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The Hershey Co. (NYSE:HSY)
Q4 2017 Earnings Conference Call
January 31, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning everyone and welcome to the Hershey Company's fourth quarter 2018 results conference call. My name is Aaron, and I will be your conference operator today. All participants have been placed in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. You may register to ask a question at any time by pressing *1 on your touchtone phone. This call is scheduled to end about 9:30 a.m., so please limit yourself to one question so we can get to as many of you as possible. Please note this call may be recorded, thank you. It is now my pleasure to turn the program over to Ms. Poole, you may begin.

Melissa A. Poole -- Vice President, Investor Relations

Thank you, Aaron. Good morning, everyone. We appreciate you joining us for The Hershey Company's fourth quarter 2018 earnings conference call and webcast. Michele Buck, President and CEO; and Patricia Little, Senior Vice President, and CFO, will provide you with an overview of our results, followed by a Q&A session. Before we begin, please remember that during the course of this call, we may make forward-looking statements within the meanings of the federal securities laws. These statements are based on our current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements contained in our 2017 10-K filed with the SEC and today's press release.

Finally, please note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, I would like to turn the call over to Michele.

Michele G. Buck -- President and Chief Executive Officer

Thanks, Melissa and good morning to all of you on the phone and webcast. As I reflect on the progress that we've made against our strategic plan and the initiatives we have under way for 2019 and beyond, I am confident and excited about the future of this company. Before I get into the details of our results, I'd like to take a moment to reflect on our 125th anniversary that we are celebrating this year. It's an incredible privilege to lead a company that remains as relevant with consumers today as we were more than a century ago. Everyone here at Hershey has tremendous pride in our incredible portfolio of brands and it's the care and attention that we put into each of our brands that resonates with our consumers. Our job is to deliver on our consumers' expectations each and every day. We are also interested to make the strategic decisions to ensure that Hershey is well-positioned long-term. I'd like to thank my Hershey colleagues for their consistent passion and commitment.

Now turning to the business at hand. We are fortunate to participate in growing categories with amazing brands that consumers love. We have advantaged margins, a healthy balance sheet and differentiated capabilities. In a dynamic and highly competitive operating environment in 2018 we grew our business and delivered on our financial commitment while strategically investing for the future. In our US core confection business, we invested in new brand positioning and launched a campaigns for our two largest brands, Reese's and Hershey's. We shifted investments to new marketing capabilities that enable us to support more confection brands within our portfolio.

By leveraging consumer insights and new capacity, our team drove strong growth and share game during Halloween and holiday sales periods while improving our sell-through and reducing markdown. At the same time, our SKU rationalization program and pricing actions are enabling progress on improving our margins. We also expanded our portfolio to capture incremental consumer occasion with a complementary acquisitions of Amplify and Pirate's brands. These two high-growth, high-margin, better for you snacking assets are a great fit with our Hershey portfolio. They are performing well in the marketplace, and they are on track to deliver against our goals.

We may tremendous progress with our international business transformation plans delivering a record year profit as well as solid growth. This growth was balanced with organic constant currency sales and operating income gains in each of our key markets. Importantly, our team diligently continue to reduce our foundational cost structure to enable investment in growth generating assets and capabilities. Our ERP initiative is on track and modules are coming online according to plan. In the second half of 2018, we launched two commercial focused modules, trade promotion and marketing expenses and we are pleased with the early results. This ERP initiative is a key enabler to our broader digital transformation efforts.

We also will continue to invest in core capacity as we did with our new Reese's and Kit Kat line in 2018 as well as incremental capacity on Icebreakers gum and in our broader distribution network. While our gross margin was below expectation for the year, we made progress and improve performance as we progress through the year. We believe the SKU rationalization program and previously announced price increase position us well to make additional progress in 2019.

Now let's turn to specifically to progress made in the fourth quarter. We delivered sales and EPS in line with our expectations. Constant currency net sales increased 3.1% including a net benefit from acquisitions and divestitures of approximately three points. Foreign currency exchange was a 0.6 point headwind. Adjusted earnings per share diluted of $1.26 increased 23.5% compared to the fourth quarter last year. Our strong holiday program resulted in both sales growth and seasonal market share gains as well as improve sell-through at retail. Hot Cocoa Kisses was the number one new holiday item in the category and help drive merchandising support and growth for the entire Kisses franchise.

This holiday strength resulted in measured channel Hershey CMG take away increasing 1% in the 12 weeks ended December 30. This was in line with our expectations. As a reminder, take away was greater than fourth-quarter net sales growth due to the inventory reductions that we anticipated and discussed on our last quarter's call. For the fourth quarter, Hershey CMG market share declined slightly, approximately 20 basis points as competitive activity remained robust. Hershey Chocolate take away was up 1.9% in the quarter driven by strength in our Reese's brand which grew 4%. Our new Not Sorry campaign and strong seasonal execution enabled by the capacity expansion we implemented in the first quarter of last year were key contributors of this growth.

We activated additional chocolate brands within the portfolio in 2018, and we are pleased with the results. Combined retail take away for York, Almond Joy, Mounds, and Pay Day was up 2% in the fourth quarter, a seven-point improvement versus the 2017 trend and it was driven by velocity. We leverage new more efficient marketing models to support these brands and believe there is additional opportunity to bring more of our smaller but highly differentiated products to light in 2019 with this approach. Our Icebreaker business continues to perform very well with retail take way growth of more than 9% during Q4. This was driven by distribution and velocity gains on our gum business resulting in growth of over 18% during the quarter.

Our investments in digital commerce are resulting in consistent solid net sales growth of approximately 40%. We expect to see similar momentum in 2019 as we continue partnering with our retailers on differentiated offerings that meet our consumers' needs. These gains were partially offset by continued softness in our non-chocolate portfolio and sales declines from items impacted by our SKU rationalization program. We expect these headwinds to persist in 2019 as we focus on initiatives to drive growth within our chocolate portfolio and continue to reduce complexity to improve margins.

