Q4 2019 Earnings Call
Greetings and welcome to be Hershey Company fourth quarter 2019 earnings Conference call.
I'm all participants are no listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator systems. During the conference. Please press star zero on your telephone keypad.
A reminder, this conference is being recorded it is now my pleasure to introduce your host Ms.. Most the pool Vice President of Investor Relations. Thank you may begin.
Thank you good morning, everyone. We appreciate you joining us, but the Hershey company's fourth quarter 2019 earnings conference call him.
Michele Buck Chairman of the board, President and CEO and evolve School Senior Vice President and CFO will provide you with an overview of our results I would like human <unk> session.
Before we begin please remember that during the course of this call. We may make forward looking statements within the meaning of the federal Securities laws. These statements are based on our current expectations involve risks and uncertainties I could differ materially from the actual events and those described these forward looking statements contained in our 2018 10-K filed with the FTC in today's press release.
Finally, please note that on today's call, we will refer to certain non-GAAP financial measure that we believe will provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with gap. Please refer to today's press release for a reconciliation of non-GAAP financial measures to the most comfortable measures prepared in accordance with gap.
Let's turn the call Levered himself.
Well, that's a 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. construction portfolio in both retail take away and margin expansion.
Like incremental unprofitable international growth.
And by further expansion of our snacking portfolio.
And we continue to invest in our brands capabilities and people.
I'd 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% well ahead of expectations driven by incremental pricing at core based strength 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 investment 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 are 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 the long Easter contributor 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 we are seeing the benefit from our investment in marketing spending carrying through to retail performance.
Our research brands continued to outperform the market with growth of over 6% in the fourth quarter, driven by great advertising intubation and strong in store execution.
Cat grew 2.3% in Q4 behind incremental capacity and I were due kit Kat Dualos innovation, which launched late last year.
Early results of this innovation are encouraging and we expect continued momentum on this brand in 2020.
Our media and packaging investments on our mid tier iconic brands also drove strong growth with payday up over 8% on enjoy up 6% roll up 5% and heat up 35% in the quarter, resulting in a combined share gain of 20.
Basis point.
Pricing remains an important lever for us in the fourth quarter net price realization of approximately four point in Q4 was slightly ahead of expectations as we began to see a benefit from our most recent price increase announced in July of 2019.
We expect us to continue in 2020 with planned price realization of two to 2.5 points on our U.S. confection business in the U.S. for the year.
As we looked at 2020, we have another great year Activations plant within our construction business.
In just a couple of days for the first time in brand history, Reese's, we'll be running an advertisement during the 2020 Super Bowl.
This will be a great opportunity for America's number one confectionary brand to increase awareness a one of its best tasting highest consumer raises.
In the portfolio take five.
As we had shared with you last year, our relaunch of this item is off to a strong start and we're excited to build on this with an AD during America's most watched sporting event and additional in store merchandising and distribution.
We're also excited about her product innovation for 2020.
In addition to our kit Kat Dualos innovation, we're excited to announce the expansion of our sins platform in 2020.
New York, then and Reese's White, then we'll watch in March and we'll be able to in both the will be available in both the take home bag and pick format.
This provides new York lovers, a unique way to enjoy one of their favorites and it enables us to secure strong year to merchandising for our core milk and dark reese's items that we launched this past year.
Our snacking portfolio also delivered solid growth into fourth quarter.
Skinnypop ready to eat popcorn retail sales grew over 13%, resulting in a category share gain of 170 basis points.
And as expected Pirates booty performance accelerated as we began to recapture distribution walk earlier in the year.
Had strong promotional activity behind our on pack Disney promotion.
Retail sales grew 1.4% in the fourth quarter and over 4% in December .
Our most recent acquisition one brands grew 35% in traditional measured channel with additional strength and non measured channels such as E Commerce [noise].
Now for an update on our international markets, we have made significant progress over the past several years by focusing on branded high margin products streamlining our operating model and Rightsizing our investments.
We began this journey at the beginning of 2017, we have increased our segment income like $125 million over the past three years, while continuing to grow our organic constant currency net sales.
This is a significant accomplishment they made possible by the hard work and dedication of many employees around the world.
C or thank you, everyone, who helped drive this business transformation and financial performance.
