Greetings, and welcome to The Hershey Company Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Melissa Poole, Vice President of Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone. We appreciate you joining us for The Hershey Company's fourth quarter 2019 earnings conference call and webcast. Michele Buck, Chairman of the Board, President and CEO; and Steve Voskuil, Senior Vice President and CFO, will provide you with an overview of our results, followed by a Q&A session. Before we begin, please remember that during the course of this call, we may make forward-looking statements within the meanings of the Federal Securities Laws. These statements are based on our current expectations, and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements contained in our 2018 10-K filed with the SEC and today's press release. Finally, please note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. The presentation of this information does not intend to be considered in isolation, or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, I would like to turn the call over to Michele.

Thanks, Melissa. Good morning to all of you on the phone and webcast. We had a strong 2019, with accelerated business performance and differentiated financial results. This was driven by momentum in our core U.S. confection portfolio in both retail takeaway and margin expansion, like incremental and profitable international growth, and by further expansion of our snacking portfolio, and we continue to invest in our brands, capabilities, and people. I would like to extend a sincere thank you to our employees and all of our partners for their hard work to make this possible. For the full-year, we delivered net sales growth of 2.5% and EPS growth of 7.8%, a testament to our strong brands, business model, and a commitment to balance top and bottom line growth. Constant currency organic sales growth of 1.8% was ahead of expectations, driven by incremental pricing and core base strengths of our U.S. confection business. These gains drove stronger than anticipated gross margin expansion of over 100 basis points for the year, which enabled incremental investments in our brands and employees, and enhanced earnings for our shareholders. We're pleased with the consistency of our results throughout the year, and the momentum we're taking into 2020. In the fourth quarter, net sales grew 4% behind 1.9% organic constant currency growth, and our gross margin expanded 96 basis points. For the full-year, our Hershey Candy Mint and Gum retail sales increased 2.6% resulting in a category share gain of approximately 10 basis points. While a long Easter contributed to this performance, we also finished the year strong with retail sales growth of 2.8%, and a category share gain of approximately 20 basis points in the fourth quarter. As was the case with the entire year, this growth was driven by balanced activation across the portfolio, and…

Thank you, Michele, and good morning, everyone. It was a strong year and quarter and we are pleased with the quality of delivery across our segments. North America achieved net price realization and operating leverage, enabling incremental investment in brands and capabilities throughout the year. We saw consistent solid retail takeaways on our core confectionery brands in the U.S. and our international business delivered another year of incremental profitable growth. We feel good about the momentum we have heading into 2020 to deliver in on algorism year for both top and bottom line. Fourth quarter net sales increased 4% to $2.1 billion versus the same period last year, with a slight headwind from foreign currency exchange. The net impact of acquisitions and divestitures contributed 220 basis points of growth. Organic, constant currency net sales growth of 1.9% was consistent with expectations and driven by price realization in the U.S. and volume growth in our international markets. Net price realization for the quarter was 360 basis points partially offset by anticipated elasticity-driven volume declines of 170 basis points. Adjusted earnings per share diluted were $1 28 for the quarter, an increase of 1.6% versus the same period last year. This was driven by gross margin gains, which were more than offset by increased incentive compensation. For the full-year, net sales increased 2.5%. The net impact of acquisitions and divestitures was a one-point benefit. Organic constant currency net sales growth of 1.8% was partially offset by unfavorable foreign currency exchange of 30 basis points. The delivery of our net sales and gross margin expansion plans allowed for investment in brands capabilities and our employees to drive future growth. This translated to adjusted earnings per share for the full-year of $5.78 cents, an increase of 7.8% versus prior year. In the fourth quarter,…

Thanks, Steve. I'm proud of what we have delivered over the past several years, and I'm optimistic about 2020 and our future, we continue to operate with a healthy level of dissatisfaction and constantly push ourselves to elevate the business even further. We are excited about the opportunities ahead, and we look forward to sharing more details about our strategic plans in March. Steve, Melissa and I are now available to take your questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Good morning, everybody.

Good morning.

Good morning, Andrew.

Hi, there. So, two things for me; first, as we think about some of the various pieces that drove the fourth quarter unallocated corporate, maybe can you give us a sense or help quantify a bit, you know, how much sort of is expected to stay in the base as we go through 2020, and how much of any sort of reverses out and perhaps helps to become a bit of a tailwind to 2020 operating income? And second, I know it's a smaller business, Michele, but your comments on a new business model in Mexico just peaked my interest, I think you were talking about a new model to gain some incremental distribution, I didn't know if that was something along the lines of more of like a partnership or perhaps you can expand a little bit on that, and that's it. Thank you

Andrew, why don't I take that one first, because I think that's a quick one, which is really the focus there in Mexico is a new model to capture traditional trade. So, it is not anything beyond that, but really it's a focus to go after that traditional trade business.