As we look more broadly across the portfolio, total Hershey retail take away in the fourth quarter was slightly higher at 1.2% driven by SkinnyPop and Pirate's Booty. SkinnyPop retail take away remain strong with growth of 9% in the 12 weeks ending December 30. The core Ready-to-eat Popcorn portfolio grew 6.5% lead by continued household penetration gains. This resulted in a category share gain of 28 basis points in the quarter. Pirate's Booty grew approximately 5% in the quarter outpacing the category. Similar to SkinnyPop, these gains were driven by increases in household penetration.

For 2019, we have a balanced plan to build on our second half 2018 momentum. We expect annual net sales growth of 1 to 3% and adjusted earnings-per-share diluted growth of 5 to 7%. We believe this growth will be driven by improving organic sales growth and profitability within North America. Let me provide you with some details around our plan. For our US convection business, we anticipate growth from seasonal strengths, pricing, core distribution gains, innovation, and new brand positioning. A very balanced set of growth levers. Our seasonal growth will benefit from a late Easter adding approximately three weeks of additional selling days for the season. While there will be some offset in our everyday sales, we do expect a net positive impact to the business based on historical patterns. Merchandising is already off to a strong start on consumers' Easter favorites, Reese's and Cadbury Eggs. Additionally, we expect our strong hollowing and holiday performance from 2018 to result in increased orders for the upcoming season.

Our previously announced price increase of approximately 2.5% is on track. As a reminder, we expect the P&L impact to build over the course of the year. Similar to past price increases, we anticipate some volume impact on items experiencing higher retail shelf prices. As we rationalize less productive SKUs in the portfolio, we continue to make progress in securing distribution on higher velocity items to maintain and optimize our shelf space and improve productivity for both Hershey and our retailer partners.

We are also focused on securing incremental space for the entire category. We are consistently collaborating with our retailers on ways to adapt to this rapidly changing environment and optimize space to drive sales and margin. We recently partnered on and implemented a new front end planogram at a key customer to increase space for snacking and is showing promising results so far. Hershey performance in stores that implemented this change are currently pacing 500 basis points ahead of stores with the old planogram. Strong retail partnerships are always a key priority for us and have helped to fuel our success. We are excited about our core marketing and innovation plans for 2019. As we discussed last year, we have both packaging and product innovation that we believe will drive consumer engagement and increase sales.

The transformation of our packaged candy portfolio is on track and starting to hit shelves after Easter. This will benefit many of our chocolate brands with better shelf impact and improve velocities. Additionally, we will continue to leverage our in-house creative studio and new media models to support the breadth of our portfolio in 2019. Investing in our portfolio has always been and will remain a critical part of our business model. We constantly look for ways to engage with our consumers in new, different, and more efficient ways.

Our Reese's Thins launch will be in this new improved packaging, and it's on track to hit shelves after Easter. This great tasting product gives consumers another way to enjoy their favorite combination of chocolate and peanut butter, and it'll be available in both milk and dark chocolate varieties. Reese consumers are passionate about their cups, and we will leverage TV media, in-store merchandising, and social to engage with them and drive excitement and ultimately incremental purchase. We will continue to have a lineup of news such as our Hershey's with Reese's Pieces launch to drive relevancy and merchandising.

While our overall innovation lineup is comparable to 2018, the contribution will be slightly skewed to the second half. Also, as a reminder, the late Easter will drive slower retail performance in February and March and then rebounded in April. We expect the category to accelerate slightly in 2019 driven by the longer Easter we expect our performance to be in line with the category. We feel confident about the actions we are taking both to compete today and to build for the future. But as you all know, the competitive environment is intense, and it is taking more to win. We are committed to investing in our business to maintain our leadership position while also delivering our financial commitments.

Now for an update on our 2019 plans for our recently acquired snacking assets. Amplify remains on track and is expected to grow mid-single digits in 2019. SkinnyPop is projected to grow share in the ready-to-eat popcorn categories behind additional distribution gains and a new marketing campaign. As we shared last year, some of our convection capabilities can be applied to broader snacking. This is been a priority area for us, and we are seeing some great progress. The Pirate's Booty integration is proceeding nicely, and they Amplify team in Austin is preparing to take over selling responsibilities. As with SkinnyPop, Pirate's Booty has a focused set of core SKUs with high velocities that warrant greater shelf presence and we plan to leverage our category management capabilities to drive distribution in 2019.

I want to thank all the teams working hard to integrate and drive sustainable growth on these important brands. I'd also like to take a few minutes to recognize our international team who have done an amazing job executing our transformation plan. We expect to make continued progress internationally in 2019 albeit at a slower pace given the significant gains we drove in 2018. We will continue to leverage our strengths and focus on our Hershey's first strategy which has resulted in solid Hershey brand share gains in our focused market. In Mexico, the Hershey brand has grown share of the chocolate category for 17 straight quads. In Brazil, the Hershey grand is growing share of the bar category in a highly competitive environment, and in India, we are gaining share in syrup, spreads, and drinks. The Kisses lunch in India is on track and we are excited by the opportunity here. We have also launched gifting items under the Kisses brand in Mexico which we believe will enable us to capture an incremental premium occasion to drive growth.

While we are confident in the plans we are executing, we remain cognizant of potential geopolitical risk that could impact international performance in 2019. We are focused on driving actions within our control and managing risks as effectively as possible. In summary, in 2018 we delivered our financial commitment and we continue to invest in our future growth. Our core confections sales and margin trends are improving, and we believe we can further build on this momentum with a balanced 2019 plan. Our recently acquired snacking brands continue to see strong growth and deliver against our financial objectives and our international business remains on track. We remain focused on driving long-term shareholder value by delivering balanced top and bottom line growth in 2019 while investing in differentiated capabilities to expand our competitive advantage in the future. I'll now turn it over to Patricia who will provide you with details of our financial results.