Our international business provides us with important geographic diversification and incremental growth and we are excited to build on this progress with another year of profitable growth in 2020 [laughter].
In Mexico, we will continue to focus on increased distribution and innovation on our Hershey and pay long pellet Rico brands.
After strong test results last year, we will be launching a new business model more broadly in 2020 aimed at securing incremental and profitable distribution in traditional trade.
Additionally, we will continue to innovate with new flavors and packaging to drive growth in our existing channels.
In Brazil, Despite a continued heightened competitive environment, we delivered profitable growth in the fourth quarter.
Dark chocolate Hersheys portfolio has performed very well and we're excited to bring new innovation within that platform to market in 2020.
Additionally, we are focused on growth in non traditional retail channels and work spending a successful 2019 test to more regions. This year.
In India, our National kisses launch remains on track and we are leveraging important learnings from a regional launch last year to further optimize the proposition as we expand in 2020.
We continue to see this market the strategic growth sector for our business.
In China, we had a strong finish to the year and we plan to build upon last year's successful flavors of life promotion with new varieties in 2020.
Due to the timing of Chinese new year in 2020, and 2021, we expect 2020 shipments to be slightly pressured, but we continue to feel good about our in store Activations and our base business momentum.
In summary, we're pleased with our performance unbelievable, we will deliver another year of high quality financial results in 2020.
We are proud of what we've accomplished and the momentum we are seeing on the business, but we also recognize we must continue to adapt and invest to elevate the business further.
Okay.
Over the past several years, we've invested in incremental capacity and planning capabilities.
I am pleased by the progress that we've made here and the opportunities that this has unlocked for us.
In 2019, we delivered our best case bill rate in a decade.
Something meaningful increases in our advantage survey rankings.
Since 2017, our supply chain ranking with our customers advanced from number 15 to number four and our customer service is now ranked number one amongst our peers up from number 12, just three years ago.
We will build on this with additional investment in our supply chain capabilities over the next several years.
As a part of a multiyear capital project, we will add additional capacity for our largest and fastest growing brand.
Killed agile fulfillment and late stage customization capabilities and invest in new data and technology within our supply chain.
The increases visibility automation and digitalization.
We believe these investments will enable us to respond to changing needs for both our consumers and customers, while maintaining our advantage margin profile.
We look forward to sharing more details about this at our Investor day in March.
In addition to investing to advance our business capabilities. We are also very focused on elevating our talent and culture.
In December I announced several organization changes that I believe will enable us to take our business to the next level [laughter].
Chuck Ralph has been promoted to president at U.S.
Chuck is a proven results driven commercial operator with a successful 10 year track record at Hershey, Most recently, leading the acceleration of our U.S. CMG business.
Chuck deep expertise across snacking, having led all areas of confection at Hershey and from his previous experience at Kraft will be instrumental to our future success as we pursue our strong growth ambition across traditional and digital channels [noise].
[noise] Kristen rent has been promoted to chief growth Officer, Kristen started with the company more than 14 years ago and has worked across nearly all commercial functions. Her focus on driving growth is underpinned by a strategic and analytical understanding of the month modern consumer.
Strong marketing expertise and tenacity for creating positive change in the organization.
Together, the U.S. business and gross office will work seamlessly to ensure the delivery of both 2020 and our growth plan over the next several years [laughter].
And finally Crystalia has been promoted to chief Human Resources Officer, Chris.
Chris joined Hershey in our legal department in 2005 and transition to human resources in 2011.
Since that time. This is let talent management recruiting HR operations and business partner teams as well as workforce development.
Chris brings a strong commercial business acumen, and analytical rigor to talent planning and development and a passion for how people and culture drives performance.
These changes are a testament to hershey's talent development and succession planning and I couldn't be more excited about the opportunities ahead with its tremendous talent across the organization.
I see that Todd Mary Beth Kevin and Terry for all their contributions to our success over the past several years I'll now turn it over to Steve who will provide you with details on our financial results Steve.
Thank you Michelle and good morning, everyone.
As a strong year in quarter, and we're 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 takeaway on our core confectionary.
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 the algorithm 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.
Net impact of acquisitions or divestitures contributed 220 basis points of growth.
Organic constant currency net sales growth of 1.9%, what's 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 elasticities, driven volume declines of 170 basis points.
