Mark Pogharian - Director of Investor Relations John Bilbrey - CEO, President and Director Bert Alfonso - President International and Head of Mergers & Acquisitions Michelle Buck - President North America

John Baumgartner - Wells Fargo Securities, LLC Bryan Spillane - Bank of America Merrill Lynch Jonathan Feeney - Athlos Research Alexia Howard - Sanford C. Bernstein & Company, Inc. Andrew Lazar - Barclays Capital Eric Katzman - Deutsche Bank David Driscoll - Citigroup Chris Growe - Stifel Nicolaus Ken Zaslow - Bank of Montreal

Good morning. My name is Phyllis and I will be your conference operator today. At this time, I would like to welcome everyone to The Hershey Company's Fourth Quarter and Year End 2014 Results Conference Call. [Operator Instructions] Thank you. Mr. Mark Pogharian, you may begin your conference.

Thank you, Phyllis. Good morning, ladies and gentlemen. Welcome to The Hershey Company's fourth quarter 2014 conference call. J.P. Bilbrey, President and CEO and Bert Alfonso, President International and Head of Mergers & Acquisitions will provide you with an overview of our results followed by a Q&A session. Let me remind everyone listening that today's conference call may contain statements which are forward looking. These statements are based on current expectations, which are subject to risk and uncertainty. Actual results may vary materially from those contained in the forward-looking statements because of factors such as those listed in this morning's press release and in our 10-K for 2013 filed with the SEC. If you have not seen the press release, a copy is posted on our corporate website in the Investor Relations section. Included in the press release is a consolidated balance sheet and a summary of consolidated statements of income prepared in accordance with GAAP. Within the Notes section of the press release, we have provided adjusted pro forma reconciliations of select income statement line items quantitatively reconciled to GAAP. The company uses these non-GAAP measures as key metrics for evaluating performance internally. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP. Rather, the company believes the presentation of earnings, excluding certain items, provides additional information to investors to facilitate the comparison of past and present operations. As a result, we will discuss 2014 fourth quarter results, excluding net pretax charges of $32.5 million or $0.30 per share diluted primarily related to a noncash trademark impairment charge and loss on disposal of $24.8 million or $0.10 per share diluted and business realignment cost of $4.7 million or $0.02 per share diluted. Our discussion 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.