Patricia A. Little -- Senior Vice President, Chief Financial Officer

Thank you, Michele. Good morning everyone. As anticipated, fourth-quarter net sales of $1.99 billion increase 2.5% vs. the same period last year. Constant currency net sales increased 3.1% with foreign currency exchange a 60 basis point headwind. The net impact of acquisitions and divestitures was a three-point benefit to net sales growth. Volume was a 90 basis point benefit which was partially offset by anticipated negative net price realization of 80 basis points. For the full year 2018, net sales increased 3.7%, the net impact of acquisitions and divestitures was a 3.6 point benefit. Organic constant currency net sales growth of 0.3% was partially offset by unfavorable foreign exchange of 0.2 points.

Adjusted earnings-per-share diluted of $1.26 in the fourth quarter represented an increase of 23.5% vs. the same period last year. This was driven by a more favorable tax rate, SM&A declined, acquisition and volume growth. For the full year 2018, adjusted earnings-per-share diluted a $5.36 was an increase of 14.3% vs. the full year 2017. This was driven by favorable tax, SM&A, and acquisitions partially offset by gross margin declines. By segment, in the fourth quarter, North America net sales increased 4.3% vs. the same period last year. The Amplify and Pirate brands acquisitions at a 4.8 points and organic volume gains contributed 80 basis points.

Net price realization in foreign currency exchange rates were 110 and 20 basis points headwind respectively. These results were in line with expectations. North America advertising and related consumer marketing spend declined 13.3% in the quarter. This was in line with expectations. Consistent with what shared throughout 2018, these declines were driven by optimization of emerging brand spend as well as media efficiency gains as we leverage new models and channels to reach consumers. Despite spend declines for the full year, our consumer impressions were up on our chocolate brands. In 2019 we expect the year-over-year changes in advertising and related consumer marketing spend to be more comparable to our historical patterns and grow relatively in-line with sales.

Now for an update on Amplify and Pirate brands. Accounting for the Tyrell's divestiture, the Amplify business came and according to plan on both the top and bottom line. The acquisition was approximately eight months EPS accretive, consistent with our previous guidance. The Pirate's brands contributed slightly to our overall sales performance and had a negligible impact on our earnings in 2018. Fourth-quarter total international and other segment net sales decreased 8.9% including an 8.4 point impact from divestitures and a 3.1 point headwind from unfavorable foreign currency exchange. Volume and net price realization were 190 and a 70 basis point benefit respectively. Organic constant currency net sales in our focus markets, Mexico, Brazil, India, and China grew 7%. International and other advertising and related consumer marketing declined 13% in line with our expectations as we write size or investments to drive more profitable growth.

Now turning to growth margins, adjusted gross profit of $844 million increased 1.9% resulting in an adjusted gross margin of 42.5%, a decline of 20 basis points vs. the fourth-quarter of last year. This was a meaningful improvement vs. our first half and third quarter trends although slightly below our estimate for the quarter. This lightness was driven by the disposition of underutilized packaging assets related to the upcoming migration of our package candy line in the second quarter of 2019. Excluding this impact, our growth margin was slightly up vs. prior year in line with our expectations. We believe we will continue to make progress in 2019 and expect modest gross margin expansion for the year.

Fourth-quarter adjusted operating profit of $369 million increased 13.1% vs. the fourth-quarter of 2017. This resulted in an and adjusted operating profit margin of 18.6%, an increase of 180 basis points driven by lower selling marketing and administrative expenses. As we look forward to 2019, we expect operating profit margin to expand slightly above our recent historic average. This is driven by pricing and productivity initiatives in both cost of goods sold as well as SM&A. As a reminder, we over delivered our margin for growth program expectations in 2018 with savings of approximately $90 million partially driven by the acceleration of some savings originally slated for 2019. Additionally, we expect some of the remaining savings to flow through into 2020 due to the phasing of our ERP implementation. We continue expect our overall margin for growth program savings to be toward the high-end of our $150 million-$175 million range.

Moving down the P&L, interest expense of $38 million increased $12 million versus Q4 of last year driven by the Amplify and Pirate brands acquisition. Full-year 2018 interest expense of $139 million was in line with our previous guidance. In 2019 interest expense is expected to be approximately $150-$160 million, a slight increase versus 2018 due to acquisitions. The adjusted tax rate for the fourth quarter was 9.5% versus 15.1% in the year ago. This resulted in a full year 2018 adjusted tax rate of 19.2% versus 26.6% in the year-ago period in line with our expectations. Both the fourth-quarter and full-year tax favorability was driven primarily by US tax reform. In 2019, we expect our tax rate to be approximately 17%.

In the fourth-quarter other expense was $38 million in additional expense of $10 million versus the year-ago period. This year-over-year decline is driven by timing related to our investment tax credit strategy as well as favorable nonservice related pension expense. Full-year 2018 expense of $69 million was in line with our expectations. In 2019, we expect other expense to be approximately $105-$115 million. This reflects a higher investment and tax credit as well as additional expense associated with our pension assets due to the year-end negative stock market performance.

For the fourth quarter of 2018, weighted average shares outstanding on a diluted basis were approximately 211. In November, the company purchased $48 million of common stock from the Hershey trust in connection with the exercise of stock options. The company did not repurchase common shares in the fourth quarter against the October 2017 or the July 2018 share repurchase authorization. The total combined outstanding authorization is $560 million. Total capital additions including software was $87 million in the fourth quarter. For the full year 2018, capital additions were approximately $329 million. This was slightly below our estimate driven primarily by lower capital spending required to support the Amplify integration. For the full year 2019, we estimate the CAPEX will be in the $330 to $350 million range. As a percent of net sales, this remained slightly higher than our long-term target as we continue to advance our ERP transformation and invest in core capacity.

