Good morning, everyone, and welcome to The Hershey Company’s Fourth quarter 2015 results conference call. My name is Keith, and I will be your conference operator for today. All participants have been placed in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, please limit yourself to one question, so we can get to as many of you as possible. Please note this call may be recorded. Mr. Mark Pogharian, you may begin your conference.

Thank you, Keith. Good morning, ladies and gentlemen. Welcome to The Hershey Company’s fourth quarter 2015 conference call. J.P. Bilbrey, Chairman, President and CEO; and Patricia Little, Senior Vice President and CFO, will provide you with an overview of our results, which will then be followed by a Q&A session with them; Michele Buck, President, North America and Myself. 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 2014 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 Note 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 4Q results, excluding net pre-tax charges of $39 million, or $0.10 per share-diluted, primarily related to the productivity initiative announced in June, a non-service related pension expense, and acquisition and integration charges. Our discussions of any future projections will also exclude the impact of these net charges. With that out of the way, let me turn the call over to J.P. Bilbrey.

Thanks, Mark. We made progress against many of our strategic initiatives in 2015. And despite a difficult environment in the second-half of the year, we delivered adjusted earnings per share diluted growth within the targeted range we provided during our second quarter conference call. Fourth quarter net sales on a constant currency basis was slightly below our expectations and declined about 3%. North America gross margin expansion resulted in solid operating profit growth and we continue to hold the line on overall expense control. Hershey U.S. CMG retail takeaway sequentially improved from Q3 to Q4, and increased plus 2.5%, although market share was up about 0.2 point. Seasonal performance was good and we gained market share in both Halloween and holiday. Our fourth quarter marketplace performance was similar to the full-year. Specifically combined fourth quarter retail takeaway at one of our largest retailers and within the dollar and drug channels was a solid plus 6%. The drug class of trade was driven by our precision initiatives, while the other two channels were winners from a consumer trips perspective. However, in the remaining channels, our combined retail takeaway was only slightly up, while small, we also had meaningful gains in non-measured channels, such as e-commerce and food service. For the full-year, Hershey U.S. CMG retail takeaway increased 2.4% and was largely in line with category growth. As a result for the 52 weeks ended December 26, 2015, Hershey U.S. market share was an industry-leading 31.3%. Following a period of relatively consistent marketplace success where we outperformed the category, our momentum slowed in the second-half of 2015, and was relatively in line with the CMG category as a result of increased competitive activity within CMG and broader snacks. Over the last three years, the average growth rate of the CMG category was…

Thank you, J.P. Good morning to everyone on the phone and on the webcast. Fourth quarter net sales of $1.91 billion decreased 5% versus last year and generated adjusted earnings per share diluted of $1.08, an increase of 3.8% versus last year. Excluding the negative impact from foreign currency exchange rates of 1.9 points, net sales declined 3.1%. Pricing and net acquisitions and divestitures were 1 point and a 40 basis point benefit respectively, offset by 4.5 points of lower volume, due to slightly lower sales in North America versus estimates and the expected sales decline in China. Fourth quarter North America net sales were slightly below expectations, due to a decline in spreads and baking chips sales due to increased competitive activity. Our focus on inventory levels at select retailers most likely looking to manage working capital and slightly lower seasonal sales than anticipated. Excluding the 1 point impact of unfavorable foreign exchange rates in Canada, North America net sales increased 1.2% versus the year-ago period. Net price realization in this segment was a 2.3 point benefit and volume was off 1.4 points. On a net basis, the Allan Candy and Krave acquisitions in the Mauna Loa divestiture were 30 basis point benefit. Total international and other segment net sales for the fourth quarter declined about 27% versus last year. Foreign currency exchange rates and trade promotion were unfavorable by 5.7 and 4.2 points, respectively. In October, Shanghai Golden Monkey acquisition sales were 1.1 point benefit. The international and other segment core business volume was off about 18 points, due primarily to the Chinese chocolate business and Golden Monkey November and December performance that was less than a year-ago. Turning now to margins. Adjusted gross margin increased 80 basis points in the fourth quarter, however, this was less than…

[Operator Instructions] Please note this call is recorded. And we can take our first question from John Baumgartner with Wells Fargo. Please go ahead.

Hi, good morning. Thanks for the question.

Hey, good morning, John.

Good morning, John.

John, [indiscernible] I think Michele spoke to the plans for 2015, it was pretty specific in terms of the improvements in the retail coverage and space acquisition and sourcing from snacking. And in Q4, you also had a bump from marketing, but we didn’t really see much aware ofshare gains, as the year unfold us. So maybe just in hindsight, how did your execution evolve relative to that CAGNYplan, and what’s holding back your share gains there?