Good morning all of you on the phone and webcast. In 2014, Hershey made progress against its strategic initiatives. U.S. CMG, xAOC+C market share reached 31.4% up 0.3 share points versus last year. We acquired Shanghai Golden Monkey which more than doubles the company’s presence in China. We expanded into snacks and adjacencies with the launch of Hershey Spreads and the related Snacksters Graham Dippers. And we sourced 30% of our cocoa needs from certified and sustainable cocoa farms, putting us in a solid position to deliver on our 100% goal by 2020. There are also challenges. In 2014 we believe lower retail store traffic, changes in consumer spending patterns as a result of the SNAP program and a more competitive snacking environment for contributing factors that impacted how consumers participated in the snack segment. This resulted in fourth quarter and full year sales and earnings that were below our expectations. Specifically, growth in snacking alternatives and an evolving retail landscape are impacting what consumers buy and where and how they make purchases. Higher income consumers continue to ask for simple ingredients, health and wellness, and millennials view brands and brand attributes beyond traditional transparency to include social responsibility. They are also interacting with media differently. Now let me share with your some of the things that we're doing to address this. Our R&D and innovation teams continue to make progress on new confectionary and snack products that enable us to offer great confectionary products and increase the breadth of our portfolio. Later this year, the Club channel will be introducing Brookside, dark chocolate, fruit and nut snack bars. Building on our snacks and adjacencies strategy, earlier today we announced that we entered into an agreement to acquire Krave Jerky, which enables us to enter the rapidly growing meat snacks category. We are really excited about this acquisition and the opportunity to participate in the 2.5 billion meat snacks category that's growing at a double digit rate. While snacks and adjacencies is a lever in our long term sales algorithm, we are very focused on confectionary. It's who we are and it's our name sake. We have a lot of CMG innovation this year that I'll talk to in a moment. But we also have a meaningful new product pipeline that gives me confidence that innovation can continue to contribute at least one point of growth to our net sales algorithm on an annual basis. So I remain bullish on the CMG category and our ability to keep increasing market share. As it relates to simple ingredient and transparency, we've actually done a lot of work here. We have at leverage what we've done as our plan is to move a large portion of our portfolio in this direction. We are building the capability and have made progress to source non-GMO sugar and RSBT free milk for products in the United States. We've already begin this work with key sourcing suppliers here in the U.S. and we’ll have more news on this later in the year. On the media front, we expect that advertising and related consumer promotion will increase at a rate greater than sales. Included in this is a greater proportion of investment in digital advertising on programs, consumers view on their mobile devices via traditional networks, user generated content and sources like BuzzFeed. So we are making investments that will benefit the company in the near and long term. And we'll have more on this at CAGNY, so let’s move on. I was satisfied with improved results in the convenience store, large mass retail, and dollar store channels especially in the second half of the year. However, FDMx non-seasonal candy performance was not inline with our initial plans. Lower retail store traffic, greater levels of in-store activity by broader snacking manufacturers and continued economic challenges for a segment of consumers in these channels impacted our non seasonal candy growth. Looking at total xAOC+C store retail takeaway, U.S. marketplace performance sequentially improved throughout the year. Hershey fourth quarter retail takeaway of 3.8% was greater than the category growth of 2.2% resulting in a market share gain of 0.5 points. Marketplace performance was greater than 4Q net sales given solid Halloween and Holiday sales, a portion of which shift in the third quarter. The timing of the buy-in related to the price increase as a portion of third quarter net sales would have normally occurred in the fourth quarter. And that lapping of the strong year ago period when select retailers increased inventory levels. Driving our fourth quarter takeaway results were improvements in convenience stores, large mass retail and dollars stores. These were the channels where many of our second half initiatives were focused, so I was pleased with the results. The programming and execution changes we made in the FDMX and Club channel simply required a longer lead time to impact in-store merchandizing activity. Hence our sales mix and lower than forecast category growth impacted profitability and margins. Let me now talk about 2015 where our focus will be on restoring our U.S. momentum. We have a solid line-up of new products that will bring variety, news and excitement to the category. In addition to the carryover benefit of Brookside Crunchy Clusters and Reese's Spreads, we're also launching Kit Kat White Minis Hershey’s Caramels, Ice Breakers Cool Blasts Chews, Reese’s Spreads Snacksters Graham Dippers and some other yet to be announced new products. Additionally, the Reese’s brand is leveraging its NCAA relationship and is becoming the official sponsor of ESPN College Football Game Day. These initiatives are tied into customers, specific merchandizing programs and big core brands that should result in higher quality merchandizing versus last year. Additionally, we're increasing our reach as we're adding incremental headcount to our sales force that will result in hours in store being up mid single digits. We'll complement this with increased levels of advertising that I mentioned earlier. We believe the investments we're making across our business, positions us for future growth. The dynamics of the confectionary category, impulsivity, conversion rate of check-outs, season, multiple pack types are all an advantage. As a result, in 2015 we anticipate that the plans we have in place will help mitigate the volume elasticity related to the price increase and it will outpace the category and again, gain market share. Let me now provide you with some information on our international business. For the full year, our international net sales increased nearly 15%, including the negative impact of foreign currency exchange rates and positive contribution of about $54 million for Shanghai Golden Monkey. Excluding SGM and unfavorable FX, international net sales increased 10%, a solid number, but less than our expectations due to macroeconomic headwinds that have yet to subside and will most likely remain a challenge this year. The Hershey Golden Monkey integration work is underway and on track. In 2015 we will distribute acquired confectionary and protein based bean curd snacks into the China modern trade and we expect to have deeper Tier 2 city coverage of some Hershey chocolate products. We're also leveraging newly acquired manufacturing capabilities. In China, Brazil, Mexico and India we've made solid progress against our planned initiative of investing in go-to-market capabilities and portfolio expansion. In select markets, we launched Reese's and is off to a good start. Additionally, we're testing additional products as we look to build out global brands over the next few years. Therefore in 2015, including a negative impact from foreign currency exchange rates and excluding the impact of M&A, we expect international net sales growth to increase around 10%. Including SGM, reported international net sales are expected to be around $1.2 billion by the end of 2015. By country, our chocolate business in China had a solid year. Chocolate category growth in 2014 was about 12%. Historically the chocolate category has increased 10% to 11% in the fourth quarter. However, it's slowed to around 8% as we see less gifting behind the Government policy changes. Hershey fourth quarter retail takeaway of about 20% was less than our expectation. Importantly, our market share in Q4 increased a full point to around 11%. In Mexico, chocolate category growth in the modern trade in 2014 was around 1%. The category and consumer struggled during the year although trends were better in the second half of the year with chocolate category growth of 3%, but this is still below the historical growth rate of 7% to 8%. Hershey Mexico chocolate retail takeaway for the year was up around 2%, resulting in a market share gain of 0.3 points. We expect 2015 to be better than last year albeit in a continuing challenging environment. Our performance in Brazil has sequentially improved as the year progressed. For the year Brazil chocolate growth was 1% versus about 5% in recent years. Hershey retail takeaway was up 2%. Our performance was driven by our Hershey tablet bar growth and the launch of Reese's. We look to build on this in 2015. Now to wrap up, our consumer and customer plans as well as our investment profile for 2015, clearly reflect the learnings from 2014. Our plans are focused and the investment profile was concentrated in the areas to leverage Hershey's advantage brands and go to market strength. Investment in our brands, innovation and capabilities as well as an increase across all channels and merchandizing and programming, positions the company to compete effectively in confectionary and across the broader snack continuum. We believe these investments should generate organic net sales growth or constant currency sales, excluding M&A and FX impacts of around 4% to 6% in 2015. This is less than our previous estimate and reflects the macroeconomic headwinds in international markets and the slowly improving U.S. non-seasonal trends. I typically just talked to net sales with and without M&A however, when we established our long-term sales target, we didn't anticipate the U.S. dollar being this strong. Given the current backdrop, we expect foreign exchange rates to be greater than our previous estimate and be about one percentage point unfavorable in 2015. We estimate that the net contribution for acquisitions and divestitures will be around 2.5 points. We continue to focus on growth initiatives and margin opportunities behind continuous productivity improvement initiatives. With the conclusion of the Project Next Century program, in 2015 we'll focus on with the next largest opportunities are for future incremental productivity and cost savings. A portion of any particular savings from this assessment would be reinvested in our CMG and snacks business to accelerate our growth and we'll provide more information on this at the upcoming CAGNY Conference. I'll now turn it over to Bert, who will provide some additional detail on our financial results. Bert?