Adjusted earnings per share deluded were $1.28 for the quarter 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 up 30 basis points.
The delivery of our net sales and gross margin expansion plans allowed for investment in brand capabilities and our employees to drive future growth.
This translated to adjusted earnings per share for the full year, a $5.78 an increase of 7.8% versus prior year.
In the fourth quarter, our North American segment net sales increased 3.8% versus the same period last year.
The net benefit of acquisitions was 250 basis points.
Organic net sales up 1.3%, what's driven by price realization of 400 basis points.
Partially offset by elasticity driven volume decline of 270 basis points.
Recall in the third quarter price realization was approximately one point lower than expectations due to the timing related to our July 2019 announced price increase.
As anticipated this headwind reversed in the fourth quarter.
Without this timing shift price realization was approximately 300 basis points.
50 basis points ahead of expectations as we began to get a slight benefit from our most recent price increase [noise].
This incremental pricing contributed to stronger than anticipated gross margin expansion into fourth quarter.
Adjusted gross margins in North America expanded 130 basis points versus prior year.
This was driven by net price realization and favorable commodities, which were partially offset by increased logistics and packaging costs consistent with other quarters.
North America advertising and related consumer marketing spend increased 5.1% in a quarter driven by planned advertising increases enabled by our gross margin expansion.
Fourth quarter International and other segment net sales increased 5.8% versus a year ago period.
Constant currency net sales grew 6.3%.
Offset by a 50 basis point headwind from foreign currency exchange.
Volume was up 5.7 point benefit and net price realization contributed 60 basis points to net sales growth.
Combined organic constant currency sales net sales in Mexico, Brazil, India, and China grew 6% versus the fourth quarter of 2018 with growth in all markets.
International and other advertising and related consumer marketing decreased 11% versus prior year as we continue to optimize investment in these focused markets.
Now turning to gross margin.
Adjusted gross margin excuse me adjusted gross profit of $898 million into fourth quarter increased 6.4% versus prior year.
This resulted in adjusted gross margin of 43.4% increase up nearly 100 basis points, driven by net price realization and favorable commodities.
Fourth quarter adjusted operating profit of $370 million resulted in operating profit margin of 17.9% a decrease of 70 basis points versus the fourth quarter of 2018.
Gross margin gains were more than offset by higher incentive compensation.
This incentive increase was related to a strong 2019 performance and a structural market based increase of variable compensation linked to a company performance for our managers in individual contributors.
This increase was planned to occur gradually over the coming years. However, our strong performance in 2019 allowed us to accelerate this change, which we believe is important for retaining and securing top talent in our organization.
As you saw in our press release reported operating profit in the fourth quarter declined 135 million versus the prior year period, driven by the recognition of a long lived intangible asset impairment loss associated with our 2015 acquisition of crave.
Well meat snacks remain a growing category volume has been driven by mainstream and value brands. The premium segment slowed and became even more competitive which pressured sales and margin.
While disappointing this acquisition wasn't important staff to be getting to diversify our portfolio in the U.S. and we have leverage the learning to improve the propositions and performance on our more recent acquisitions.
Moving down the piano interest expense of $37 million was in line with the prior year period.
Full year interest expense was $144 million increase of $5.3 million versus 2018 due to increased debt associated with acquisitions.
The adjusted tax rate for the fourth quarter was 9.8% versus 9.5% in a year ago period.
This rate was favorable versus our expectation due to the execution of additional tax credits.
For the full year 2019, the adjusted tax rate was 17.4% versus 19.2% in the year ago period.
This full year favorability was driven by excess tax benefits from stock based compensation and valuation allowance releases in our international markets.
In the fourth quarter other expense was $34 million, a decrease of 5.1 million versus a year ago period, driven by non service related pension expense.
For the fourth quarter of 2019 weighted average shares outstanding on a diluted basis were approximately 210.5 million, reflecting a slight decrease versus the prior quarter.
The company did not repurchased any shares in the fourth quarter against our July 2018, 500 million dollar authorization and $410 million remain.
Total capital additions, including software were $82 million into fourth quarter totaling 318 million for the full year 2019.
This was slightly below expectations as some of our I guess initiatives were delayed due to employee resource constraints related to our large ERP and supply chain projects.
We continue to return cash to our shareholders with fourth quarter dividends of $157 million.
