Hershey : Q4 2022 Q&A Transcript

The Hershey Company

Fourth Quarter 2022 Earnings Results

Q&A Session

February 2, 2023

The Hershey Company - Fourth Quarter 2022 Earnings Results Q&A Session, February 2, 2023

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

Melissa Poole, Vice President, Investor Relations

Michele Buck, Chairman of the Board, President 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 L P A R T I C I P A N T S

Andrew Lazar, Barclays

Robert Moskow, Credit Suisse

Ken Goldman, JPMorgan

Bryan Spillane, Bank of America

Michael Lavery, Piper Sandler

Cody Ross, UBS

Chris Growe, Stifel

Nik Modi, RBC Capital Markets

Jason English, Goldman Sachs

Pamela Kaufman, Morgan Stanley

Chris Carey, Wells Fargo Securities

David Palmer, Evercore ISI

Steve Powers, Deutsche Bank

Max Gumport, BNP Paribas

John Baumgartner, Mizuho Securities

Jonathan Feeney, Consumer Edge

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The Hershey Company - Fourth Quarter 2022 Earnings Results Q&A Session, February 2, 2023

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

Operator

Greetings, and welcome to the Hershey Company's Fourth Quarter 2022 Question-and-Answer Session.

At this time, all participants are in 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. You may now begin.

Melissa Poole

Good morning, everyone. Thank you for joining us today for The Hershey Company's Fourth 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. At this time, we will be conducting the question-and-answer session.

Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Andrew Lazar

Thanks so much. Good morning, everybody.

Michele Buck

Good morning, Andrew.

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The Hershey Company - Fourth Quarter 2022 Earnings Results Q&A Session, February 2, 2023

Steve Voskuil

Good morning.

Andrew Lazar

Hi there. I guess just one for me. I'm trying to get a better sense of how you're thinking about elasticity for '23, versus what you saw in '22, which was very little, and what percentage increase in capacity are you expecting for this year, and I guess I ask because, you know, if elasticity were to stay as benign as it has been and you ramp some capacity, I'm trying to get a sense of whether it could render your flat to slightly down volume outlook for the year somewhat conservative or if continued capacity constraints limit the potential for top line upside from here.

Michele Buck

Yes, thanks, Andrew. As we look at price elasticities, we are assuming that they will be closer to last year than they were to historic, but not quite as good as last year, and as we look at our capacity, we will have low-single-digit increases in capacity, which do give us some ability to flex with demand as we see it.

Steve, anything else?

Steve Voskuil

No, that's spot on.

Michele Buck

Yes.

Andrew Lazar

Excellent. That's it. Thank you so much.

Michele Buck

Thanks, Andrew.

Operator

Thank you. Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Robert Moskow

Hi, thanks, and congrats, everyone, for such a great year. I wanted to know if the guidance for '23 is more aggressive than normal. Like, you normally start the year rather conservative, but this year you're guiding above your normal algorithm, and I want to know if you could kind of isolate what the key drivers are and why you've raised it compared to three months ago. Maybe drilling down, it looks like gross margin is coming in better than you thought, maybe you can explain why. Then, also, on market share, are you expecting market share gains in Confectionary in '23? Thanks.

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The Hershey Company - Fourth Quarter 2022 Earnings Results Q&A Session, February 2, 2023

Steve Voskuil

Sure. Do you want me to start with that one?

Michele Buck

Yes, go ahead, Steve.

Steve Voskuil

Yes. So, just on the big movers on the top line, obviously price driven, and we have good visibility into that, we saw that effect be part of the driver for the fourth quarter performance, and so we see that carrying forward, especially through the first three quarters of next year, and we do have elasticity factored in, as Michele said in the last question. Our planning isn't quite down to the levels of historic elasticity, but it probably looks more like last year, to see it sort of drop further through the P&L. We do see some benefit from the gross margin side as we see more stabilization and the pricing coming down and some cost efficiencies, and a return to more historic levels of productivity. Now, we still have to reach for more productivity, but at least this year we're starting to see something that we hadn't seen in the last two years. So, those are some drivers through the P&L that far.

On the market share side, yes, we do expect to have positive market share next year. I think that's one that we're disappointed about this year and want to see turn the other direction next year.

Michele Buck

Yes, and some of that market share will be helped by the incremental marketing investment, as we've taken that up, as we have additional capacity online, and certainly the additional capacity, as well. As we think about the pacing of the market share, you should think about it relative to the beginning part of the year will be slower and we won't see those declines probably till we get into the spring, but once we hit the spring, that will really kick into gear. We know that we had some lost opportunity this year around Seasons, that we weren't able to fulfill totally all of the orders, and then, also, a little bit of a mix impact from refreshment being a late rebounder given social behaviors, but we think that'll neutralize going forward.

Robert Moskow

Okay, makes sense, and just one follow-up. On the gross margin side, are your costs, like, inflation costs, coming in better than you thought, or is this really just productivity is accelerating more than you thought?

Steve Voskuil

Yes, it's probably more on the productivity side. We have pretty good visibility into the COGS costs, and with the hedging program and so forth, particularly on commodities. We're still expecting high-single-digityear-over-year inflation through commodities and a lot of the materials items, and mid-single-digits on things like labor and logistics and other supply chain costs. I don't think those assumptions have changed much from our outlook, but probably a little bit more productivity.

Robert Moskow

Great. Thank you.

Michele Buck

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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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