Well thank you JP and good morning, to everyone. It's a pleasure to be here to talk about our results as well as some of the recent M&A activity. As Mark mentioned, I've been very close to all of this as I have responsibility for the M&A function as well as our international segment. So let's get started. Fourth quarter net sales of $2 billion increased 2.7% versus last year, generating adjusted earnings per share diluted of $1.04, an increase of 20.9%. As JP stated, the sales increase was lower than our expectations, primarily due to lower retail store traffic. Net price realization, mostly in the U.S., was a 3.1 point benefit. Excluding Shanghai Golden Monkey, volume was off 2.3 points due to price elasticity associated with the U.S. price increase announced in July and lower than expected non-seasonal sales. The Shanghai Golden Monkey acquisition was a 2.7 point benefit and foreign currency was a 0.8 point headwind. Q4 U.S. seasonal sales primarily driven by holiday increased high single digits on a percentage basis versus last year. Full year seasonal sales were a bit higher given a later Easter in 2014. Conversely Easter is 15 days shorter in 2015 and will be a headwind this year. From a market place perspective, our Halloween and holiday market share increased 0.9 points and 1.1 points respectively. International net sales in the fourth quarter, increased 28% including a benefit of about $54 million related to the Shanghai Golden Monkey acquisition. Excluding Shanghai Golden Monkey, international net sales increased 8% as reported and 11% on a constant currency basis as unfavorable FX was greater than anticipated. Macroeconomic headwinds in Q4 led to international sales being lower than our expectations. Turning to margins, fourth quarter adjusted gross margin increased by 30 basis points. The increase is driven by net price realization, slightly favorable input cost and supply chain productivity, partially offset by unfavorable sales mix and other supply chain costs. Fourth quarter adjusted earnings before interest and taxes or EBIT increased 17.5% versus last year, generating an adjusted EBIT margin of 18.7%, a 240 basis point increase versus last year. The increase was due to the higher gross margin and lower SM&A cost that declined about 5% due primarily to lower employee related costs. In Q4, advertising was up about the same as last year and as we said throughout the year, advertising GRPs were up mid single digits on a percentage basis versus 2013. Now let me provide a bit more detail on our international business. China continues to drive international net sales growth and excluding Shanghai Golden Monkey increased about 35% in both the fourth quarter and for the full year. We anticipate a similar profile in 2015. I'm very pleased with the progress we continue to make in China and remain optimistic regarding confectionery growth in both the modern and traditional trade. We'll continue to expand our selling capabilities and expect growth in 2015 to be balanced between velocity and distribution games. We will also expand cross-selling of products between Shanghai Golden Monkey and Hershey China in the coming year. And finally we were very pleased with our 1.6 point share gain in chocolate in 2014. In Brazil, Q4 net sales were about the same as last year on a reported basis, an increase about 12% on a constant currency basis. For the full year, net sales declined about 3% on a reported basis and increased about 7% on a constant currency basis versus last year. Despite the difficult category environment, we were pleased with a small share gain of 0.1 points. In 2015, we're exploring other go-to-market options together with our current JV Partner Bauducco. Our distribution JV with Bauducco has enabled us to double our market share in the last few years. However, we are considering having total control over the selling and distribution function to give us more flexibility and investment options. In Mexico, fourth quarter net sales declined 6% on a reported basis and were flat on a constant currency basis versus last year. For the full year, net sales declined to 8% on a reported basis and 4% on a constant currency basis compared to 2013. Again our chocolate performance is favorable with a 0.3 point share gain driven by both velocity and distribution gains. Trends in Mexico are getting better and we expect continued improvement throughout 2015, although still below the historical growth rates. We’ve made solid progress against our international strategic plans. We remain committed to our core markets and we’ll continue to make the necessary investments to build distribution capability, brand equity, and drive trial and repeat purchases. Moving down to P&L, the fourth quarter interest expense is $21 million, was about the same as last year. The before year interest expense was $85 million and in line with our expectations. And for 2015, we expect interest expense to be $75 million to $80 million. The adjusted rate for fourth quarter and the full year was 34.5% in line with our estimates. In 2015, we expect the adjusted tax rate to be similar to last year. In the fourth quarter, with average shares outstanding on a diluted basis, we're approximately $223.5 million, we need to adjust earnings per share $1.4, an increase of 20.9%. Full year adjusted EBIT increased 5.8% versus last year, generating an adjusted EBIT margin of 19.6% or a 40 basis point increase. The increase was driven by lower SG&A. Turning now to the balance sheet and to our cash flow. At the end of the fourth quarter, net trading capital increased versus last year's fourth quarter by $240 million. The cash receivable was higher by $119 million primarily due the Shanghai Golden Monkey acquisition, Lotte China consolidation and traditional credit terms provided to our largest customers in China. Inventory was higher by $141 million to the Shanghai Golden Monkey in Lotte, as well as higher raw material inventory levels, primarily dairy that we mentioned in the last quarter. And accounts payable increased by $21 million. Capital additions including software were $139 million in the fourth quarter and $379 million for the full year in line with our expectations. This included capital related to our manufacturing facility that we're building in Johor, Malaysia. In 2015, we expect CapEx to be in a $375 million to $400 million range. The company repurchased 2 million outstanding shares in the fourth quarter and 202 million for the full year. Repurchases of 125 million were against the prior authorization and 77 million were against the current 250 million repurchased authorization approved in February of 2014. In addition, 32 million of common shares were repurchased in Q4 to replace shares issued in connection with the exercises of stock options. Depreciation and amortization was $59 million in the fourth quarter and $212 million for the full year in line with expectations. Dividends paid during the quarter were $115 million and $440 million for the full year. Cash and short term investments at the end of the fourth quarter were $471 million slightly below our expectations due to the lower sales. The company remains well positioned to fund our dividends, working capital, capital expenditure requirements and acquisitions. Let me close by providing context into our 2015 outlook. As J.P. summarized in 2015 we have a solid pipeline of target innovation, merchandising and programming that can drive pack type and channel growth. In addition, advertising related to consumer marketing expense is expected to increase at a rate greater than net sales growth. As a result, we expect 2015 net sales to increase from 5.5% to 7.5% including the negative impact of foreign currency exchange rates, and a net contribution from acquisitions and divestitures of about 2.5 points. This includes the acquisition of Shanghai Golden Monkey and Allan Candy that closed in the fourth quarter, as well as the agreement entered into over the last month to acquire Krave Jerky and divested Mauna Loa. We expect the Krave and Mauna Loa transactions to close in the first quarter. Excluding that acquisitions and divestitures, sales are expected to increase 3% to 5%. This is lower than our previous estimate due to the continued macroeconomic headwinds as well as greater than initial estimates related to unfavorable foreign currency exchange rates. And we expect foreign exchange impact to be greater than our previous estimate and have an unfavorable impact of approximately one percentage point on our full year net sales growth. We continue to have a significant focus on gross margin and expect the previously announced pricing action, as well as productivity and cost savings to result in 2015 gross margin expansion of 135 to 145 basis points. Adjusted earnings per share diluted are expected to increase 8% to 10% and that includes dilution from acquisitions and divestitures of $0.03 to $0.05 per share. Before we open it up for Q&A, just a couple of thoughts on the first quarter. Remember that Easter is two weeks shorter this year and being sold in at the old price points which will pressure gross margin. Our international sales profile is similar to prior years with annual growth primarily driven by second half. Therefore total first quarter net sales including M&A are expected to be around the low end of our annual sales target. Additionally, brand building as well as investments and selling capabilities will ramp up in Q1. Given all these moving parts, EPS growth is expected to be pressured in the first quarter and higher as the year progresses. I thank you for your time this morning, and will now take questions.