We continue to return cash to our shareholders with fourth-quarter dividends of $147 million. This was our 356th consecutive quarterly dividend on the common stock. We expect full year 2019 net sales to increase 1 to 3% including approximately half a point net benefit from acquisitions and divestitures. We are planning a negligible FX impact for the year. However, the environment is very volatile. We anticipate FX will be a slight headwind in the first half and a slight tailwind in the second half. As a reminder, the SKU rationalization program we announced last spring will continue to impact net sales for the first half of this year. This, in addition to the timing of divestitures, key marketing activities around innovation and packaging, and FX impacts are expected to result in stronger net sales growth in the second half of the year. Full year adjusted earnings-per-share diluted our estimated to grow 5 to 7% driven by operating profit margin gains as well as a more favorable tax rate.

Due to the timing of investments throughout the year as well as the gating of the sales growth, we expect EPS growth to be stronger in the second half of the year. We take a balanced and disciplined approach to building our brand and evolving our business model for the future. We have strong cash flow and a healthy balance sheet that gives us flexibility to make the necessary investments to drive long-term shareholder value. That concludes my financial discussion. Thank you for your time this morning, and I'll now turn it back over to Michele for some closing remarks.

Michele G. Buck -- President and Chief Executive Officer

Thanks, Patricia. I remain confident in our strategies and I am excited about we here at Hershey have ahead of us in 2019 as we look to drive a year balanced growth. As we talked about, the marketplace continues to advance at an accelerated pace. I am optimistic that this change creates opportunities for us to engage with our consumers in new and innovative ways to unlock growth. As I mentioned at the top of our call, 2019 is our 125th anniversary and it's an incredible time to be here at the company. Our remarkable employees are dedicated to delivering the best quality and the best experience for our consumers each and every day. That hasn't changed over the past century and it will continue into the next. Patricia, Melissa, and I are now available to take your questions.

Questions and Answers:

Operator

If you'd like to ask a question, please press the *1 on your touchtone phone. You may withdraw your question by pressing #. Again, it is *1 to ask a question. We will take our first question from Ken Goldman with J.P. Morgan; your line is open.

Kenneth B. Goldman -- JPMorgan Securities -- Analyst

Hi, good morning. I just wanted to poke around a little bit on the de-load. Can you frame for us, I don't think you quantified the impact of it, so if you did forgive me, but I'm just trying to get a little bit of sense of the number there and then I also want to get a sense for where retail inventories sit as far as you can tell. Are they still up year on year after the de-load? I really just want to get an idea of further risk as we look ahead because I know you guys talked about how the de-load was in line with your expectations, but I don't think most people on the street were quite prepared for it as perhaps you guys were.

Michele G. Buck -- President and Chief Executive Officer

So, let me just start Ken, then alternative to Patricia for more details. The year did close in line with our expectations and we know that as more data and analytics are available, retailers are constantly looking at how they can optimize inventory levels as we all are and we do expect that to continue into 2019 and those assumptions are built into our guidance, but I'll let Patricia give a little bit more detail around that.

Patricia A. Little -- Senior Vice President, Chief Financial Officer

Yeah, as we talked about on the third quarter how good insight, especially on some of the bigger customers in terms of their inventory and we knew that there would be some de-load in the fourth-quarter, and you saw that play through in the difference between the sales in the retail take away. That was absolutely in line with our expectation. We don't have as good an analytic on all of the many, many customers, but we know that overall, we believe that inventory came down through the system. We expect that to continue into 2019 as Michele said, again, really related to broad secular trends in the industry.

On any given quarter, that will have a lot of movement based on seasons, based on timing of pricing which we think was an impact this year looking at when promo activity is, innovation timing. So, quarters can have a lot of movement, but this was exactly what -- we ended the year exactly as we expected.

Kenneth B. Goldman -- JPMorgan Securities -- Analyst

Okay, thanks very much.

Operator

And our next question comes from Bryan Spillane with Bank of America; your line is open.

Bryan D. Spillane -- Bank of America Merrill Lynch -- Analyst

Hey, good morning everyone. Hey, just one clarification and one quick question. Just on the clarification, Patricia you talked a little bit about share repurchases, and it just wasn't -- I want to make sure we're clear, the guidance, the EPS guidance range for this year does not assume a reduction in the share count?

Patricia A. Little -- Senior Vice President, Chief Financial Officer

You know we have a long-term sort of historic average of doing share repurchase on a discretionary basis every year, and we always put that into our plans because otherwise it would just us, especially in the absence of acquisitions which are hard -- which we don't put in the plan, which does show is building cash. So, there is a modest amount of our normal run rate share repurchase included in the plan.

Bryan D. Spillane -- Bank of America Merrill Lynch -- Analyst

Okay, but nothing unusual relative to history?

Patricia A. Little -- Senior Vice President, Chief Financial Officer

Correct, nothing unusual.

Bryan D. Spillane -- Bank of America Merrill Lynch -- Analyst

Okay, all right. And then Michele, you talked a little bit about the gap between in North America, the takeaway and chocolate versus nonchocolate and you said the nonchocolate being a drag and I guess that and SKU reductions. Can you just give us a little bit more color what the magnitude of that is and then I know, I guess it's still good to be a drag in 2019, but is it less of a drag in 2019, and it was in 2018?

Michele G. Buck -- President and Chief Executive Officer

Yeah, so the SKU rationalization is probably the bigger impact on the business, and that's about a point in 2019, and that's about the same that it was in 2018.

Bryan D. Spillane -- Bank of America Merrill Lynch -- Analyst

Okay.

Michele G. Buck -- President and Chief Executive Officer

And then relative to the nonchocolate portfolio, I would say the impact will be similar in 2019 versus 2018 as you know the large proportion of our business is chocolate. So, from a magnitude perspective, I think that can give you a little bit of a feel of the size of that.

Bryan D. Spillane -- Bank of America Merrill Lynch -- Analyst

Okay, great, thank you.