Got it.

And just picking up on the on the compensation and what stays and goes just in the fourth quarter really had three things that rolled in, one was if you look year-over-year, there was a re-based impact on incentives, the prior year period had below target performance and payout. So, in the fourth quarter, you sort of catch up to target. We had then a predicted over-target performance, and then the market adjustment that we talked about, and clearly as we roll into 2020 that one-time market based adjustment will go away, and so will the performance will reset at a target level. So, roughly 50% of that increase will stay going forward, and about half of that will go away.

Great, thanks very much.

Thank you. Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Hi. The results are pretty much in line with what we'd expected, maybe incentive comp is a little higher than we thought, but -- so I was just going to jump into CapEx, the CapEx spend is a big step up. You mentioned it's related to the ERP and supply chain program. Are there any expenses that run to the income statement related to this step up in your ERP program, or is this really just a kind of a CapEx kind of effort, and also what steps are you taking if any if you need to mitigate customer service issues? Thanks.

Sure. The ERP program has been going for a number of years, and so, you're right, there's a portion of that CapEx step up in 2020 is due to the ERP program continuing. There is a portion that hits the P&L. Year-over-year for '20 it's not a material factor, and it's obviously factored into our guidance. As we get to the March Investor Conference, as Michele said, we'll talk more about the supply chain project, and probably also talk more about the next couple of steps that we expect on the ERP program, but for 2020, it's fully reflected from both OpEx and CapEx.

And we have a big focus on change management to the end of your question relative to really managing the risks and business continuity during that period of time, and we can talk a bit more about that in March.

Okay. Well, I'll wait till March then. Thank you.

Thank you. Our next question comes from the line of Ken Goldman with J.P. Morgan. Please proceed with your question.

Hi, good morning. Thank you.

Good morning, Ken.

Hi. First the increase in CapEx, does that change your outlook at least in the short-term on M&A? I know most of the M&A you've been doing is relatively, I guess, tack on in nature. So, my guess is probably you'll stay opportunistic, but I'm just curious for your thoughts there. And then my second question is, thank you for the guidance on the gross margin outlook, I guess, in that guidance, are you assuming any incremental pricing action, whether it's list prices, whether it's reduced promos or pack size changes, things like that, or is it just sort of status quo and you have all the pricing actions that you need already baked into hit that gross margin number? I'm asking because obviously, cocoa has gone up a little bit, and I know your heads there and so forth, but just curious.

Maybe I'll take the first part of that question relative to thinking about M&A relative to the additional CapEx. So clearly, it has an impact on free cash flow. Our capital allocation priorities aren't changing. You know, we continue to look first and foremost at funding, both organic and inorganic growth, protecting the dividend and obviously watching overall leverage. I would say as we sit here today, we have with the incremental CapEx investment we're not pulling back, are looking for potential inorganic opportunities as they come available, we'll always do that with an eye towards leverage and the value proposition for shareholders. I would say no change in our posture from that perspective. On the gross margin side, we don't comment about specific pricing actions that we might have planned for the coming year. We can say price continues to be a strategic part of our repertoire of tools to use along with all the other components. So, anything you want to add to that, Michele?

Yes. I would just say, I mean, overall, we are expecting price in that 2% to 2.5% range for the year in North America, and our gross margin guidance is consistent with that being a part of it.

Great, thank you so much.

Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

Good morning, everyone.

Good morning.

So, it seems as though the core business is chugging along, you've got the modest price increases rolling through each year. In terms of the future business development, acquisition strategy from here, can you talk a little bit about what the key learnings have been from what's worked with SkinnyPop Popcorn, and what seems to be improving with Pirate's Booty, and maybe some of the things that didn't work so well with KRAVE and Brookside? And then also maybe just talk about what your priorities are for it from here, is it going to remain within salty snacks in the U.S., are you thinking about more overseas acquisitions, what's the priority list from here? Thank you very much, and I'll pass it on.