[Operator Instructions] Your first question comes from the line of John Baumgartner with Wells Fargo.

J.P., did I hear correctly about a sales force increase in 2015?

If you think about the total investment we're making on our go-to-market strategy both in international as well as North America, the U.S. will continue to invest in hours for store in our sales organization. Then of course in China we've been talking about a geographic expansion there. So it requires a broader go-to-market strategy. So yes, we are really investing again in our go-to-market capabilities.

So just digging deeper in the US increase, is it in terms of just why now. Is it more of a sense the competitive environment is maybe shifting beyond your current capabilities? Or is it more related to shifts in channel shopping by consumers and the irregularities there?

Well I think the biggest driver for us is, we look at 2014 in a competitive nature of merchandising and being in the right place and being able to responsive. We really see that as always being one of our core advantages and we continue to believe that. We're going to invest in those resources at retail.

Thanks J.P.

Your next question comes from the line of Bryan Spillane with Bank of America.

So I had a question about as we're looking into next year and the parts of the revenue, the drags on revenue relative to target right now, aside from FX, are the non-seasonal, confections business in the US. And the international, collectively, the international business is below long-term targets. So if you could talk about first, on the non-seasonal business, are you seeing any sequential improvement in January or so far year-to-date, just simply because you've got some pressure? Gas prices are lower, jobless numbers that look better. Just any insights into how non-seasonal is maybe tracking as you moved into the first quarter.

Sure. There's a couple of things and we’re encouraged with some of the things we're seeing as we deconstruct the weekly data. So you’re correct, the non-seasonal FDMx sales has been the biggest drag in our business. So we feel good about the fact, the fourth quarter we saw improvement we continue to grow ahead of the category and it was really a result that we think improve focus on merchandising in specific channels. In FDMx it's a slower built there because the planning cycle is also different. But there’s a couple of things that we were seeing, and if we look at the weekly data when you get the most recent quarter, you're going to see that we're making good progression from a share standpoint. We think that reflects some of the changes we made in merchandising. One of the other things that we're seeing is a trips continue to be negative although they are getting better but negative and off course that continues to effect the consumer business, as everyday business, people log into story, you loose that instinct consumable piece. So we are very focused on that. There is a piece of data that I recently looked at for our brand specifically that would in the trip, there is an increase in actual purchase size. So the trips that we're getting purchase side is actually up. But the one caveat I make, keep in mind with the fourth quarter you have some seasonal, so that can be part of it. But in the weekly data, and this is all home scale information, we do have some really encouragement there. So I feel good about what I'm beginning to see anecdotally as you talked to retailers, I would say that I’m hearing some of those same kinds of sentiments echoed. And then of course we all are aware that the consumers had a lot of pressure at the bottom of the economic pyramid and its still yet to be seen how that consumer participates in the market. But for the total, I think I’m encouraged.

That's really helpful. And I just wanted to clarify. In terms of the -- your revenue outlook for this year, and actually the gross margin because it's affected by it as well, are you expecting a material improvement both in international or non-seasonal? Or at this point, will an improvement be upside to where the guidance is?