Yes. So, John, thanks for the question, it’s Michele. I would say two things relative to Q4. First of all, our biggest shortfall in Q2 – in Q4 was really around our grocery and snacks business. So we saw a lot of competitive activity, both in baking and as well in spreads. And I would say on spreads to some degree, we’ve really learned our way to where we will win in that category, where we’ll focus. We’re doing well in jars and we’ve seen some price value issues in the instant consumables. And then I would say the other pieces when it comes to CMG, we gained share in the season, so we had solid growth. But we didn’t gain as much as we anticipated, because frankly, we saw more competitive activity during the marketplace, and we have adjusted our plans coming into the year, this year to really dial up to be even more competitive to regain that share momentum.

Is there a sense that it involves more trade promo going forward or balance between advertising and promo?

There absolutely is more trade promotion and more trade investment. And as we look to this year, you will see us investing more in trade. There are more snack options out there, so there’s more competition. As you know, there are some retailers who are going to cleaner floor policies and so there is a little bit less space and more competition for it, so.

One of the things, John, you would have seen over the course of the year, if you just look at CMG pricing relatively modest as we got into the fourth quarter, you could see a bit of lower pricing versus some of our average pricing as well and we believe that may have had an impact on some of our business.

Okay. Thank you.

And we can take our next question from Bryan Spillane with Bank of America. Please go ahead.

Good morning, Bryan.

Hey, good morning, everyone. So I guess just one question related to the change in your long-term growth algorithm. And I guess, could you describe, I think in the previous algorithm, there was some explicit expectation that M&A would be a contributor to the growth algorithm? So could you talk about in the 3% to 5% sales growth expectation, is there any expectation for M&A? And also I guess within that how much are you expecting in North America sort of the non-confections business to contribute to growth? So the expansion of things like Krave and other snacks, how does that build into the 3% to 5%? Thanks.

So for clarification, we would not have had M&A in any of our previous guidance, nor would it be in the current algorithm. The way you think about it broadly without breaking out the Krave pieces of the business, which are – some of those is relatively small. You should really be looking at three to four in North America, one in international. So if you think about this year, it certainly falls within that range. But I think as you saw in our comment, we talked about 2.5% to 3% and a point. So I think that’s a good way to think about it in terms of 2016.

And specifically on snacking we’ve looked to have that at between 0.5 point and a point off of the CMG.

Okay. Thank you.

Yes.

And we can take our next question from Ken Goldman with JPMorgan.

Good morning, Ken.

Good morning. Hey, everybody. According to Nielsen, I know it doesn’t tell a whole story. It looks like there were some share losses for Hershey in both the Halloween and Christmas Seasonal Candy or at least especially Chocolate. First of all, is that accurate? And second, could you give us a little color about what happened and what the company is doing, if it is an issue to remedy the problem this year?

So if you look at both of those on a volume basis, if you look at all of our seasons over the course of the year, we were up about 3.7% on a volume basis. If you look at Halloween, it was about, I think about 7.5, and it was about half that I think it was 3 point, so 3 something on holiday. But it’s about a 0.25 point in terms of share, which is below what we would have set our targets. But we did gain share in both of those at a modest level, but we did gain share.

Okay.

And if you just – so I’ll just leave it at that unless Michelle has anything she wants to add.

No, I would just go back to the comment I made about some increased competitive trade dollars to get merchandising during the seasons and we’ve adjusted that in terms of our offerings going forward.

Okay. I’ll follow-up after the call. Thank you.

Thank you.

We’ll take our next question from Eric Katzman with Deutsche Bank.

Good morning, Eric.

Hi, good morning, everybody. I guess on the – my first question has to do with the Premium. I think J.P. you mentioned going with Dagoba and Scharffen Berger?

And also we’d be introducing a Cadbury item as well that Cad – the couple of those would be think – you think about those as mass premium and then Scharffen Berger would obviously be in super premium.

Yes, and remember, Eric, there was a – the latter Scharffen Berger and Dagoba more of a 500 store test market right now.

500 selected kind of retail environment test. But Cadbury is a broader offering since it plays in mass premium.

Okay. And then just a follow up more of an accounting question, I guess, for Patricia. So now that you own a 100% of SGM. Does that mean that there’s greater EBIT losses that have to be recognized versus, I guess, maybe you had a minority interest kind of a back out on the net income line, or on a pre-tax basis. But this International EBIT get negatively affected by the fact that you now own a 100%, and then I’ll pass it on. Thanks.