Operator

We will take our next question from Andrew Lazar with Barclays; your line is open.

Andrew Lazar -- Barclays Capital, Inc. -- Analyst

Good morning everybody. I know heading into this year, her she had obviously worked through a decent chunk of some SKU rationalization as you talked about, some trade inventory reduction. You've made capacity investments and divested some businesses that have been a drag. This year you've got, obviously, the benefit of a longer Easter, getting some pricing in place and then you still got incremental cost saves as well. So, I guess my question is maybe why wouldn't we see may be more of a on algorithm type of year with respect to the top and bottom line? Maybe in other words, would you characterize 2019 as a year of still year of incremental investment or perhaps you're being a little bit more cautious on things like volume elasticity in relation to the pricing and things of that nature? Thanks very much.

Michele G. Buck -- President and Chief Executive Officer

Well Andrew, yeah, we feel really good about the plans and the activations that we have the share and I think what we feel great about is how balanced, how many different growth levers we think we're really pulling. So, as you know, as we mentioned we expected to accelerate performance and are important North America market. However, that SKU rationalization is still impacting us at about that point as I mentioned and if you add that back into where our growth is, that really puts us smack dab in terms of where the long-term guidance is. So, the price increase which will have a little bit of an impact, we feel good about the price increase, but we do anticipate a little bit of volume conversion which as you know, based on history, you get a bigger volume impact and that works its way back up throughout the year. And will continue to see that little bit of softness as retailers continue to optimize inventory. But we feel great about the plans and the acceleration, but that SKU rat is really the biggest offset.

Andrew Lazar -- Barclays Capital, Inc. -- Analyst

Got it, thank you.

Operator

Our next question comes from Robert Moskow with Credit Suisse; your line is open.

Robert Moskow -- Credit Suisse Securities -- Analyst

Yeah, when I try to add up the big building blocks for 2019, it does shape up to be a very different year in terms of what's driving the profit growth. In 2018, as far as I can tell, international segment profits grew a lot, and I think that was largely due to overhead reductions. You had a big advertising cut, like an 11% cut, and then when you think about 2019, those kinds of benefits kinda go away, and what's driving 2019, it looks like, is more gross margin expansion which is fueled a little bit by the pricing and you know maybe some other factors and then maybe the tax rate is a benefit too, although a little unclear. So, is that a more difficult task in 2019 given the competitive intensity that you brought up and also the pressure from retailers that's pushing inventory down? Thanks.

Michele G. Buck -- President and Chief Executive Officer

No, I feel confident that we've done a very solid job building this plan and that we have all the right building blocks to deliver that growth and profit algorithm in the way that we've laid out. So, I wouldn't say that it's a more difficult task. I think we're excited about what we have to deliver that. I think our pricing is on track, so some of the levers that are to deliver that are already in place, you know the Easter season which benefits us, pricing, we feel really good about the innovation that we have. So, we feel great about it.

Patricia A. Little -- Senior Vice President, Chief Financial Officer

And just a comment on the taxes, that will be a benefit, the slightly lower tax rate, but that will be basically offset by the fact that, as I mentioned, are nonservice related pension costs will be higher in 2019 due to just asset performance at the end of the year. So, that's not a big net overall change to our EPS.

Michele G. Buck -- President and Chief Executive Officer

Yeah, Rob, what I would say, I just think we've taken into account a lot of the varying factors going on in the marketplace in a better way than ever have in the past and have a strong plan.

Robert Moskow -- Credit Suisse Securities -- Analyst

I appreciate that, but can you comment on the pricing in North America in the fourth quarter; it was more negative than I thought it would be. Did some of your price increase get implemented in the fourth quarter or did any of it get implemented?

Michele G. Buck -- President and Chief Executive Officer

You know, as we've seen over history, it really takes a period of time for our pricing to hit the marketplace because of the seasons which are sold in so far in advance and then protecting promotional programs which are usually also about six months out commitments. So, that really would not normally hit until 2019, that's when we're anticipating to hit, we've seen a little tiny bit of it show up already, but it will build as we go throughout the year. So, it's totally in line with expectations.

Robert Moskow -- Credit Suisse Securities -- Analyst

Got it, thank you.

Operator

Our next question comes from David Driscoll with Citi; your line is open.

David Cristopher Driscoll -- Citigroup Global Markets, Inc. -- Analyst

Great, thank you and good morning. I wanted to ask about your price volume elasticity expectations. You made a couple of references, Michele, but specifically, will volumes be negative in North America in 2019. You've got the longer Easter, but you know it is a price increase and so just curious if you actually would guide negative volume growth in North America for 2019?

Michele G. Buck -- President and Chief Executive Officer

I would say closer to flattish on volume given what we've seen historically and what are elasticity data would show.

David Cristopher Driscoll -- Citigroup Global Markets, Inc. -- Analyst

And Patricia, you mentioned, and I think you reiterated in your script the margin for growth, the total program achieving $175 million, you've been at this level for a little while. It sounds like the program is going very well. Is there a possibility of upside to this program and give us some cadence here as to how you guys are thinking about that? It's been a while since his program is out, just curious about your revision process and then specifically what is the savings expected in 2019? And then I just would love an update on your CFO search, Michele, just to see how that's going. I don't think you mentioned that, but I'm curious how that's going as well. Thank you.

Patricia A. Little -- Senior Vice President, Chief Financial Officer

Well, I'll start. On the margin for growth program, we've been really pleased with how it's done in really two senses I just want to say, clearly in one sense, and we talk probably a lot about this, is in terms of the savings that we've had in a lot of function and I just want to thank all my colleagues are working on a very effective program. But I also want to say, I just never want to forget this, we also use this as an opportunity to invest in more of our commercial capability. So, it was really a change in that and that's going very well also.

