to the first, our -- the guidance, as we're talking about it, reflects the shift between the third and the fourth quarter. So that's really reflected in terms of what we're talking about going forward. And then secondly, with respect to FX, we're probably looking at about a half, 50 basis points for the full year, and it's pretty much in line with what we had forecast. We forecasted it to be heavier in the first half and lighter in the second half. Christopher R. Growe - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And then if I could, just one follow-up. Dave, in relation to dairy costs and I know those are high, but they were really trending higher in the fourth quarter of last year. Based on that degree of pricing you're coming through -- or expected to come through in the fourth quarter, it would seem like you could offset your cost inflation in the fourth quarter. Would that be an accurate assumption?

Yes. I mean, we're expecting to see gross margin increase in the fourth quarter versus last year. Christopher R. Growe - Stifel, Nicolaus & Company, Incorporated, Research Division: And then hopefully you'll be able to overcome costs, okay.

Yes, yes.

All right. Thank you for joining us for today's conference call and the Investor Relations group will be available for any follow-up calls you may have.

That does conclude today's conference. You may now disconnect.