No, it doesn’t. So first just to be completely technical, we haven’t yet closed the rest of the Golden Monkey, and it’s been a 100% consolidated from day one.

Day one yes.

Okay.

So a 100% of their sales and a live loss Eric has been in our P&L since day one.

Okay, okay. Thank you. Pass it on.

And we’ll take our next question from Alexia Howard with Bernstein.

Good morning, Alexia.

Good morning, everybody. Can I ask about the outlook for 2016 on the Chocolate category in the U.S.? It looks from the Nielsen data though it’s been very on-again, off-again a lot more precarious I guess that we’ve seen in previous years. What do you think happening in there in terms of consumer behavior, retailer behavior, and are you confident that or where do you see the category gets back to as we get back maybe into the middle of the year and past the Easter pressure? Thank you.

Well, I think that we would see Chocolate by itself being somewhere between 2 and 2.5, it’s a fairly broad range. I think, Alexia, what we think about in our 2016 plan is, we’re going to have a strong focus on our core brands and then we also think there’s an opportunity for us as we’ve looked at quality merge over 2015, that innovation plays an important role and being able to get that incremental quality merged even and be competitive. So we’re also very focused on that. So, I think what we’ll see is as long as there is a strong focus against big core brands and then we can achieve good quality merge against our innovation activity, that becomes the incremental activity that makes us competitive, not only within chocolate specifically, as you asked, but it also makes us competitive against any potential trial at least you’ll get from competitive brands, so…

Alexia, I would just add to that. We also know chocolate is really a destination for the seasons, during the seasonal periods, and that will continue. So I think, we kind of think about it, that’s a solid foundation and base that consumers are looking for chocolate in particular around those times, in addition to all the other comments J.P. made about how we’re seeing the year.

Thank you. In the interest of time, I’ll pass it on. Thank you.

We’ll take our next question from David Driscoll with Citi Research.

Good morning, David.

Hi, good morning. This is actually Alexis Bornin in for David this morning.

Okay. Greetings.

Hi, international. So Hershey’s international segment was profitable in 2013 and 2014. How obviously the segment took a big step backwards in 2015. When do you expect the segment to return to profitability?

That is not something that we layout an exact timetable on. But clearly, we are not going to be back to those 2014 levels in 2016.

Okay. Thank you.

And we take our next question from Jason English with Goldman Sachs.

Good morning, Jason.

Hey, good morning, folks. How are you?

Good.

Good.

in :

Well, I think what you’re going to see in total is that, it will be a more of competitive environment and that you’ll see a greater trade spin in 2016 than you would have seen in 2015, which could lead to some lower net prices. And so obviously that makes – that obviously has a mix effect in terms of the P&L.

The other thing I would just add to that, I think it is important to note some of the trade spending will go into promoted price points, but some of that will also be investment to really get spaced in other ways.

Yes, because, Jason, Michelle’s last point it’s pretty important, with more snacks, we’ve all seen them coming on over the last few years, I don’t think that will abate. Everybody is trying to get to the perimeter of the store. So that’s based – it’s not expanding anymore let’s face it. It’s just very competitive to get.

Yes, got it. And then one other quick follow-up question. You mentioned the cost upgrades weigh in our margins in terms of simple ingredients, as well as the mixed impact from lower margin snacking items. Can you give us a sense of the magnitude of margin headwind you’re anticipating in 2016 from those initiatives?

I mean, we typically don’t talk about inflation, the inflation as a percent looking forward, we’ll always tell you what it is. When we report for various competitive reasons, we don’t want to get into that level of specificity right now. But we do have net inflation this year.

Okay. Thanks a lot, guys. I’ll pass it on.

And we’ll take our next question from Jonathan Feeney with Athlos Research.

Good morning, everybody.

Hey, good morning.

I want a little bit more detail about the competitive landscape, not only within chocolate candy. You mentioned pretty high levels of competition a couple times in the narrative, but also some of yourcompetitive sort of pushback and different behavior you might have gotten from some of this extension into other categories with Krave and some of the non-candy snacks?