This was our 360 it consecutive quarterly dividend on the common stock.
We have solid underlying momentum in our core business that we believe positions us well to keep the momentum going into 2020.
We expect full year net sales growth of 2% to 4% consistent with our long term algorithm.
This includes an approximate one point benefit from the acquisition of one brands.
We anticipate our growth in North America will accelerate versus 29 team as we lap R.S.G. you rationalization program.
While we continue to expect profitable growth in our international markets. We expect the contribution will be lower than 2019 due to less favorable macro economic conditions impacting the confectionery category growth.
Like 2019, we expect our North America growth to be driven by pricing, while our international growth is expected to be more volume driven.
We expect gross margins to expand again in 2020, but at a slower pace than 2019.
While we plan to benefit from slightly more price realization commodities will change from being a tailwind in 2019 to a headwind in 2020.
As a result, we expect adjusted gross margin to expand 40 to 50 basis points.
As was the case in 2019, we will leverage this pricing and gross margin expansion to lead into investments in our brands and capabilities.
We expect to advertising to grow slightly ahead of sales this year and we'll continue to invest in data technology and other initiatives to drive sustainable profitable growth in the future.
We expect 2020 interest expense to be relatively in line with 2019.
And other expense to increase $30 million to $40 million versus 2019, as we plan to execute additional tax credits.
As a result of these higher tax credit investments, we expect our 2019 adjusted tax rate to be between 16 and 17%.
The net impact of investment tax credits and our adjusted tax rate is unfavorable versus 2019, as we lap the onetime benefit a valuation allowance releases.
For 2020, we expect elevated capex spending as we advance our ERP transition and initiate a strategic supply chain program.
As Michelle mentioned this multiyear capital project will not only add capacity, but also give us new fulfillment and technology capabilities that we believe will help us deliver on the needs of our consumers and customers, while maintaining an advantage margin profile.
Given the significant investments our Capex for 2020 is estimated to be between 475 and $525 million.
Our core business sales growth and another year of gross margin expansion are expected to deliver full year adjusted earnings per share growth of 6% to 8% consistent with our long term algorithm.
Given some of the timing of this year's key initiatives as well as events. We are lapping from prior year, we do expect second half financial performance to be stronger than the first half.
While we have more pricing in the first half and are lapping our sq rationalization program. We're also lapping a strong Easter pipeline fill associated with our package candy transition.
Tax strategies that resulting in a low first half 2019 rate and second quarter margin benefits associated with our July 2019 price increase.
Similar to 2019, while these factors creates some volatility in our quarterly financial results, we expect retail performance to be more consistent throughout the year and remain confident in our ability to achieve our full year guidance.
We remain focused on delivering balanced growth with a disciplined approach to building our brands and evolving our business model for the future.
We have strong cash flow and a healthy balance sheet and we'll continue to make the necessary investments to drive the business and deliver long term shareholder value.
That concludes my financial discussion and I'll now turn it back to Michelle.
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 just satisfaction 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 and the interest of time, we ask that you. Please limit yourself to one question and one follow up if you would like to ask a question. Please press star one on your telephone keypad confirmation telling more indicate your line is and the question Q you May press star to if you'd like to remember your question from the Q.
For participants using speaker equipment, maybe necessary to pick up your handset before pressing the star keys. One moment. Please let me pull for your questions.
Our first question comes from the line of Angela's, our with Barclays. Please proceed with your question.
Good morning, everybody.
Good morning, one area.
So two things for me first as we think about some of the various pieces that drove the fourth quarter on allocated corporate maybe can you give us a sensor or help quantify but how much sort of is expected to stay in the base as we go through 2020, and how much if any sort of reverses out and perhaps helps to become a bit of a tailwind.
2020 operating income and then second I know some smaller business Michel but.
Your comments on a new business model in Mexico, just piqued 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 about a partnership or perhaps you can expand a little bit on that and that's it. Thank you.
Andrew Wonder when I take that one first because I think that's a quick one which is yeah 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.
Yeah, just picking up on the on the compensation and what state 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 rebase impact on incentives. The prior year period had below target performance and payout and so in the fourth quarter, you've sort of catch up to target.
We have then oh predicted over target performance and in 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 add 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, I'm on 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 you know 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 through the income statement related to this step up in your ERP program or is this really just stay.
