Hershey : Q3 2024 Earnings Q&A Transcript

The Hershey Company

Third Quarter 2024 Earnings Q&A Session

November 7, 2024

The Hershey Company - Third Quarter 2024 Earnings Q&A Session, November 7, 2024

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

Anoori Naughton, Senior Director, Investor Relations

Michele Buck, Chief Executive Officer and Chairman

Steve Voskuil, Senior Vice President and Chief Financial Officer

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

Ken Goldman, J.P. Morgan

Andrew Lazar, Barclays

Peter Galbo, Bank of America

Alexia Howard, Bernstein

Robert Moskow, TD Cowen

Michael Lavery, Piper Sandler

Tom Palmer, Citi

Max Gumport, BNP Paribas

David Palmer, Evercore ISI

Chris Carey, Wells Fargo Securities

Leah Jordan, Goldman Sachs

Rob Dickerson, Jefferies

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

Operator

Greetings and welcome to the Hershey Company Third Quarter 2024 Earnings Q&A Session.

At this time, all participants are in a listen-only mode. A question-and-answer session will follow. If anyone should require operator assistance, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded

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The Hershey Company - Third Quarter 2024 Earnings Q&A Session, November 7, 2024

It is now my pleasure to intro your host, Anoori Naughton, Senior Director of Investor Relations. Thank you. You may begin.

Anoori Naughton

Good morning everyone. Thank you for joining us today for the Hershey Company's Third Quarter 2024 Earnings Q&A Session.

I hope everyone has had the chance to read our press release and listen to the prerecorded management remarks, both of which are available on our website. In addition, we have posted a transcript of the prerecorded 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 risk and uncertainties. These statements including 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 risk 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 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 for the GAAP results are included in this today'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. Again, we will now be conducting a question-and-answer session. If you would like to ask a question, please press star, one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star, two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question comes from the line of Ken Goldman with J.P. Morgan. Please proceed with your question.

Ken Goldman

Hi. Good morning and thank you. I wanted to ask a couple of questions around the comment regarding top-line being roughly on algo for next year. The first question is, the Street is looking for a pretty decent step-up in your realized price for next year. I wanted to make sure that's kind of the right way to think of it. And then the second question is is it reasonable for us to assume that your guidance will factor the typical or historical one-for-one elasticity on certain products that you've mentioned in the past?

Steve Voskuil

Sure.

Michele Buck

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The Hershey Company - Third Quarter 2024 Earnings Q&A Session, November 7, 2024

Steve, do you want to take that?

Steve Voskuil

Sure. The reference to the algorithm, we're talking about our long-term algorithm. So that's 2 to 4 on the top. That's the reference point that we're looking to. In terms of realized price, all-in, we'd expect pricing next year to look a lot like this year as the price increases we took this year flow through. Obviously, we'll work to make sure we're competitive and work with retailers to make sure we get good execution of that. From an elasticity standpoint, we expect historical elasticity, which is what we've seen as we progress further through this year.

Ken Goldman

Got it. I'll pass it on. Thank you.

Steve Voskuil

You bet. Thanks Ken.

Michele Buck

Thanks Ken.

Operator

Thank you. Our next question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Andrew Lazar

Great, thanks. Good morning Michele and Steve.

Michele Buck

Good morning.

Andrew Lazar

I guess I wanted to put sort of all things cocoa, sort of a side for a moment and focus again on sort of core underlying trends. What would you expect core, I guess, chocolate market share trends to look like as you exit this year? Can market share get back to stable or do you think it takes maybe more to the first half of next year? And what should we be looking for in the data, I guess, as we move through the fourth quarter? And I ask because obviously, if we're supposed to be looking through the anomalous cocoa cost inflation in '25 to potentially a year of maybe outsized growth in '26 as costs normalize, it's really these underlying share trends that obviously are most important and in core chocolate we're going on I think like two years of some share weakness. So that's really what I'm trying to get at. Thank you.