Yes, I think, so I think we’ve been fairly clear in terms of how we’ve talked about the confectionary environment. If I go beyond broader snacks, the comment I would make specifically to meat snacks is that in the premium segment that we compete, the meat snacks business continues to be up about 25%, overall meat has slowed a bit in terms of growth, and of course a core part of our focus is to continue to build distribution around the Krave business and then also you’ll us introducing some extended items to the current line that we have as we built out that distribution. So from that standpoint, I don’t think it’s a significant, difference is probably a positive for us. If you think about broader snacking, I think I said on a previous call that as you look over the last 18 to 24 months, there’s about 80 SKUs, which have been added in that segment. And therefore, it’s more fragmented it has before gives the consumer different alternatives for trial. And therefore, we’ve seen some competitiveness and a little bit of a competitive pressure from there. But I think, again, it comes back to making sure in each segment that we compete that we’re winning merchandising and display, as we talked about earlier. But those would be a couple of things that I think are part of the existing landscape that we face.

Thanks, J.P.

Thank you.

Our next question comes from Andrew Lazar with Barclays.

Good morning, Andrew.

Good morning. Hershey obviously talks a lot historically about being a gross margin focused company. I guess, this year you’ve got to reinvest a little of that into trade promotion and you’ve got some ingredient cost you’ve talked about from some of the new products and things. I guess, is it a shift at all in Hershey’s long-term emphasis on gross margins, or more getting the base right and moving from there? And then last thing would be with the reduction in the long-term growth outlook, I guess, does it change management’s or the Board’s view on thinking about maybe creating even if it’s larger scale partnerships, or in pieces of the business, whether it would be overseas or in the U.S. to, I guess, help compete and grow, it’s kind of a broader question?

Yes. So I think if you think about your first question around gross margin, we’ll always defend our brands and we’ll be brand building consumer centric company and invest in our brands. But I would tell you that it’s not a change in philosophy. We continue to be a gross margin focused company. And there maybe years of periods of time when you have to change the way you get there. But we’ll always have the gross margin at the top of our list and again there can always be a mix effect of how you get there. I’m not going to speculate around any kinds of comments from partnerships and things like that. We continue to look for ways to grow and build our business and things that are good for our shareholders. And so, we’re continuously looking at our strategic options in terms of how we build our business. And so that would be the only comment that I would make.

Thank you.

We’ll take our next question from Robert Moskow with Credit Suisse.

Good morning, Rob.

Hey, good morning. Thanks for the question. I thought that the guidance for 2016 sounds very reasonable and sets a logical base. But the one assumption I wanted to ask you about was China, I think, going back to kind of flat to up a little bit from a category perspective. And then just in the broader context of international being down as much as it was. What are the drivers that that you think helps China stabilize especially given your modern trade exposure? And then the other countries too, you have economic issues in Brazil. Mexico was very competitive. It seem like this is an area where you’ve been surprised in the past. Did you consider something a little more cautious just in the near-term for international?

Yes. There is a couple of things that I would say and maybe Patricia and I both talk about this a little bit. But if you look at the total international business about 80% of the impact of that business really occurred in China. And so we know that that was a very unique event. About another 10% of that was really India in the oils business and then, of course, you have the impact of the FX. And then in a local currency basis, of course, you had both Brazil and Mexico, which were positive contributors albeit modestly. So that’s a little bit of where you see us come out. Also and I mentioned this a bit earlier, as we look at our different opportunities, I think what you’ll see us is moderate our pace and approach to where we think we could best allocate capital and still be consistent with our long-term investments and strategies. And so, that also has an influence, I think, and I think it’s quite pragmatic actually to go to where you think the ball was going to be. So those are a couple of comments that I would make. I don’t know Patricia has anything or perspective that she want to add to that.

Yes, I think that we – clearly, it was a tough year in China overall and it was this combination of macroeconomic forces in China that we’re not alone in experiencing, as well as the added complexity of an integration that didn’t – an acquisition and acquisition that frankly didn’t go the way we wanted. We certainly can start to see our way moving through those two aspects. And while I think the macroeconomic environment in China is not something I’d ever want to predict. Some of this is in our control, as we start to bring the businesses together and understand what we have in terms of brands, in terms of supply footprint, in terms of channels, in terms of distribution. And that’s where we are going to be focused on the things that we can control.

Thank you.

Our next question comes from Matthew Grainger with Morgan Stanley.

Good morning, Matt.

Hi, this is – good morning. This is actually Pam Kaufman calling in for Matt. I was hoping that you could elaborate on the stable advertising and marketing expense that you saw in North America during the fourth quarter? And the company’s previous commentary about plans for increased advertising and programming during Q4? Did it have the anticipated impact on your non-seasonal business in the U.S.?