You started the questions by started comparing what we were thinking in the third quarter versus more recently. And if you think about the international side, a half of point is really just incremental drag from FX, back then we’re thinking closer to half a point today, we’re firmly at a point and we'll see where that goes, hopefully the dollar starts to stabilize a bit. When we look at international business, we're probably closer to around 13% back than we alluded to 10 as J.P. mentioned. The macro economy has got little tougher in places like Brazil and Mexico. We saw a little bit of slow down in China in the fourth quarter but we worry less about that. We've had a lot of momentum going into Chinese New Year but certainly what J.P. talked about in terms of some pickup on the everyday business and little bit lower expectations at least for 2015 in international is what makes the biggest difference. We also had a little pressure on our export business which while is not huge is very profitable and as you can imagine the currency into some of these markets also has some impact.

Thanks, Bert. That's helpful. And again, as we tie that altogether, does the guidance assume that things really improve, or would improvement in both of those areas be upside to where our revenue guidance is?

We're hoping for - although we haven't baked it into our plans, gradual improvement. But we would say back half versus first half.

Okay. Great. Thank you.

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

So I have three questions, but they're all kind of related. The first is, about what percent of your North American volume do you assume is going to be under the new price increase this year? You mentioned Easter was, and about what percent would that be? Related to that and secondly is, is there some negative mix factor I'm missing that why gross margins would only be up 120 to 130 rough gross margin? When you've got this magnitude of price increase, you're number two commodity dairy is now in free fall, and I know you've bought forward to some extent and that's understandable. But it looks to me like your cost bucket might be flat to down exiting the year. But is there something I'm missing as to why that margin expansion is so small, and how that might pace over the year? And then third and finally, can you give us a sense of what kind of volume you're thinking globally associated with this guidance? So maybe I can understand if there's some deep manufacturing deleverage like we saw in the fourth quarter? Thanks very much.

Let me take the pricing one first and then let Bert talk a little bit about the gross margin. The best way to think about the pricing is as we move through the year, there is still some activities that are under the old price certainly around the seasonal business. So you’ll begin to see that have a greater impact in Q2 and Q3 and then if you think about getting through the end of 2015, we continue to model the elasticity at about one to one rate in terms of volume and price. So by the time we get to the first quarter of 2016, our modeling would suggest that we’re back to a whole environment or back to 100 in terms of volume contribution to our growth. So that's the way I would think about it broadly. There is a lot of movement still, but as we look at some of our channel modeling, there is nothing that we're seeing that would cause us to believe that it would be any different than how we planned. As you know, when we were increasing advertising in a very rapid rate back in 2008, 2009 and 2011, there might have been a little bit of a faster conversion rate but we think the way we’ve currently model this its probably about right.

Let me try to fill your end on your question around gross margin. As we think about our gross margin expansion, we're expecting 135 to 145 basis points. We are coming off the year when we’re actually down at gross margin first time in a long time. We did start to see a pick up in the fourth quarter slightly below what we thought. When you look at our year end year commodities, I won't talk specifically about hedging program but clearly cocoa is still on average at higher prices than it was in our 2014 standard. And that’s really a function of - as we roll out of commodity program in a environment of increasing costs and we've seen cocoa increase pretty dramatically. Obviously, you may have some of the lower hedges rolling off and are buying into little bit higher market. So, while we’ve seen some improvement recently and that’s good. We still have cocoa that's higher than 2014 level. So that does have some, a bit of an impact in terms of how you’re thinking about the expansion. The other thing as J.P. mentioned, our profile for 2015 is driven by pricing. So we are expecting five to six points of pricing and one to two points of lower volume. And that lower volume does pressure our absorption in the plans, and so you don’t get the full benefit of that until as you get later in the year as J.P. mentioned we start to recover the pre price increase volume. So some volume impact doesn’t work through the price of elasticity. And while some commodities are clearly in a better place like dairy, and sugar we do still have higher cocoa prices year-on-year. So that’s helping to mitigate to some degree what might be otherwise larger growth margin expansion.

Great, thank you. And if I could just add one follow-up real quick about the mix. Is there any big mix the factor we ought to know about, whether it's geographic or whether it's in the portfolio? Anything that's really affecting either the present quarter or 2015 that maybe isn't obvious?

In the first quarter we certainly have the mix of Easter at the lower or old prices right, because that particular season is still protected. Once you get beyond that, then you have seasons. So if you do have that, and J.P. already talked about the everyday business starting to improve but the more that improves quicker, the better we look on a mix basis. We did have as is already explained, not as good a mix in 2014 as we thought we would just based on the every day. So certainly a first quarter impact on Easter at old prices, and then improving throughout the year as pricing kicks in.

Jon its Mark, just one thing so you would expect that we would have the most pricing than in the second and the third quarter and looking at it total company for the full year you’re probably thinking – think about it as five to six points a price volume of 1.5 to 2 points because most - a lot of the international business is all going to be volume driven and then you got a point of FX so that’s I guess how to think about the full year.

Great. That’s very helpful. Thanks guys.

Your next question comes from the line of Alexia Howard with Sanford Bernstein.

So a couple of quick questions. It was a little alarming to hear about how the candy mint and gum category growth has slowed to about 1.7% in 2014, and how there might be some encroachment from other snacking categories. Are you worried that some of those types of shifts may be more structural I guess? Are you seeing -- are you worried about smaller brands continuing to come up? And then my second question is actually more about the acquisition strategy from here. As you've bought the Krave business and moved very clearly into a very different snacking category, might we see more of those types of moves that you end up bulking up in snack categories that are maybe more in line with where the consumer is heading? Thank you very much.