So, we pulled ahead a fair amount into 2018 as I mentioned, that primarily comes out of 2019. There's a small piece that given just the timings that we get into the details of the program got pushed into 2020 and that relates around some of the -- honestly, a lot of it's in the finance function created by our ERT transformation. That'll leave us I think pretty much where we expected to be earlier in the year which is the high-end of the program, closer to the 175 range and I would expect if you sort of do that math, that puts us in the $30-$40 million range for 2019.

Michele G. Buck -- President and Chief Executive Officer

And then David, to follow up on the second part of your question regarding the CFO search, it's on track, I have nothing to report at this time, but will know as soon as make our announcement.

David Cristopher Driscoll -- Citigroup Global Markets, Inc. -- Analyst

Thank you so much.

Operator

And we will take our next question from Jonathan Feeney with Consumer Edge; your line is now open.

Jonathan Feeney -- Consumer Edge Research -- Analyst

Good morning, thanks very much. I wanted to get to the gross profit a little bit and forgive me if this is -- just tell me what you feel like you can, but I'm trying to understand this, I know there's some moving parts, but what an organic rate of gross profit looked like for the fourth quarter broadly. Was that particularly in line with your expectations because it was a little bit behind mine and maybe what role costs played, were they a headwind, a tailwind there, and what does that mean on the cost piece for 2019? I believe you already commented on gross profit, gross margin for 2019. Thanks so much.

Patricia A. Little -- Senior Vice President, Chief Financial Officer

So, we as I mentioned, we did have a small write off in the fourth quarter related to some -- we disposed of some underutilized assets. Absent that, we would've been closer to a positive 20 basis points for the quarter. In terms of the underlying cost structure, I would say that what we've really seen, clearly, we as well as everybody else have been hit by inflationary pressures as well as well as some of the negative price realizations and what you see is that stabilizing in the fourth quarter. Especially things like freight logistics, cost like that. They remain high but stable. Going into 2019 we don't see a real reduction in those. We think we're doing a good job of optimizing freight and logistics, but there's still a base level of inflation and that as well as packaging.

We're also starting to see some of the wage inflation related to some of the high employment rates that you see, especially in places like our distribution centers, so that's also a bit of a pressure on us. Opposite that though we will have some good news in our commodity based on where some of the commodities pricing and our hedging program puts us. So, all of those puts and takes puts us at a modest improvement for 2019 growth margin.

Jonathan Feeney -- Consumer Edge Research -- Analyst

That's really helpful, Patricia, but I guess, again, if you don't want to comment, fine. But I was just thinking you brought Pirate's brand gross profit in, you've got a certain amount of the Amplified gross profit, and I know some of that got divested, but net of that it looks like that seems to be a bigger number than the $15 million in adjusted gross profit year-over-year. And I know you have a divestiture, I mean divested you just talked about. When you net all that stuff out, I'm trying to understand what the trend is in your organic rate of gross profit. So, when all the stuff goes comparable, we kinda understand what's going on. Is that clear?

Michele G. Buck -- President and Chief Executive Officer

Patricia A. Little -- Senior Vice President, Chief Financial Officer

Yeah, it is. I'd have to think it through that way. I think what we're saying though is those aren't as big an impact. What we said all along is we've been negative gross margin, and we see that go to base at the fourth quarter.

Patricia A. Little -- Senior Vice President, Chief Financial Officer

There is some slight accretion from Amplify. Pirate's is really hardly anything.

Michele G. Buck -- President and Chief Executive Officer

Golden Monkey was a help. We could take that further detail later.

Jonathan Feeney -- Consumer Edge Research -- Analyst

Yeah, we can take it further off-line later, thanks so much, appreciate it.

Operator

And our next question is from David Palmer with RBC Capital Markets; your line is open.

David Palmer -- RBC Capital Markets -- Analyst

Thanks, good morning. A question on your US organic growth as we head into 2019 it feels like one way to organize the outlook is to think about the big three things going on. You have the confectionery innovation that you're doing, you have that SK rationalization, and then you have the build out a broader snacking and the distributions you might get there. Could you touch on the big buckets as you see them and perhaps compare that to 2018 and help us understand where you see an acceleration in organic growth coming from? Thanks.

Michele G. Buck -- President and Chief Executive Officer

Yeah, absolutely. So, I think it kind of the highest level there will be an acceleration in North American growth driven by price. There will be acceleration driven by seasons, both Easter as well as Halloween and holiday, and certainly there will be a contribution from snacking that will be incremental as well. I think those are the real biggest buckets to focus on as the biggest change from a year on your perspective.

David Palmer -- RBC Capital Markets -- Analyst

I guess it's just a follow-up, if I were to concentrate on the core confectionery side of things, I guess one thing I wonder about is you've had a few different new products, some of them are combinations of Reese's Pieces and your core trademarks. You've kind of gotten two and half years it feels like into some of these call them mega extensions and I wonder about the incrementality of the new stuff you're doing versus perhaps the fate of some of the 2017 and 2018 vintages of these extensions. Is that something you're managing, and do you think you can still manage that on a net positive basis? Thanks.

Michele G. Buck -- President and Chief Executive Officer

Yeah, so as you think about 2019, what I'm really excited about in our innovation plan is that are two big innovations the chocolate packaged candy packaging reinvention which is really a better package but the same product which will drive shelf impact and usability etc. and then Reese Thins and we've got a great track record of innovations on Reese and also any time we innovate close to the core. So, I think the innovations we have in 2019 have a lot of the levers that tend to be correlated with some of our bigger successes. And then I think you're right, as we look at SKU rationalization, we include in that some of the past innovation that has had a couple good years of growth but maybe has dwindled down a bit to the point where we have more productive uses of the shelf space and so that's kind of included in that.

David Palmer -- RBC Capital Markets -- Analyst

Thank you.

Operator

In our next question comes from Jason English with Goldman Sachs, your line is open.