Well, first of all a comment I would make is that if you look at the numbers part of what you have to recognize there is GRPs were actually up in the fourth quarter. And some of our actually administrative costs and non-working costs were actually what was lower. So the brand investment actually in terms of eyeballs on brands and attention to brands was up. And so as you parse through the numbers, that’s an important piece to understand. Michele may have a point that you were talking about effectiveness or anything beyond that. But it’s important that you understand that as you look at the absolute numbers.

Yes, so the – that – it was the non-working kind of production costs that actually we just had some timing shifts on. And then relative to impact on the business, we felt good about our every day takeaway in Q4. So while we don’t have all of the analytics back on the spend based on what we know to-date, we feel pretty good about it. And one other thing I would just point out is, as you look at the takeaway as we’ve launched Snack Mix and Snack Bites, which is key innovation on our core brand. It’s actually the Snack Mix piece is rolling into the salty snack category and not CMG. So, as you look at every day takeaway just keep that in mind.

Okay. Thank you.

Our next question comes from David Palmer with RBC Capital Markets.

Good morning, David.

Good morning. I’ve seen data from the NPD Group, which points to decline in volume for the sweet snacks mega category. And I guess we’ve seen some falling in the chocolate category as well. I’m wondering, I mean, clearly, we can see some things that might be more category specific like packaging innovation that’s run its course. But when you’re thinking and looking at the consumer, I know you do a lot of consumer insights work. Do you see a big mega reasons or shifts by the consumer that are things you can just to, you mentioned in the release today that your – that the consumer want simpler ingredients. But could you comment on certain other invisible things perhaps on a short-term basis that you think you could push against to cause category growth improve? Thanks.

Yes, I’ll make a couple of comments. So if you look at what the overall category trends and I’ll kind of give you where we were. If you look at the chocolate category, it was up. We were up pretty consistent with the category. If you look at non-chocolate, we actually lagged to the category and then if you look at gum and also mint, we would have outperformed the category on those segments. We have deemphasized a little bit the level of activity that we had in some of our sweets business. And so that’s certainly showing up in the business one brand in particular was a great brand. But if we just look at the absolute programming we had on a brand like TWIZZLERS, it is a little bit lower and that ended up showing up some in the overall business. If you look at the sweets business and some of the channels where it does well, you can also follow that with call it income cohorts. And one of the things that we’re doing in 2016 is using our Allen Candy acquisition to leverage our portfolio there on pegged bags and where in select places where we think that can really benefit us. So we did see within that segment an opportunity and we’re going to try to leverage that as well. And then some of our competitors also had the emphasis on some of those brands, which also would have had an influence on our performance as well.

Thank you.

And will take our last question from Rob Dickerson with Consumer Edge Research. Please go ahead.

Good morning, Rob.

Hello, good morning. I just had a kind of a larger question around your debt capacity and how look at leverage. I know previously you spoken to that 1.5 to 2 times levered to adjusted EBITDA. But I mean how do you think that over time is running a lower level of leverage relative to your peer set? And one could argue potentially an inefficient capital structure is the right way to go, or if you’re talking about snacking opportunity and leveraging your distribution network in the asset base. Then why not increase your leverage a bit more than you have historically actually grow a bit more quickly via acquisitions and not in China, I mean, more on the snacking side in the United States. Thank you.

Great. Thanks for the question. We really like where we sit right now on a leverage basis is something that we go back and pressure test every year. And one of the benefits that it gives us is that, it gives us a lot of capacity to do something incremental. It’s something big and attractive and incremental came along in the category. We would be very open to it, I don’t think that our leverage would be a constrained in that situation. But as we sit here today with opportunities in front of us, we feel very good about where we are.

Okay, thank you. And just very quickly, I’ve seen some material on your SOFIT brand. I haven’t heard you mentioned much, but I think I believe it’s selling on Amazon. Is that something we should see more of in the future such that SOFITwould be rolling out like a Krave, or like a Brookside into mass retail, or is that for the time being to sell on price?

Yes. I think SOFIT is test and learn. It’s a brand out of India. It’s soy protein and it’s part of our efforts to learn about the protein segment plant-based. And so you’re seeing it more – from a test and learn standpoint, we’re going to be able to make that in the U.S. versus obviously try to ship it from India. So, as you know with beverages and so forth closed on is always a good idea. But it’s a brand, we think is very interesting. But it’s really about us having a learning approach.

And I’m delighted you found it on Amazon, because we just…

Yes. Okay. Thank you very much.

All right. Thank you.

Thank you for joining us today I’ll be available for any follow-up calls that you may have.

Ladies and gentlemen, this does conclude today’s program. Thanks for your participation. You may now disconnect and have a great day.