Alexia to your first question around the category my answer is no. I don’t think there is anything structural that's going on here. One interesting piece of that is, helpful penetration actually went up through our brands in 2014. And so I think the thing that we’re seeing is potentially several fold. So 2014 there were lot of moving parts in terms of macroeconomic influences on consumers so we see that. The trips piece for business like ours which has this everyday component is certainly an impacted people audience stores. And I think there is a real consumer strata influence there that I think has to be dealt with. Then in terms of let's just talk about the consumers themselves. I do believe there is an evolution always happening with consumers and the relationships they have with brands, I think some of the smaller brands have done a very good job of resonating with some of the on trend things that consumers talk about and we can talk separately about Krave here in a second of why we think that's on trend product uniquely positioned within that particular segment. But as we saw takeaway improved throughout the year, we feel we became a more competitive company, responding to some of the just things that are happening within the category and consumers of course have broader choices. What we see happening almost everywhere though and I'm very optimistic about how this plays to our strengths, is that snacking and snack and portable snacking is not just a short term, this is really a trend and its becoming a habit if you look at the way the number of meals people have during the day, they have broader options on the menu of how to participate that. We just have to be competitive and we have to be competitive with the brands we have that are within the core of the Hershey Company, our confectionary products, we are expending brands like Brookside which have a nice hallow effect of goodness. And then we also see ourselves as we’ve talked about expanding across a broader snacking continuum. And even if you talk - even if you think about China in a brand - our bean curd, in China that’s a product, it brings protein, it's on trend in terms of being a snacking on the go brand. So we just see that being more and more important in terms of consumer trend and so as a company we have to adapt to where the consumer head it. We talked about simple ingredients with GMO. So if you think about a chocolate bar, there is really only four components in a chocolate bar. So we should be talking about the simplicity of that in responding to the transparency that consumers want, and we’re doing that. So I'm very optimistic about all of these things. You set us up nicely to talk about Krave. Michelle Buck who is the President of North America was very, very involved with the acquisition for Krave. She's here so, why don’t I give her a chance to just talk for a couple of minutes about the acquisition.

Thanks J.P. As J.P. mentioned, we’re seeing consumers continue to snack more and graze throughout the day and as such their snacking need are really evolving. We’re going to be focused as we continue to look at the growth of our company as a snack company and how we meet those needs. One of the areas that we’ve seen a lot of consumer interest in is affordable nutrition and protein-based snacking. So, as we look at that marketplace, clearly one of the categories that's really meeting consumers need is meat snack category that is one of the fastest growing, growing double digit in the U.S. this past year and over the past several years. Household penetration is expanding so household penetration is only up 31% but it continues to grow through two points this past year. So clearly its meeting a lot of consumer needs. And as we look to that category Krave was interesting to us because Krave is really playing in the fastest growing segment of the meat snacks category, the better for you premium segment. So we really like the brand, we think it has tremendous potential, the product preposition has a unique point of difference with a great taste, a texture, it's a culinary inspired kind of profile, and we think that there is a lot of potential as they can continue to bring new consumers into the meat snacks category in the marketplace first to leverage Hershey strengths and supply chain, consumer insights and retail to really drives the business. So we couldn’t be more excited about how it would continue to help us to meet consumer's needs as we stay very focused of course on winning in our categories.

Alright, we’ll take our next question.

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

Two quick things. One, J.P., would be -- and maybe you'll cover this a little bit more at CAGNY, but I think it's important just to cover the topic. I certainly appreciate the evolution of where consumers are going, and Hershey's desire to cover off on that a bit more with snacking adjacencies and such. But the last time Hershey did this, albeit in a different set of broader snacking categories, the execution really wasn't where the company wanted it to be. The sustainability of some of those items, whether it was cookies in the C-store, nuts, things like that, weren't exactly I guess as sustainable. So is there something now that is different about capabilities, the way you're planning for these sorts of things whether it's KRAVE or things beyond that that make you feel a lot better about the sustainability of it? And then I've just got a quick follow-up.

Andrew I think the biggest thing in my mind is the ability for us to execute against I think a clear business model today than we've had in the past. I think that if you look what we’re doing in China and we’re going at a plan for thoughtful to execute against the right R&D, the right distribution, the consumer insights and supporting it with advertising et cetera. I think that’s where we're probably doing a much better job today than we have in the past. And so admittedly not all things work perfectly but I think that we have a clear sense of how we want to execute it against these – against these things and I expect this to be successful.

Thanks for that. And then I certainly understand your thought process around no structural changes to the core CMG category growth rate. Do you think for planning purposes that perhaps the historical 3% to 4% rate as a category in 2015 may prove overly optimistic, or do you think that might still hold for this year as well?

As we’ve thought about the category we certainly plan to go market share within that category. We think long term, the 3% to 4% growth rate for the category is still the right way to think about it. You know these things are sometimes a bit of up, sometime it's a bit low but as we’ve seen some improvement over the - as I talked earlier about, the quarter and the weeks et cetera, we think that it's still a good planning stand for this year to think about, positive category growth. And the most important thing is that in environment we have to win.

Thanks very much.

