Hershey : Final 1142022 hershey co q3 2022 qna 13721581

The Hershey Company

Third Quarter 2022 Earnings Q&A Session

November 4, 2022

The Hershey Company - Third Quarter 2022 Earnings Q&A Session, November 4, 2022

C O R P O R A T E P A R T I C I P A N T S

Michele Buck, Chairman, Chief Executive Officer

Steve Voskuil, Senior Vice President, Chief Financial Officer

Melissa Poole, Vice President, Investor Relations

C O N F E R E N C E C A L L P A R T I C I P A N T S

Andrew Lazar, Barclays

Bryan Spillane, Bank of America

Michael Lavery, Piper Sandler

Robert Moskow, Credit Suisse

Ken Goldman, JP Morgan

Alexia Howard, Bernstein

Pamela Kaufman, Morgan Stanley

Nik Modi, RBC Capital Markets

Jason English, Goldman Sachs

Chris Growe, Stifel

Cody Ross, UBS

Jonathan Feeney, Consumer Edge

David Palmer, Evercore ISI

P R E S E N T A T I O N

Operator

Greetings and welcome to the Hershey Company's Third Quarter 2022 Question-and-Answer Session. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded.

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The Hershey Company - Third Quarter 2022 Earnings Q&A Session, November 4, 2022

I'd now like to turn the call over to your host, Ms. Melissa Poole, Vice President of Investor Relations for The Hershey Company. Thank you, you may now begin.

Melissa Poole

Good morning, everyone. Thank you for joining us today for The Hershey Company's third quarter 2022 earnings Q&A session. I hope everyone has had the chance to read our press release and listen to our pre-recorded Management remarks, both of which are available on our website. In addition, we have posted a transcript of the pre-recorded remarks. At the conclusion of today's live Q&A session, we will also post a transcript and audio replay of this call.

Please note that during today's Q&A session, we may make forward-looking statements that are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the Company's future operations and financial performance. Actual results could differ materially from those projected. The Company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the Company's SEC filings.

Finally, please note that we may 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. Reconciliations to the GAAP results are included in this morning's press release.

Joining me today are Hershey's Chairman and CEO, Michele Buck, and Hershey's Senior Vice President and CFO, Steve Voskuil.

With that, I will turn it over to the Operator for the first question.

Operator

Thank you. Our first question is coming from the line of Andrew Lazar with Barclays. Please proceed with your question.

Andrew Lazar

Great, thanks so much. Good morning, everybody.

Michele Buck

Good morning, Andrew.

Andrew Lazar

Morning. Maybe first off, you discussed in the prepared remarks how you expect a strong top and bottom line performance in '23. Given where the markets are, it seems like items like pension and interest expense will be incremental headwinds, obviously, for the group as a whole next year. I was wondering if you'd be able to help level set us a little bit on where some of these items at least that you do have visibility to might sit for next year, and if they are material enough to derail the earnings performance in the year.

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The Hershey Company - Third Quarter 2022 Earnings Q&A Session, November 4, 2022

Michele Buck

Sure. Andrew, let me start with a little bit of an overview and then I'll let Steve dive into a few more of the specifics.

Overall, we believe we can deliver an on-algorithm year next year. We believe our sales will be slightly ahead of algorithm, pricing will be about comparable to 2021. We anticipate that our gross margins will be stable. We will have a step-up in investment as we reinvest, reinstate some of the DME spend now that we have more capacity available to really be able to take advantage of that, and also to invest in capabilities to secure a profitable, sustainable future. We think all of that will net down to strong earnings performance that will likely be at the high end of our algorithm, so that's a little bit of an overview.

Steve, I'll let you go a little bit deeper.

Steve Voskuil

Yes, just on the discrete items, to answer your question at a summary first, we don't see any derailers in terms of those discrete areas. We will have more pension expense - our estimate today would probably be $5 million more year-over-year for next year. On the pension side this year, we picked up about $10 million of incremental pension expense. Next year, I would-again, markets can change, but today I would probably estimate that at probably twice that number for next year, but neither of those are material enough to shift the needle.

Michele Buck

Yes, sorry - just to clarify, that first $5 million was interest for the year.

Steve Voskuil

Yes, sorry.

Michele Buck

Then the pension, probably about $20 million.

Steve Voskuil

Yes.

Andrew Lazar

Really helpful, very helpful. Just lastly, as you mentioned, you've got incremental pricing on tap for '23, and I appreciate you're planning for greater elasticity than you've seen thus far, which is prudent. Obviously you delivered strong volume this year in the face of high single digit pricing. You've got more capacity coming online. I think A&C is expected to grow faster than sales next year. Dot's entering, I think, the organic calculation to start the year, and obviously strong underlying momentum, so at a minimum, shouldn't these help at least mitigate the potential for building elasticities in '23? I'm just trying to make sure I'm not missing anything else on either side of the ledger. Thanks so much.

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The Hershey Company - Third Quarter 2022 Earnings Q&A Session, November 4, 2022

Steve Voskuil

Yes, I think that's the right way to think about it. As Michele said at the top, I think we've got a lot of positives in the story for next year as some of the things you mentioned roll through, and I'm sure we'll have challenges but we don't see anything yet that is a derailing factor.

Andrew Lazar

Thank you very much.

Michele Buck

Thanks.

Operator

Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your questions.

Bryan Spillane

Hey, thanks, Operator. Good morning, everyone.

Michele, in the prepared remarks you referenced consumer behavior and maybe seeing some changes in where people shop, channels and pack types. Could you just elaborate a little bit more on that and maybe how Hershey is adjusting to that?

Michele Buck

Yes, absolutely. We are seeing some of those changes in how they're spending. Fortunately, we are seeing them continue to spend, but there is some reprioritization, so specifically value channels and value packs are selling well. We are also seeing some improvements in private label performance, and really we're seeing this across the board, slightly more noticeable with lower income consumers, but really across all different income levels.

Within our categories, the trends have really remained very strong as the consumer continues to prioritize snacking and particularly sweet treats, and obviously we have minimal private label presence, so we continue to see that our products remain an affordable treat for families and for consumers, and we know that part of that is they want to reward themselves when times are tough. They also use these products to relieve stress, and we think that those trends will continue.

I think on a class of trade basis, just to augment relative to the channel piece, we have seen particular strength in mass, in club and in dollar, so certainly in channels that represent strong value.

Bryan Spillane

Okay, thank you.

Michele Buck

Sure.

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ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only.

1-888-562-02621-604-929-1352www.viavid.com