Michele Buck

Absolutely. Thanks Andrew. Yes, let me step back and talk a little bit about category and market share trends. First of all, we continue to feel really good about the category resiliency that we've seen

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The Hershey Company - Third Quarter 2024 Earnings Q&A Session, November 7, 2024

consistently growing around that 2% range, which is what it's been historically and continuing to outpace other snack categories. So we think that's a really good starting point for us.

We do see us ending the year with greater momentum than we have had, particularly if we look at some of the greenshoots that we called out in the script relative to sweet and the acceleration that that innovation that we launched in the marketplace is really taking hold, driving takeaway and also increasing share with each four week period that goes by with a great Halloween and expect that we will have won share in Halloween. SKINNYPOP, certainly we called for a reversal in trend. We've seen that in the past four weeks. Innovation remains strong. And then we have a few laps (phon) that we are starting to get into that period that lessens the pressure that we're facing. We had spoken before about reductions emerge into key retailers in the last 12 weeks, which we're 2% growth there.

So as we look forward, we feel good about a lot of those things combined with, as we get into next year, a longer Easter, other headwinds that are a bit less relative to snack, Mexican drinks and some of the retailer inventory issues. So, as I say, it's going to be, I would say a gradual improvement that we do think will build, both in terms of dollars and percent. And probably the piece of the portfolio that will remain under pressure will be instant consumables because convenience stores we really saw some of the pressure in that channel start midyear. So we think it'll take us through the first half to get through that. The other pieces of the portfolio we're expecting to continue to see recovery.

Andrew Lazar

Got it. Thank you. And then, real quick, just new head of North America confectionary, and maybe just a little bit about what you see him bringing to the table and where strategy could well change or is it more continuation with just more sort of energy around it. Just trying to get a better sense for that. Thanks so much.

Michele Buck

Yes, absolutely. So, obviously, Mike is a really strong exec coming to us from PepsiCo. Several things that I think he will bring. Number one, always appreciate external perspective and always a good chance to relook what we're doing well, where we can continue to be better. Secondly, he has a very deep and rich background of being incredibly close to customers and retail, and I think that he will significantly dial that up even further as we go forward into the future to unlock new growth and continue to evolve our portfolio to those channels where consumers are migrating to.

Andrew Lazar

Thanks so much.

Michele Buck

Thank you.

Operator

Thank you. Our next question comes from the line of Peter Galbo with Bank of America. Please proceed with your question.

Peter Galbo

Hey, Michele and Steve. Good morning. Thanks for taking the question.

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The Hershey Company - Third Quarter 2024 Earnings Q&A Session, November 7, 2024

Michele Buck

Good morning.

Steve Voskuil

Good morning.

Peter Galbo

Steve, in your prepared remarks you did give a bit of insight on '25 inflation and that rate expecting to be more of a headwind versus what it was in '24, but just wondering if you could elaborate. I think your guidance for this year is high single digit COGS inflation. So when you think about more for next year, is that a low double digit number, low teens, mid teens, just anything else more you can give us to kind of help as we think about modeling.

Steve Voskuil

Yes. Not surprisingly, the biggest piece is going to be cocoa, and the year-over-year moveable beat will be significant. If you look at the rates that we've been paying for cocoa this year, we said that back when we set our guidance in February, and so we said back then, we're well hedged for 2024. So, the cocoa prices we've been paying this year reflect getting into the market really from earlier this year and preceding. Now you flash ahead to current pricing and you look at pricing for next year, it's a pretty significant step-up. And it's not just the cocoa side. The cocoa beans, of course, the biggest piece, but there's also cocoa butter, cocoa liquor and some of the other physical derivatives of cocoa that'll be inside that inflation.

So, we'll get into a lot more detail on that when we come back in fourth quarter. But that'll be the biggest source of inflation, clearly. Yes, I expect we'll see some labor inflation. We'll probably see some other inflation in specialty ingredients and things like that. And alongside that, we'll be talking about our plans for productivity and so forth but to chip away at some of that inflation. But cocoa and sugar probably are going to be the two biggest pieces.