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

A couple of questions. Kind of related to that comment about the category broadly in the U.S. It seems like the premium end of it is gaining some share for RO, Lindt, et cetera. The company, kind of like and snacks years ago, tried to get into premium but wasn't really all that successful. J.P., perhaps you could touch on that, and what that means for the category and your growth within it?

I think Eric if you look historically the premium as we sort of defined it over time, is somewhere around 7% or 8% of the total category in good economic times it always tends to grow and expand in terms of space, some of that growth is driven by distribution and then in more difficult economic times usually the distribution in category contraction goes along with it. I think what it speaks to in the current environment is the top end of the economic pyramid is fine and the consumer that participates there has the ability to participate. And I also think that part of the category has in many ways a clear message to the consumer also that is around sometime ingredients and so forth. So, I believe that’s what we are seeing more than anything else. I agree with you we have not done a good job in the premium space. We are spending a lot of time right now on how we want to participate in premium, we’re pushing up some within our – the middle of our portfolio certainly with products like Brookside which takes us up a little bit you’ll see some of the innovation we have this year which will also do that. And then we’re looking stronger our brands like Scharffen Berger and trying to make an effort to see how we can play differently with those brands. So we are not going to ignore that. I think in the past we have not done a good job. We want to reiterate ourselves a bit there and then its still problematic for the consumers are participating in the category. So you will see some category expansion from that space but I think the overall category really will continue to be driven by mass products.

Okay, thank you for that. And then, Bert, the long-term margin goals for international, obviously, the world has become more volatile, a bit slower, input costs have moved up in certain respects versus when you laid out those goals. Any comments about your ability to still achieve double-digit EBIT margins in international by 2017?

We will probably get deeper at CAGNY but I think your point is a good one, we have seen depreciating currency not so much in China even though there we’ve seen slight - that certainly has had an impact. We continue to invest behind the brands because we think we’re in the right top line response. So I always as we think about our margins overseas we could be if you think about 2017, but we think directionally we still in the heading in the right direction, our China margins are very, very close to company average which is our biggest expanding business. And right now we are seeing a blip in our exports and in markets like Brazil. So there is certainly possibly we could be off by a year but I think directionally we are still on path to get what we said as low double digit like by 17, 18 yes.

Okay. Thanks. I'll pass it off.

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

Wanted to ask a question here about pricing. I think on the last conference call, you guys discussed 2015 pricing to be up about 6.5 points. And I think today, you're saying 2015 pricing up 5 to 6 points. Maybe on one side of it, 50 bips, maybe that's just in the margin of commentary. But the low end of 5% seems considerably lower than what you were talking about last quarter for 2015 price realization. Can you guys just talk about today's thoughts on pricing?

I don’t recall the exact commentary from Q3 at this time but obviously you know when looking at the sales target this year in general, it is little bit lower than what we provided back in October. I mean obviously it does reflect how we exited the year particularly in the FDMx or call it legacy. Legacy channels that’s certainly is part of it as well.

Okay. So what you're saying is that part of this reduction in the revenue guidance is related to pricing, not specifically all volume. I think when I read the release, it felt like what you guys were saying was that the volume performance in the non-seasonal was below expectations. And my interpretation was that was the flow through to 2015. But I think now you're saying that it's a combination of both lower price expectations in 2015 and lower volume expectations in 2015 versus prior guidance.

I think excluding the M&A the 3 to 5% reflects M&A roughly a half of point greater than our expectation. Some of the international headwinds that Bert talked about on the international business that will have ending up around 10% up in 2015. And then again some of the trend certainly not getting back to what we thought it would be in the non seasonal business exiting in the fourth quarter. We think if it gets better what it probably is not going to get a bigger pick up until post Easter and the second quarter when some of the innovation starts to launch there.

When you guys talked in your script about higher advertising running ahead of re-rated sales growth in 2015, can I just be slightly more clear about this? This seems like it's vastly higher. So if we have 135 basis points of gross margin expansion, I think the math comes out to somewhere between a 20% or 25% increase to the A&C budget. Is that the right neighborhood to think about, or is there something else going on in the G&A line that would require a substantial investment?

Yeah let me try to clarify that for you below gross margin. What J.P. mentioned was that, certainly our advertising would be higher year-on-year and we’re talking in the neighborhood of two times sales. There is something that you should try to understand on SG&A. The SG&A as we planned it out with M&A is going to be in the mid-teens. If you strip Alan Candy, crave which we're expecting will close in the first quarter. And then the biggest piece by far Shanghai Golden Monkey that gets you down sort of the high single digits. And it's that mid teen to high single digits with and without M&A so apples-to-apples that should make it sort to think about what happens below that. Not that advertising up 20%, we are saying it's going to be up around two times sales.

That's extremely helpful. Because that part of it's hard to forecast. Just final question from me then is that when you just simplify all of this, your expectations for U.S. category growth in the chocolate candy category is more or less something around 3%, 3.5% for 2015? Is that right?

That's right.

Okay. That's all I needed. Thank you.

Your next question comes from the line of Chris Growe with Stifel.

Just two quick questions for you. If I could follow on the line of questioning Dave had there. As I look at the fourth-quarter, it's not clear to me why the U.S. gets better. That is, that you had a high degree of elasticity. So is it as simple as, and you've given us some good information your sales reps and the increase in coverage there, the increase in marketing or advertising would help certainly as well. Anything else that we're not considering, maybe is there a larger new product benefit for the coming year, things that can help us get a little comfort around that 4% to 6% underlying growth.