Kind of a capex kind of UBS effort and I'm also what what steps are you taking if any if you need to 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 a portion of that Capex step up in 2020 is due to the ERP program continuing a there is a portion that hits the piano 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 that Michelle said, we'll talk more about the supply chain project can 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 you know really managing the risks and business continuity during that period of time that we can talk a bit more about that in March.
Okay, Paul wait till March then thank you.
Thank you. Our next question comes from the line of Ken Goldman with JP Morgan. Please proceed with your question.
Hi, good morning, Thank you.
Good morning Cancer me.
Hi.
First the.
Increasing capex.
Change your outlook at least in the short term on.
M&A I know most of the M&A youve been doing is relatively I guess tack on in nature. So my guess is probably a you'll stay opportunistic but I'm just curious for your thought there.
And then my second question is thank you for the guidance on the gross margin outlook I.
I guess.
In that guidance are you, assuming any incremental pricing action, whether its list prices, whether its reduce promos or pack size changes things like that or use. It's is it 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 hedge there.
So forth, but just curious.
Sure.
Maybe I'll take the first part of that question relative to.
Ticket on M&A relative to the additional capex. So put it has an impact on free cash flow our capital allocation priorities aren't changing you know we continue to look first and foremost funding both organic and inorganic growth.
Protecting dividended, obviously watching overall leverage I would say as we sit here today, we have with incremental Capex investment we're not pulling back are looking for potential inorganic opportunities as they come available will always do that with an eye towards leverage and 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.
You know because it price gets it needs to be a strategic part of our repertoire of tools to use a in what you have long with all the other components. So anything you want to answer that Michelle 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 I.
Hi, good morning, everyone.
Good morning, so it seems as though they are the coal business since its chugging along you called the modest price increases rolling for each year.
In terms of the a 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 well it seems to be improving with pirates booty and maybe some of the things that didnt work, so well with Craven Brookside, a and then also maybe just talk about what your priorities. Our frac from here is it going to remain within salty snacks in the U.S.
How are you thinking about more overseas acquisitions, what's the priority list from here. Thank you very much in off off at home.
Sure. So let's start with our overall strategy, which is about capturing incremental snacking occasions, and if you look within that I'm certainly the number one priority is.
In categories outside of suite indulgence in the U.S.. So both the salty snack savory as well as you know 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 and confection, if there's a gap in our port.
Fully or we will and we would entertain international acquisition, but our bar as much higher given the risk levels of that business and obviously give them we don't have scale internationally.
The businesses that makes sense for us or just a bit different than in the U.S.
Relative to our key learnings I would say that probably the first didn't 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 were used to growing and building skinny pop and pirates booty fit right in that sweet spot on both of those elements.
I think, especially if we're going into a newer category or segment within snacking Craven particular wasn't acquisition that did not meet either of those relative to adequate scale, nor adequate gross margin. So I think that's the the single biggest learning was that piece of what fits our business.
Model in 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 were buying or into a phase of scaling up the 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 sodomy and happy but in New York.
Okay.
Welcome.
I wanted to come back real quick on the Capex piece, because it's it's a surprisingly large number.
And it sounds like we'll give more detail where the expense coming at the analyst day, but Tim.
Given that you're spending a lot more into supply chain and their space at the same time that your prior margin for growth productivity savings are poised to step down.
On a reasonable thinks that we should expect a larger or or or some sort of news around rhonda renew productivity goals over the next couple of years.
Yeah, we're not we're not announcing today any renewed productivity goals I wouldn't say productivity is and will remain a key part of our algorithm inside you know some you're right last couple of years with market for growth and probably had higher than historically typical productivity. A 2020 is down a little bit from that is that the kind of peak of that program.
And passes.
And we will do as we always do kind of continue to look for additional productivity opportunities and some of the improvements coming I'm in terms of fulfillment with the supply chain investment watch receptive future for some more as we go forward you a little bit of additional context, you know in the past, we did big supply chain projects and those tend 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 that's good contacts I understand but that I appreciate that.
Switching gears real quick to the growth side.
New capabilities helped drive growth, but from a volume metric perspective, there's not a lot of growth right now and you are at least in your North America portfolio and I noticed inelasticity components, there, but how should we think about the growth trajectory for both the category and and your portfolio as we track through the next to 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 and 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 gonna grow at that 1.5% to 2% type of range. We believe in 2020 that it will be at the higher end up.