Peter Galbo

Got it. Okay. No, that's helpful. We'll wait for February for more detail there. And then, if I can just ask on the gross margin actually in the quarter. It seemed like it maybe came in below not only just history but maybe your own internal expectations. Just kind of what drove the variance? Is it the deleverage piece from volume or than you expected? Is it more mix? Just can you help us understand what happened there? Thanks very much.

Steve Voskuil

Sure. It was below what we were expecting. Just as we said, we're disappointed on the topline, disappointed by the margin performance as well. The biggest piece was the sales flow through and the fact that sales were down and then the mix of sales. We talked about C-store, for example. So there's some negative mix and size of sales delivery that had an impact on gross margin. And then as you mentioned, we also had some volume deleverage when we have that big of an impact in the quarter.

So between the sales flow through, the mix and the deleverage, those are really the biggest pieces that drove that disappointment.

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The Hershey Company - Third Quarter 2024 Earnings Q&A Session, November 7, 2024

Peter Galbo

Great. Thanks very much.

Steve Voskuil

Mm-hmm.

Operator

Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

Alexia Howard

(Inaudible).

Michele Buck

Alexia?

Alexia Howard

Hi there. Can you hear me okay?

Michele Buck

Now we can. Yes.

Alexia Howard

Good. Okay, perfect. Can I bring up the topic of the GLP-1 drugs? There seem to be a few data sources now. Obviously, it's early days, but suggesting that maybe mid single digit percentage of U.S. adults perhaps a little higher are currently using these. That was a little faster than we expected them to be adopted this time last year. Can I ask how you're going about exploring what these patients need, how should we respond to that, whether you're seeing any impact on the chocolate sales at the moment and what the forward is on that? And then I have a follow up.

Michele Buck

Yes. So, we would say we're seeing a mild year-on-year impact. I'd say consistent with what I think we've shared before, in line with what we would expect, which I would say is more of a gradual impact. We continue to see multiple sources of data validating that the consumers on those drugs aren't eating disproportionately less of our category. I know there's some mixed data, but we've seen a lot on that.

So, it's in line with what we expect and we are carefully monitoring that behavior, how it's evolving and certainly understanding what the needs are of those consumers so that as we continue to evolve our portfolio, which we'll always doing over time, that we are evolving it in a way to make sure that we have the right offerings for those consumers as well.

Alexia Howard

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The Hershey Company - Third Quarter 2024 Earnings Q&A Session, November 7, 2024

Many thanks. And then a quick follow up. You mentioned an increase in competitive activity in the international segment from global competitors in confectionary. Can you elaborate on that? Is that pricing competition or is there something else going on? Thank you, and I'll pass it on.

Michele Buck

Yes. A lot of it has been pricing competition where certain competitors have chosen to really deal back somewhat deeply on price point, and that's in some of the markets where we tend to be a smaller player.

Steve Voskuil

Yes.

Michele Buck

And it's a smaller market for us. But it's been intense in those markets where that is occurring.

Steve Voskuil

Yes. We've had pockets of strength. The U.K., Europe, winning with Reese and I think we're really pleased with the progress. But particularly Mexico and Brazil, we've seen higher levels of competition, some of which has been price related.

Alexia Howard

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

Steve Voskuil

Thank you.

Operator

Thank you. Our next question comes from the line of Robert Moskow with TD Cowen. please proceed with your question.

Robert Moskow

Hi. I guess two questions. I don't think I heard you, Michele, if you felt like 2026 can be an above algo year. I know a competitor of yours is really calling that out based on what they think cocoa costs will do. So, maybe you can give more specifics on how you think that works. And then I also wanted to make sure I understand the comment from Steve on pricing. I think you said it's going to look a lot like--pricing in '25 will look like '24. But you have a high single digit price increase on chocolate. So, if it looks like '24, that just looks lower than what I would expect. So maybe I'm wrong there, but can you give more clarity?