One thing I would mention Chris and I know there were lot of moving parts in the fourth quarter but certainly in the North America business the third quarter one point time shift because of the volume certainly that was a headwind in the - for the fourth quarter but there were some positive that we certainly saw in the fourth quarter. I mean we saw the C-store class of trade did very well at the high end of our 3% to 4% long term category growth rates. One of our largest retail partner was - had takeaway in the fourth quarter certainly greater than the 3% to 4%, dollars store continue to do well. In the trends that we – again and we are seeing very early in January, are in pace with that, certainly in some of the FDMx, again building, not quite at the level of those other channels but getting better than we had given up the fourth quarter. So those are some signs of encouragement there.

You know a couple of other things as you start to lap, the SNAP which was an event that back in November the previous year in 2013, so you start to get that back into the base. And then I think the unknown and keep in mind we never talk about gas prices in terms of leading sales up and down. So in difficult times we seem to be pretty good in terms of those linkages. However, what we don't know to answer to yet, I don’t think is that the real income that the lower fuel prices are bringing to consumers is really significant. So how that makes it way through to behavior, I don’t think we know yet but I think that’s more likely a positive than a negative, I would say for food in general and consumer products in general and then obviously we’re going to fight for our share there.

I guess the way to think about it and hopefully you’ve this team now, is that and to clarify maybe what Bert said, we continue to feel very good about our business within CMG. I think Bert has set a category previous, we actually think the category could be some that, we think we will be better than the category. And we’ll gain shares just as we did this year and our result - if you look first half, second half from a takeaway and share perspective they are much different profiles.

That's good. Just a quick one if I could. The Krave acquisition, I see a lot of ways in which that fits, and you're operating the same channels. It's obviously snacking category. I think at first glance, and I wrote a note to this effect, and I'm sure that you've as well. It's just that it's a very different category for you from an input cost standpoint. And I'm just curious, should we assume that there are the snacking categories beyond the obvious confectionary categories where Hershey will be looking in the future to bolster its growth?

I think the simplest way for me to address that is, as you get to learn more about Krave, you’ll really see how the positioning of the brand, we believe is very on trend and creates differentiation within that segment. We’re always looking for both in our product development as well as potential acquisitions for things and we believe could fit well with portable nutrition and broader snacking. We will always be diligent to not distract ourselves from the core business that we’re in but we are also in the consumer products business and have to make sure that we’re meeting what consumers are always desiring. We think that’s definitely within the core businesses that we’re in. And we think because of our go-to-market capabilities, our R&D and ability to make things taste great that there are opportunities for us in broader snacking.

That’s good. Thank you for your time.

Operator, we have time for one more question.

Thank you. Your final question comes from the line of Ken Zaslow with Bank of Montreal.

Not to belabor the point, but I guess taking a bigger picture look at this. Do you think your long-term growth algorithm, both not only one just a sales line but also on the bottom line, is a little bit more challenged because as it seems like Hershey needs to take greater risks in terms of product integration. You're taking more risks on acquisitions, more risk on creating a new brand, having to add new salespeople. It feels like we're going into a different era with Hershey versus two or three years ago where it was not low hanging fruit, but a little bit easier to get the growth and now it seems a lot more challenging, and you have to do bigger risk items for it. Can you comment on that?

Well first I tell you it feel challenging every day, but you know, I think the way to think about it is, we feel good about our long term guidance. We know that there’s going to be these periods of times where there’s pressure on businesses and you know, if we look back I’m sure over our 120 year history and I remember hearing people talk about cocoa being at $7,000 a ton and the world was going to end. There are always, these periods of times, which seem more challenging maybe than others. But if you think about our footprint and our portfolio, the countries that we’re focused against, despite there maybe currency headwinds and these kinds of things, these are some of the best high growth GDP markets around. We don't have a lot of legacy businesses that we have to drag along with it. I look at China by itself and, largely we're a Hershey’s business there, more specifically we’re a Hershey's kisses businesses there. As we expand our category, our portfolio within the category, that gives us a tremendous amount of runway. We advertise in - like I think only about 20% or 25% of the cities that the leading competitor in the market does. So as we continue to expand that, and our household penetration grows, we can talk about what’s the right GDP for China, but if think about an emerging middle class and our portfolio over time, we have a tremendous amount of runway there. And so as we execute against our business model in a thoughtful, plan-full way, we have this very precious North American business that I have a tremendous amount of confidence in. I think that our guidance is absolutely right for the long term. We want to continue to be acquisitive and so I think we've got great future.

And my just final -- just add on a little question is, the skill set for Hershey in terms of being very focused on chocolate is that your ability to hedge and just understand the input costs associated with Hershey is far superior - because of your knowledge base. Now you're getting into a meat category, which has a whole another host of issues which buying and selling. Does that raise concerns for you?

Well we have people in our organization in specifically in our both R&D as well as our supply chain that have a lot of experience in their background specifically within protein and in meats. So while it maybe a new endeavor for some of our folks it’s certainly not for all of our people, we’re acquiring what we thing are people with great skill sets. Obviously we’ll do everything we can to learn as much about the business as fast as we can. But when you think about food science we have a technical center with 250 professionals sitting over there many of them PhD’s in food science and they already are experts in proteins. We certainly don’t go into anything with any arrogance we’re going to be eager to learn, but we also believe that we bring some capabilities to the category that will service as well.

Great. I thank you very much

All right. Thank you for joining us today and we'll see you all in a few weeks at the CAGNY conference.

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