Sure. So, let's start with our overall strategy, which is about capturing incremental snacking occasions, and if you look within that, certainly the number one priority is in categories outside of sweet indulgence in the U.S. So, both salty snacks savory as well as we recently bought the ONE brands nutrition bar. So, I'd say it's largely about better for you in savory in the U.S., not to say that we will not move forward with something in confection if there's a gap in our portfolio we will, and we would entertain international acquisition, but our bar is much higher given the risk levels of that business, and obviously, given we don't have scale internationally the businesses that makes sense for us are just a bit different than in the U.S. Relative to our key learnings, I would say, probably the first and biggest learning is that is around selection of assets, that is, we are a branded high gross margin company that is -- those are the kinds of brands we're used to growing and building. SkinnyPop and Pirate's Booty fit right in that sweet spot on both of those elements, and I think especially if we're going into a newer category or segment within snacking. KRAVE in particular was an acquisition that did not meet either of those relative to adequate scale nor adequate gross margin. So, I think that's the single biggest learning was that piece of what fits our business model and staying true to that, and then certainly along the way, I think we learned other things relative to integration and how to get the best of both leveraging our scale as well as enabling some of the entrepreneurial spirit, but realizing the businesses we're buying are in a phase of scaling up in growth and there's help needed to do that.

Great, thank you very much. I'll pass it on.

Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

Hey, good morning, folks. Thank you for citing me in and happy belated New Year.

Thank you.

You're welcome. I want to come back real quick on the CapEx piece because it's a surprisingly large number. And it sounds like we'll get more detail on where that spends coming at the Analyst Day, but given that you're spending a lot more into supply chain and you explain at the same time that your prior margin for growth productivity savings are poised to step-down. Is it unreasonable to think that we should expect a larger or some sort of news around renew productivity goals over the next couple of years?

Yes, we're not announcing today any renewed productivity goals, I would say productivity is and will remain a key part of our algorithm inside the P&L. You're right last couple of years with margin for growth that probably had higher than historically typical productivity. 2020 is down a little bit from that as that kind of peak of that program passes. And we will do as we always do, kind of continue to look for additional productivity opportunities and some of the improvements coming in terms of fulfillment with the supply chain investment will actually set the future for some more as we go forward.

Yes, little bit additional context. In the past, we did big supply chain projects and those tended to be much more focused on utilization of capacity and also margin enhancement. This supply chain project is very much focused on enabling growth and doing so by providing increased flexibility and customization capabilities that will then allow us to meet consumer and customer needs while maintaining the advantage margin structure that we have.

Thank you. That's good context. I understand a little bit better. I appreciate that. Switching gears real quick to the growth side, so new capabilities help drive growth, but from a volumetric perspective, there's not a lot of growth right now in at least in your North American portfolio, and I know there's some elasticity components there, but how should we think about the growth trajectory for both the category and your portfolio as we track through the next 12, 24 months?

So first of all, we think both volume and price are important to our long-term algorithm. During the years where we have pricing, those years will be much more pricing driven than volume driven. And we do a lot of hard work on our programming to keep our volumes flat during that time. Otherwise, according to the models, we'd actually decline in volume. So we're pleased that we've been able to do that. But over the years, you'll see a bit of both. And as we look at the actual growth outlook, we continue to think that the CMG category is going to grow at that 1.5% to 2% type of range. We believe in 2020, that it will be at the higher end of that range given the pricing in the marketplace, but we believe it will not be as high as 2019, which also had the additional benefit of a long Easter and we look to grow in line or slightly above the category growth rate.

Got it, okay, Thanks a lot. I'll see you in Florida.

Okay.

Thank you. Our next question comes from the line of Steven Strycula with UBS. Please proceed with your question.

Hi, good morning. Just piggyback off of Jason's question on organic sales for the year, how should we think about maybe how the China and Brazil macro situations really kind of play into how you think about the international business, I know it's a smaller part and then on the U.S. front, anything to comment on Snap and how that any potential developments in legislation might potentially impact that business as you think forward? Thank you.

Yes, so certainly we have seen macro economic softness in several of the developing markets in which we participate. As we developed our plans for the year, we tried to take that into account as other factors that were known at the time, clearly the coronavirus would be the one unknown that really we didn't have visibility to at the time, and we are tracking that carefully. We do anticipate that will have an impact on our business in China. But as you know, we're a predominantly North American based company. So not as big an impact as we may see from some others, and we are carefully tracking, and always do kind of what happens with Snap at this point in time; we have not built in nor anticipate something significant there, but we'll keep a close eye on that.

As a quick follow-up to that, Michele, I appreciate the color for China, as you think about it being a potential impact as you noted, is it more from a manufacturing standpoint that facilities or maybe offline until maybe the beginning of February, as is the case for the industry, or is it more just an early indication that depletion rates in the retail channel are already starting to come in a little bit as travel slows, any color there would be helpful. Thank you.