Michele Buck

Yes. So I'll hit the 2026. We do feel good that 2026 can be on algorithm if cocoa is stable and if cocoa prices really decline. There could be some outsized growth possible, certainly. So, we're watching the cocoa price carefully but we are feeling good based on what we believe and see that we would be on algorithm or have some upside.

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The Hershey Company - Third Quarter 2024 Earnings Q&A Session, November 7, 2024

Steve?

Steve Voskuil

Yes. On the pricing side, I think the piece is we've taken pricing on about half of our chocolate comp. So when you factor that in, it ends up netting out to low mid single digit pricing in total. And that's why I say it's largely similar to what we saw this year.

Robert Moskow

Okay. Thank you.

Steve Voskuil

Thanks Rob.

Operator

Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Michael Lavery

Thank you. Good morning.

Michele Buck

Good morning.

Michael Lavery

Just wanted to understand how you're thinking about marketing spending. Your advertising spending was down slightly but of course so were sales and it wasn't down quite as much as sales. On a percent basis, obviously, even in this quarter, that's held up. You've obviously got a cost pressured environment. Is marketing one of the ways you can have some flexibility with the bottom line? Or how do you think about just protecting that or really trying to protect share as well given the price increases.

Michele Buck

I'll share some thoughts and I'll ask Steve to as well. So, clearly, we continue to believe in the importance of investing in our brands. We think that's also really important in an environment where prices are where they are. That said, we have really good marketing mix models. We continually look at generating higher ROIs. Each year we hold ourselves to that standard. We are also always looking at things like new media agency RFPs that can drive meaningful productivity. We do have that as we approach 2025.

So, we're trying to be very thoughtful about investing where we think it makes sense strategically. There's an area next year that we really want to focus on in terms of incremental investment in our variety brands to really bolster the instant consumables business.

Steve, other things you want to add there?

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The Hershey Company - Third Quarter 2024 Earnings Q&A Session, November 7, 2024

Steve Voskuil

Yes. We did say Q3 we indexed a little bit to sales the way media hits P&L, so there's some impact there. No pullback in terms of supporting our brands. As we look to next year, our top priority is going to be driving topline, driving share, driving consumption and we're going to leverage media as one important tool to do that. And that's not to say we don't want efficiency. As Michele said, we're looking to new agency that'll drive some efficiency. We're bringing new tools to bear to make sure that we're allocating that money wisely. But we're absolutely not pulling back.

Michael Lavery

Okay, that's helpful. And then, just a follow up on your inventory comments, tighter retailer inventories you had called out as impacting the outlook. Coming into the quarter you had pointed to a second half inventory restocking that would have been 4Q skewed, I believe, even maybe kind of a 4 or 5 point lift in, at least, confections in 4Q. I don't know how specific you can be, but it sounds like that's not coming through as expected. Can you just give a sense of maybe how much the guidance cut is from an inventory reset that isn't materializing the way you had initially expected?

Steve Voskuil

Sure. Yes, we still expect in the fourth quarter to see a mid single digit but kind of say all shipping timing impacts is still going to be pretty significant in the fourth quarter. If I take a look at full year guidance, the impact of all of these inventory moves, it's probably about a half point drag on the adjustment that we made. Just to give some perspective, and I think we acknowledged, this is a noisy quarter with lots of- between lapping S4 in the case of ALD (phon) and timing and the way retailers have laid out Seasons have lots of factors. But when you look across all of it, the biggest piece is a half point.

We expect to see less of that all in 2025, which should be a lot cleaner conversation.

Michael Lavery

Okay, great. Thanks so much.

Steve Voskuil

Sure.

Operator

Thank you. Our next question comes from the line of Tom Palmer with Citi. Please proceed with your question.

Tom Palmer

Good morning.

Michele Buck

Good morning.

Tom Palmer

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