Jason English -- Goldman Sachs & Co. -- Analyst

Hey, good morning everyone thanks for slotting me in. I was hoping you could comment on the amount of pricing you expect to be realized in the P&L this year. I heard you say you're on track for the 250 BPS contribution, but it sounds like the timing of the new bags is going to happen a bit later than we expected and obviously we're entering the year with what looks to be a fair amount of year on year increase in trade spend, at least as we're closing last year which is creating a net price drag. As we contemplate the puts and takes of all that, what are you expecting to roll through the P&L?

Michele G. Buck -- President and Chief Executive Officer

Approximately about 1.5 for the year.

Patricia A. Little -- Senior Vice President, Chief Financial Officer

Yeah, you're right. And as we talked on the last call, it does build throughout the course of the year, so the full 2.5 doesn't get realized in the overall P&L, but you build up to that 2.5 by the time you get to the third quarter. So, all in it next to about a point half of the year.

Jason English -- Goldman Sachs & Co. -- Analyst

Okay, thanks, and sorry if you guys had previously given that clarity. And then I wanted to come back on the SKU rationalization drag. I think in your prepared remarks mentioned that SKU rationalizations is affording you the ability to swap out unproductive SKUs with more productive SKUs. If that's the case, shouldn't this be an acceleration? You're putting higher productive SKUs on shelves, shouldn't it be adding to growth net-net? And if not, I know your citing the drag, what am I missing there?

Michele G. Buck -- President and Chief Executive Officer

Well, there are inventories that get pulled back associated with some of those SKUs, and that's what drives part of that drag. So, there's a transition timing, there's the inventory piece, and that really creates that.

Jason English -- Goldman Sachs & Co. -- Analyst

Got it. And the last question, these are just sort of rapid-fire ones; I know on the last call you flagged retail take away with tracking at about 2.5%, you were gaining share. Your retail take away has slowed, your share has kinda flipped negative despite the strength and Halloween. Can you give us some context and color of what drove that sequential consumption deceleration?

Michele G. Buck -- President and Chief Executive Officer

I believe we stated we expected our retail take away to be about 1% in the fourth quarter and that's exactly where we came in, and the key drivers were as we expected. We had some really strong seasonal strengths, that was the biggest driver. And our shared clients decelerated as well which was expected.

Jason English -- Goldman Sachs & Co. -- Analyst

Okay, all right, thank you.

Operator

Our next question comes from Alexia Howard with Bernstein; your line is open.

Alexia Jane Howard -- Sanford C. Bernstein & Co. -- Analyst

Good morning everyone. Hi, can I just have a little poke into the drivers of growth margin? I know there's been a couple of questions on this, but I'm thinking particularly around the outlook for 2019, over the last 18 months I think you've had some headwinds from packaging. Things like the shelf ready packaging being a lull in gross margin product maybe some extra packaging costs because of online different formats and maybe having to go out to co-manufacturers a bit more often to get those different pack types. Is that still a headwind or is it becoming a bit easier and what are you seeing on the ingredient side of the outlook for 2019? Thank you, and I'll pass it on.

Patricia A. Little -- Senior Vice President, Chief Financial Officer

Hi Alexia, it's Patricia. You know clearly, we do expect gross margin expansion. Pricing will be a piece of this although I do want to remind everyone that a part of it relates to our new packaging that we're bringing on shelf after Easter and that has a cost implication too so that pricing is really designed to cover the cost of that. So, that's not a net drop-down to gross margin. In terms of ingredients, we do expect commodity costs to benefit us this year because when we look at the price of the underlying commodities and the timing that we get from hedging, so that should be a help to us.

But we do continue to expect inflation on things like packaging which is both core just pure inflation on packaging which we definitely see as well as continuing to build out things like our retail ready packaging and some of those programs. Freight is while it stabilized, it's not stabilized in a better number, it stabilized at where it is. And then as I mentioned, I think earlier today, we are starting to see some wage inflation related to low unemployment rates. So, you can really tell from that that there are a number of puts and takes, but overall, we definitely expect modest gross margin improvement.

Alexia Jane Howard -- Sanford C. Bernstein & Co. -- Analyst

Thank you very much, I'll pass it on.

Operator

We will take our next question from John Baumgartner with Wells Fargo; your line is open.

John Joseph Baumgartner -- Wells Fargo Securities -- Analyst

Good morning, thanks for the question. Patricia, I wanted to come back to your thoughts on reinvestment. I mean it sounds as though there won't be any real robust uptake in advertising spending in 2019. We haven't really seen trade spending increase for about four or five years now and I can't recall the last time we heard of any real material uptake in feet on the street sales force presence. So, as you think about the CMG category sticking below the long-term growth rate, the competition from adjacent categories ratcheting up, how do you think about those buckets of investment? Is there any area where you're seeing incremental needs being larger or how is it you think about the ROI on those buckets devolving? Just any clarity that would be helpful.

Michele G. Buck -- President and Chief Executive Officer

Hey John, it's Michele. So, I'm gonna kick off with some thoughts and Patricia will probably jump in as well. Let me start with advertising. As you think about advertising, while we definitely look at our rate of spend as a percent of net sales, we are also very focused on our delivery of media impressions to the consumer. So, if we look at the past year, our consumer impressions, our media impressions on our chocolate brands, we are actually up over 3% for the full year. So, what we're constantly trying to do is optimize how we approach each of these line items to get even more efficient. Sometimes we will increase the spending to get impact and other times will go for efficiency.

So, some of the ways we were able to do that, we've continued to advance our media capabilities and gotten smarter about how we are targeting some of that media. That's driven some of that. We've increased the earned impression using that as a lever which has helped us optimize the portfolio expanded and also, we created this in-house content studio which really let us take production costs down which enables us to put more of that spend into media. So, I would say for media if you think about that, that's a good analogy to how we think about every one of our line items.