Yes, I would say it's more the latter which is our business tends to have a seasonal skew around Chinese New Year, we sold in our volume and now consumers are not able to go to retail and so we're trying to carefully watch what's the take away will be and any waste implications from the fact that that portfolio is seasonal in nature. So that's the biggest hit for us.

All right, thank you.

Thank you. Our next question comes from the line of Jon Feeney with Consumer Edge. Please proceed with your question.

Good morning, thanks very much. A couple of detailed question first and then a real question. The detail question is on looking at your takeaway data you gave us, so 28 on Candy Mint and Gum or 11.3 on salty snacks, 2.5 overall, is it like last quarter where all that gap is that all KRAVE that were kind of flushing out of the system is my first question that because it would seem to me it'd be something like in the threes overall if that was the case. And second question, real question is, it seems like pricing works a lot better than it used to, and it's worked fantastically at times in the past decade. But it seems like you get it, you see less elasticity, you grow gross margin like, is there something just new under the sun here where you have better capabilities, and you can just price more tactically going forward than used to be, if any detail on that, I'd appreciate it.

Okay. So relative to your first question, you're right that there are some of the smaller emerging brands like KRAVE that are a drag to our total consumption. The other piece is our grocery business, which is comprised primarily of syrup and baking chips. Syrup tends to be a pretty stable business. But baking chips has big promotional windows, and it's very competitive. So, we always have decisions to make relative to which pieces of business to go for at which just don't have the profit margins that we're interested in. And so we passed on some less profitable business this year. And that was a drag in our total retail takeaway. Relative to pricing, I would say we think about the impact as being pretty consistent with what we've seen over the years that we've always had a pretty solid ability to leverage price, and we believe that's only though because of all of the investments that we make with retailers in retail specific programs. The high level of advertising we put behind our brands that creates the brand value proposition for the consumer then it enables that. So but we see basically the elasticity is being somewhat in line with what we've seen historically.

Well, it works whatever it does. Thank you.

You're welcome.

Thank you. Our next question comes from the line of John Baumgartner with Wells Fargo. Please proceed with your question.

Good morning. Thanks for the question.

Good morning, John.

I guess, Michele or Steve, I just like to hear a bit more about the operating leverage, given the importance of that to the P&L. We've seen plant closures over the years you've had the modernization in Hershey. Now there's talk about, I guess, the smart plants. So as you exit the margin for growth, how do you think about leverage from here, I mean how large of the contributor will manufacturing be given the increases in capacity, flattish category growth relative to leverage from SG&A at this point and a lot of moving pieces, just trying to get a sense for the factors and how it materializes?

Steve, you want to take that?

Driving operating leverage over time is going to continue to be a key part of the algorithm. And so, all of these investments whether we're talking in the manufacturing area or some of the capability investments, all are with an eye towards driving a return over time and ultimately driving leverage of itself. Some of the investments in digital and data, all have a business case around leverage at the end, and so as we've done in the past, as margin for growth wraps up, we will kind of that Michele said in the past go right back through the P&L and attack each one of those to continue to drive sustainable leverage. Anything to add there, Michele?

Nope.

Okay. And just as a follow-up there. Based on the guidance, it looks as though non-advertising SM&A for 2020 should increase a fair amount year-on-year. Are there any particular callouts there in terms of the plan, whether it's in-store programming, your sales force feed on the street or anything else worth note that we should think about here?

Our data and technology investments do fall in that line. So investments around ERP, investments more broadly around data and technology when it comes to analytics and how we evaluate the business, new data sources, et cetera filling up buckets, that's a significant piece.

Okay. Michele and Steve, thanks for the time.

You bet.

Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Great, thank you. I guess first question, Michele is just, given the amount of investment, you deployed over the past two, three years to now, speaking to the next two to three years, to become more efficient. With that in mind, as we see brand support increase, I feel like at least, usually that brand support goes to larger brands, right, just higher margins that are leverage overall. But you've also acquired a number of smaller companies that are faster growth, smaller with faster growth, on trend, et cetera. So, like, when you step back and say, okay, we kind of, let's say, we've kind of gotten through the first part of kind of our investment overall supply chain ERP, now we have further investment, like should we be expecting, increased innovation in the marketplace on brands like Skinny and Pirate's Booty and One, and I just asked because, you seem to be kind of the on-trend growth to your brands, not as big, but there's a lot of potential there, and I feel like we just haven't seen a tremendous amount of new innovation come out of those brands so far post acquisition?