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 along Easter.
And we look to grow in line were slightly above the category growth rate.
Got it okay. Thanks, a lot I'll see you in Florida.
Okay.
Your next question.
Line Stephens trickle out what do you B.S. Please proceed with your question [noise].
Hi, good morning.
Oh Gee back up.
The big Piggyback off a jasons 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 and it's a smaller part and then on the U.S. front or anything to comment on snap and how that any potential developed mentioned legislation might potentially impact that business as you think Ford. Thank you.
Yeah. So certainly we have seen you know macroeconomic softness in several developing markets in which we participate as we developed our plans for the year, we try to take that into account as you know as other factors that were known at the time clearly the Corona virus 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 are a predominantly north American based company, so not as big an impact as as as we may see from some others and we are you know carefully tracking and always do.
Kind of what happened with snap at this point in time, we have not built and nor anticipate something significant there, but we'll keep a close eye on that.
As a quick follow up to that Michelle 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 off line until maybe the beginning of February as is the case for the industry, whereas a more just an early indication that depletion rates in the retail channel are all.
Already starting to come in a little bit as travel slows any color there would be helpful. Thank you.
Yeah, I would say, it's more the latter which is you know 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 to take take away will be and you know any waste implications from the fact that that portfolio.
No it's seasonal in nature. So that's the biggest hit for us.
Alright, 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 detailed question first and that a real question diesel question is on.
What are you looking at your take away data you gave us so to wait on Candy Mint and gum 11, three on salty snacks, two and a half overall is it like last quarter were all that gap that that is that all crave that that.
Kind of flush out of the system. We my first question that because it would seem to me you'd be something like in the threes overall, if that wasn't the case and.
The second question real question is usually it seems like pricing works a lot better than it used to its worked fantastically of times in the past decade, but it seems like you get it you see will actually elasticity you grow gross margin like is there something just new under the Sun here, where you have better capabilities.
And just price more tactically going forward.
I used to be big 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 crave that are a drag to our total consumption. The other piece is our grocery business, which is comprised primarily of syrup and baking chips.
It tends to be a pretty stable business, but baking ships 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 and which just don't have the profit margins that were interested in and so we passed on some less profitable business. This year and that was a drag and our total retail.
Take away.
Relative to pricing I would say, we think about the impact is being pretty consistent with what we've seen over the years that we've always had a pretty solid ability.
Two.
To leverage price and we believe that's the only though because of all of the investments that we make with retailers in real retail specific programs.
The high level of advertising, we put behind our brands that creates the Brant brand value proposition for the consumer than enables that so, but but we think basically the elasticities 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.
I guess done.
The sellers.
Just looking here a bit more about the operating leverage given the importance of that the piano, 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 how large the contributor old manufacturing be given the increases in capacity or flattish category growth.
Relative to leverage from S. DNA at this point and he is one of moving pieces, just trying to get a sense for the factors and it hasn't materialized.
Steve you on that yet like you know awkward driving operating leverage over time is going to continue to be a key part of the of the algorithm and so all of these investments whether we're talking in the manufacturing area or some of the capability investments you know all are with an eye towards driving a return over time and ultimately driving leverage so that's.
The investments in digital and data all have a business case around leverage at the end. So as we've done at the path. He knows margin for growth wraps up we will kind of that's Michelle said the basket right back through the piano and in a attack each one of those to continue to drive sustainable leverage anything to add them show.
No.
Okay, and just as a follow up there based on the guidance it looks as though non advertising s. M&A for 2020 should increase a fair amount year on year are there any particular call out there in terms of the plan or whether it's in store programming Salesforce get on the street or anything else worth, noting we should think about here.
You know our data and technology investments do fall in that line. So.
You know 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, all enough buckets, that's up that's a significant piece.
Okay. So thanks for the time.
You bet.
Thank you. Our next question comes from the line of Rob Seckerson with Jefferies. Please proceed with your question.
Great. Thank you.
Just first question Michelle its just a given the amount of investment you deployed over the past calls two three years to now you know speaking to the next two to three years to become more efficient you know with with that in mind, you know as we see brand support.