 As we look at trade promotion, we mentioned previously that one of our ERP applications is a new trade promotion module that we think gives us better insight. Frankly, industry-leading insight and that will enable us to get both more effectiveness, more impact, but also hopefully more efficiency that helps to drive net price realization as well. And so, we are constantly looking at how we build those differentiated capabilities, e-commerce and other places that were looking to build those that as the world has evolved, even though we value very much our retail force in bricks and mortar and we constantly upgrade the skills there, we look at e-commerce as a new channel and we certainly invest a lot to build capability in that area. Invested in new distribution capacity. So, we think we are investing in a balanced way while also trying to optimize within.

Patricia A. Little -- Senior Vice President, Chief Financial Officer

Yep, and I don't -- that sounds great. I agree with everything you said.

John Joseph Baumgartner -- Wells Fargo Securities -- Analyst

Great, thanks for your time.

Operator

And we will take our next question from Steve Strycula with UBS; your line is open.

Steven Strycula -- UBS Securities -- Analyst

Hi, good morning. So, just to circle back on a question that you had touched on a little bit earlier and I apologize if there's any redundancy here, but on this SKU rationalization, Michele, could you just help us understand and unpack that, what was the key catalyst when you kind of embarked on this mission maybe last year? Was it more of just better intelligence as you kind of looked across the portfolio or maybe you weren't optimizing certain space? Or is it more focused on some of the smaller brands such as Crave and whatnot? So, that would be the first part of my question and I have a follow-up.

Michele G. Buck -- President and Chief Executive Officer

Okay, sure. So, the real impetus was complexity. We were starting to see the complexity creating some challenges in gross margin frankly. And so, it was really about simplification to drive that productivity through reducing merch units, assortments, some of our innovation, etc.

Steven Strycula -- UBS Securities -- Analyst

Okay, and then a question for your full-year guidance, I just wanted to understand a little bit more. Should we think about the benefit of the longer Easter season being about half a point for your org sales growth over the full year? Is that pretty fair? And then on the input cost assumptions, the way you've built out your gross margin expectations, have you factored that in Bay stuff kind of the current spot rates, or do you build in a little-anticipated inflation just so we kind of gauge at the conservatism? Thank you.

Michele G. Buck -- President and Chief Executive Officer

So, relative to Easter, guess about half a point is how you think about it, and Patricia do you want to handle the --

Patricia A. Little -- Senior Vice President, Chief Financial Officer

Yeah, on our key commodities because we hedge one of the things that gives us is a lot of good cost visibility, so that's what we include in our plan. We have those pretty -- since we hedge 24 months out, we have good visibility into that. We also stay in very close touch with the market on things like packaging, freight, wages that allow us to I think do very good at estimating the impacts of those.

Steven Strycula -- UBS Securities -- Analyst

Okay, thank you.

Operator

And we will take a final question Rob Dickerson with Deutsche Bank; your line is open.

Rob Dickerson -- Deutsche Bank Securities, Inc. -- Analyst

Great, thank you so much. So, Michele, I just have a broader question with respect to the 20 to 23% operating margin target you put out a couple years ago. So, I hear for 2019 gross margin should be up modestly. It sounds like some of that is more commodity-driven, not necessarily off of restructuring spend or ERP efficiency, etc. And then you set also that on the operating margin side was, sounds like that would be up a little bit more than what we've seen historically but frankly over the past three years, we haven't seen that much. So, I'm just wondering if we think about what this implied op margin expectation, you know where they need to be for 2020, is that still rational given what I'm hearing is increased efficiency, increase velocity probability off of SKU rationalization and more targeted spend, but I'm also hearing that maybe there's some need given the competitive environment that if you're more efficient, you might need to reinvest more which therefore could maybe increase the probability of accelerated topline growth with not as much margin expansion at the company? Which might not be a bad thing. So, I'm just curious of updated thoughts around kind of the top line growth relative to profitability expansion platform. Thanks.

Michele G. Buck -- President and Chief Executive Officer

Sure, when we set the target, it was really sad to ensure that we will be in the top quartile among our sector and that's really the goal and the intent of that EBIT margin target. We will always take a balanced approach to expanding margins on the last question and growing the top line and we know that sometimes we will shift in one direction versus the other, but we think that balanced approach is critically important. You know, 2018 overall was a pretty tough year for the industry from a margin perspective, but we are confident in our plans to make that progress in 2019 that you referenced, both in terms of on the gross margin line and a little bit below. So, we think there's always opportunity there, and we need to continue to evolve and attack each line item in the P&L to go after margin improvement, and we'll continue to do that going forward.

Rob Dickerson -- Deutsche Bank Securities, Inc. -- Analyst

Okay great, thank you.

Operator

And this concludes our Q&A session; I'd like to turn the program back over to our presenters for any additional remarks.

Melissa A. Poole -- Vice President, Investor Relations

Thank you for joining us this morning, will be around today for any follow-up questions you may have.

Operator

Thank you for your participation. This does conclude today's program. You may disconnect.

Duration: 64 minutes

Call participants:

Melissa A. Poole -- Vice President, Investor Relations

Michele G. Buck -- President and Chief Executive Officer

Patricia A. Little -- Senior Vice President, Chief Financial Officer

Kenneth B. Goldman -- JPMorgan Securities -- Analyst

Bryan D. Spillane -- Bank of America Merrill Lynch -- Analyst

Andrew Lazar -- Barclays Capital, Inc. -- Analyst

Robert Moskow -- Credit Suisse Securities -- Analyst

David Cristopher Driscoll -- Citigroup Global Markets, Inc. -- Analyst

Jonathan Feeney -- Consumer Edge Research -- Analyst

David Palmer -- RBC Capital Markets -- Analyst

Jason English -- Goldman Sachs & Co. -- Analyst

Alexia Jane Howard -- Sanford C. Bernstein & Co. -- Analyst

John Joseph Baumgartner -- Wells Fargo Securities -- Analyst

Steven Strycula -- UBS Securities -- Analyst

Rob Dickerson -- Deutsche Bank Securities, Inc. -- Analyst

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