Yes. That's a great question. I would tell you that overall, as we look at growing a business, we do really believe in balanced -- the balance levers we've spoken with you all about relative to distribution, advertising that can drive base velocities, seasonal presents, pricing et cetera, and so, we believe all those levers are important, but at different phases and different brands lives, different of those levers are more important. So, with brands like SkinnyPop and Pirate's in particular, we want to make really sure that we take full advantage of driving the cores on those businesses because they were not at max distribution capacity for what they deserve, given their velocity levels. So, making sure that we continue to focus on that core distribution and also that we advertise to maximize household penetration, so there are many brands and confections where we have 40% household penetration, and it's significantly less on the brands like Pirate's or Skinny. So it's intentional that we first focus on the core, and that we judiciously add innovation. And we did do that with some seasonal items and some items, the right flavor profiles, but we think that's a key learning from the past is to be very measured in the innovation approach. We learned that on some of our early acquisition models focus enough on the core.

Okay, fair. And then, just a quick follow-up, I guess what's implied with further capital spends, especially in 2020 on the CapEx side and overall investment, I'm assuming, as leader of a company, right, the expectation is that this does build efficiency obviously. So, essentially, hopefully de-risk further acquisitions, even a smaller in scale. So, basically KRAVE doesn't happen again?

Yep, we're always focused on making better and better decisions and learning from every action we take in the past. So and we feel good about what we're seeing on SkinnyPop and Pirate's in particular and One is on track integration and acquisition model wise as well.

Okay. Super. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.

Great. Good morning.

Good morning.

In recent years, Hershey has been smarter about pricing and smoothing out the price increases in any one year and you've been hitting different parts of the portfolio and using weight outs and new packaging, but volume is still down, it's down this last quarter and wondering how you're thinking about pricing power levers that you might have up your sleeve. Should we get into a inflationary environment particularly with cocoa into '21 that looks like it's shaping up to be. In other words, do you do you think you could defend that 45% type gross margin should we get an outsize lumpiness in inflation?

So, of course, we can't really talk about the future pricing actions, but we can talk a little bit about what we're seeing in commodities and cocoa pricing and how we're thinking about how that flows through the P&L. I think if we take a little bit of a step back and talk a bit about that, and Steve and I'll kind of tag team this. So we are very focused on watching cocoas commodity, because it's critically important for us, we do know it's a headwind as we go into next year, and that headwind is built into the guidance that we've given you. So, every year going forward, we focus on the right combinations of programs, which include hedging, which includes sometimes deciding to price, which include making tradeoffs across the P&L to really accommodate whatever's happening in cocoa pricing. We do have pretty strong visibility going forward, so we have a chance to plan around that. And Steve, do you want to talk a bit more about that?

Yes, I would say, as Michele said, we have good visibility in 2020. As you point out, David, if things like the lid and some of the pressure on cocoa remain into 2021, you know, that puts some pressure for sure from a commodity standpoint into the P&L. That said, between pricing levers, productivity levers and others, we will use our toolbox to work to continue to drive leverage through gross margin as we go forward. The bar will be tougher, depending on how that cocoa pricing shapes up as we get to the back part of 2020 and into 2021, and we'll have more visibility into that as the year progresses.

It's certainly something that's been volatile over time. So I think we have experienced managing that volatility.

That's very helpful. And just a real small one, that the re-launch of Take 5 as you said, at the Super Bowl, that's an interesting move, it's only in the measured channel looks like it's about half-percent of your channel mix. So, it's not a huge trademark, but there's probably something you see in that that's making you think there's an opportunity there. So, may be a couple of comments about why you think that is? Thank you.

Sure. So Take 5 has the highest repeat purchase of any competitive innovation, and has one of the highest repeat purchases of many of the great brands we've seen over time. It lacks the awareness and trial, and so we began re-launching that brand putting it under the Reese's trademark because that is one key way to drive trial, it has great Reese's peanut butter on it, but that's where a placement like Super Bowl can tend to really help you, which is it garners a lot of awareness and trial and eyeballs, and we think that that will be really helpful for us as part of our overall marketing plan behind Take 5. So, we look at Take 5 as -- I look at it as one of our great innovations for the year. We know it's a great product, and we'll have consumers get a chance to try it for themselves.

Thank you.

Thank you. There are no further questions at this time. I'd like to turn the call back over to Melissa Poole for any closing remarks.

Thanks for joining us this morning. We will be available for the rest of the day if you have additional questions. Please feel free to reach out.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.