The increase I feel like at least a usually there perhaps barcodes your larger brands right just higher margin barrel leverage overall, a bunch of also acquired a number of smaller companies that are faster growth smaller, but faster gross on trend et cetera. So when you step back and say, okay. Weve been kind of let's say, we've kind of gotten through the first.
Part of kind of our investment overall supply chain ERP nobody a further investment I should should we be expecting increased innovation in the marketplace on brands like Skinny and pirates booty and one I just asked because you seem to be kind of be on trend growth your brands.
Not as big a 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.
Yeah, No. That's a great question I would tell you that overall as we look at growing a business. We do really believes in balanced the balance levers. We've spoken with you all about relative to distribution advertising that can drive based velocities seasonal present.
You know at pricing et cetera, and so we believe all those levers are important but different phases in different brands like different of those levers are more important so with brands like skinny pop and pirates 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 you don't get significantly less on the brands like pirates or skinny. So it's intentional that we first focus on the core and that we judiciously and innovation and we didn't do that with some seasonal items and some items the right flavor profiles, but we think that's a that's a key learning from the past is to be very measured in the end of.
Patient approach, we learned that on some of our really acquisition model focused enough on the core.
Okay Fair and then just a quick follow up I guess, what's implied you know with further capital spend especially in 2020 of the Capex side overall investment I'm assuming.
You know as the leader of the company right. The expectation is that this does don't efficiency. Obviously, so you know essentially hopefully de risk a further acquisitions, even a smaller in scale. So basically crave doesn't happen again.
<unk>.
Yeah, we're always focused on making better and better decisions and learning from from every action. We've taken the past so and we feel good about what we're seeing on skinny pop and.
Hi, Rich in particular, and one is on track integration and acquisition model lines as well.
Okay Super Thank you.
Thank you once again as a reminder, if he would like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of David Palmer with Evercore ISI. Please. Please proceed with your question.
Great Good morning.
Hi, good morning, <unk> in recent years her she's been smarter about pricing in smoothing out the price increases in any one year and.
You've been hitting different parts of the portfolio and using wait out some new packaging.
But you know volumes still down it's down this last quarter I'm wondering how you're thinking about pricing power levers that you might have up your sleeve should we get into a <unk> leisure environment, particularly with Coke go into 21 that it 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 outsized lumpiness in inflation.
[noise]. 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 piano.
How about if we take a little bit of a step back and talk a bit about that and Stephen I'm Kinda tag team. This so we're very focused on I'm watching cocos commodity 'cause it's critically important for US we do know it's a headwind as we go into next year and that headwind is it's built into the guidance that we've given you. So every year going forward, we focus on the.
Right combination of combinations of programs, which include hedging which includes sometimes deciding to price which include making trade offs across the piano too you know to really accommodate whatever is happening in cocoa pricing we do.
That's pretty strong visibility going forward. So we have a chance to playing around that and Steve do you want to talk a bit more about yeah say as Michelle 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, you know.
That said between placing lever levers productivity levers and others will use our tool box.
To work to continue to drive leverage through gross margin as we go forward Barbie tougher you know depending on how that cocoa pricing shapes up as we get to the back back part of 2020 and into 2021, and we'll have more visibility into that as the year Progressive. It's certainly something that's been volatile overtime. So we think we have experience managing that volatility.
I'd.
Oh, that's very helpful. In just a real small when I did that the relaunch of take five as you said on the Super Bowl.
That's an interesting move it's only in the measured channel looks like it's about half a percent of your channel mix. So it's not a huge trademark but there is probably something you see in that that's making you think there's an opportunity. There's maybe a couple of comments about why you think that is thank you.
Sure. So take five how has the highest repeat purchase of any competitive innovation and has one of the highest repeat purchases of of many of the great brands. We've seen over time, it lacks awareness and trial and so we relaunched the began re launching that brand putting it.
Onto the rest trademark because that is one key weighted to drive trial. It is cows, 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 thatll be really helpful for us as part of our overall marketing plan behind take five so we look at take five as I look at it is one of our great innovations for the year, we know, it's a great product and.
We'll have consumers get a chance to up to try it for themselves.
Thank you.
Thank you there no further questions at this time I'd like to turn the call back over to most the pool for any closing remarks.
Thanks for joining us this morning will be available for the rest of the day. If you have additional questions. Please repeal free to recap.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.
[noise].