Hershey : Q1 2022 Q&A Transcript.pdf

The Hershey Company

First Quarter 2022 Question-and-Answer Session Conference

April 28, 2022

The Hershey Company - First Quarter 2022 Question-and-Answer Session Conference, April 28, 2022

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

Melissa Poole, Vice President, Investor Relations

Michele Buck, Chairman and Chief Executive Officer

Steve Voskuil, Senior Vice President and Chief Financial Officer

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

Andrew Lazar, Barclays

Robert Moskow, Credit Suisse

Ken Goldman, JPMorgan

Jason English, Goldman Sachs

Alexia Howard, Bernstein

Bryan Spillane, Bank of America Merrill Lynch

Michael Lavery, Piper Sandler

Cody Ross, UBS

Chris Growe, Stifle Institutional

Steve Powers, Deutsche Bank

Jonathan Feeney, Consumer Edge

John Baumgartner, Mizuho Securities

David Palmer, Evercore ISI

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

Operator

Greetings, and welcome to The Hershey Company First Quarter 2022 Question & Answer Session Conference.

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The Hershey Company - First Quarter 2022 Question-and-Answer Session Conference, April 28, 2022

At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded.

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. Please go ahead.

Melissa Poole

Good morning, everyone. Thank you for joining us today for The Hershey Company's First 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 Presentation, 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

Ladies and gentlemen, the floor is now open for questions.

The first question is coming from Andrew Lazar of Barclays. Please go ahead.

Andrew, your line is live. Please make sure you're not muted on your end.

Andrew Lazar

Good morning, everybody. Can you hear me?

Operator

Yes, we can hear you.

Andrew Lazar

Great, thank you. I guess first off, by our estimate, it seems like you're raising full year organic sales by essentially the over-delivery in the first quarter; meaning, expectations for the remainder of the year

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The Hershey Company - First Quarter 2022 Question-and-Answer Session Conference, April 28, 2022

haven't changed. Is that the way you're looking at it, and if so, I guess why is that, given the momentum in the business? I realize you'll start to lap some of the pricing as the year unfolds.

Michele Buck

Hey, Andrew, good morning.

Andrew Lazar

Good morning.

Michele Buck

I'm going to kick it off with a few responses, and ask Steve to jump in, as well.

First of all, I'd say we're really pleased with our first quarter results and the momentum that we see on the business, but it is pretty early in the year still, and as we all know, we continue to see significant volatility in the marketplace, whether it's record inflation, the Ukraine/Russia situation, continued disruption in supply chain. As we dissect the business in the first quarter, clearly, within the first quarter the large majority of our sales were related to stronger elasticities that had been realized in the marketplace, but we do anticipate, as we look further out in the year, that we'll see some moderation on those elasticities, perhaps back to more historic levels, and a lot of that is driven by that reduction in government subsidies and the continued inflation pressure that we think consumers will experience.

There was another component of our Q1 sales beat that was about-or raise, that was about Dot's and our ability to really get our arms around the Dot's business and better understand what we thought it could deliver for the year. We have pretty good visibility into that, so we feel like the number there is pretty good.

Then, lastly, as we look at inventory, we've been really working hard to build inventory, and we did get more inventory out to retail. We made a decision to do that in Q1, to really try and increase on-shelf availability.

So, from a sales perspective, as we look at what we realized versus how we think that will impact the back half of the year, we think the strength in Q1 from sales is much stronger. But, Steve, do you want to comment more about that, and also relative to the cost and profit situation?

Steve Voskuil

Yes, on the top line, I think you hit all the key points. The inventory piece was about a 3-point benefit to the first quarter. That'll come out in the back half. That's one of the unique things, I guess, that drove the first quarter performance. Then, Michele touched on the elasticities. We saw a big benefit in the first quarter. We do expect to see elasticities normalize a bit as we go forward quarter-by-quarter through the year. So, those are probably the two biggest things. So, that's talking a little bit of the outlook on the top line.

Andrew Lazar

Great. Then, I guess the second one would be sort of a similar thought process, but more on the EPS side. Obviously, the first quarter came in some $0.40 higher than the street and you're raising the full year by $0.07. Maybe, can you bridge that gap for us a little bit? Are you trying to be just somewhat conservative in your thought process given, obviously, an increasingly dynamic environment, which

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The Hershey Company - First Quarter 2022 Question-and-Answer Session Conference, April 28, 2022

makes total sense, or are there some other things that are more discrete that we want to make sure to keep in mind on the profit side? Thank you.

Steve Voskuil

Sure. Yes, the biggest driver for first quarter earnings was that volume, 4.5 points of volume in the quarter that dropped through to earnings. That was the biggest factor. There were some unique pieces, as well. I think we called out a couple in the remarks. One was inventory revaluation, which is sort of an unusual thing, we see it in times of higher inflation, which has the impact of giving a benefit to the P&L and putting more costs on the balance sheet to reflect the cost of goods value there. So, that was 100 basis points to the Confection segment in this quarter, that won't repeat going forward.

As you said, we do expect more year to go inflation. We, in the first quarter, saw a little bit of that incremental inflation, but as we look forward, despite the hedging that we have in place, we're still going to have some incremental exposure, particularly to the commodities impacted by the events in Eastern Ukraine-or Eastern Europe, sorry.

Andrew Lazar

Thank you so much.

Michele Buck

Thanks, Andrew.

Operator

Thank you. The next question is coming from Robert Moskow of Credit Suisse. Please go ahead.

Robert Moskow

Hi. Thanks for the question. There's a lot of detail in the prepared remarks about competitive activity that caused you to lose some market share during Easter, and your capacity constraints that led to that. As we head into Halloween, are you in a position to ramp up sufficiently, so that you can hold your share? The reason I ask is, you know, I remember during the pandemic Halloween was a real tipping point for your distribution with retailers. You gained a lot of goodwill after that. You gained a lot of distribution. Are you in a position so that there's no risk of that reversing?

Michele Buck

Rob, clearly, over the past two years, we have had some nice gains in share, and certainly those have contracted recently given some of the capacity pressure. I think we're up about 50 basis points versus where we were pre-pandemic. Our share versus our next largest competitor, that gap has clearly widened and remains pretty strong, about 200 basis points ahead of pre-pandemic levels. We are doing everything we can, relative to building capacity, investing in new lines, distribution centers, hiring more people, to build our supply as much as possible, and working really closely with retailers, as well, on our plans for Halloween right now. We expect that, as we go through the year, we will continue to have supply challenges, although they will improve as we progress throughout the year, and we're working hard to maximize the opportunity for Halloween.

Robert Moskow

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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.

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