Anoori Naughton:

Good morning, everyone. Thank you for joining us today for The Hershey Company's second quarter 2024 earnings Q&A session. I hope everyone has had the chance to read our press release and listen to our prerecorded 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 [including] (ph) 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 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.

Ken Goldman:

Hi. Thank you. And Melissa Poole, I think you're probably somewhere in the call. I think you're still there. Thank you for all your help over the years. And Anoori, congrats on your new increased role. I wanted to ask within North American Confectionery this quarter, as you mentioned, there was 6% impact from lower retail inventory and around 2% to 3% from the Halloween shift. You seem confident that these impacts will have no real material effect on the year, which I understand. But my question is, is it unfair for investors to ask if there isn't at least a small red flag underlying this news? And I'm just asking because historically in food, destockings, delayed orders haven't always been for benign reasons. Sometimes they're, I guess, outgrowths of softer end user demand. So, just curious what gives you confidence there's not a relationship between the delays and demand, which seems to be implied by your commentary.

Steve Voskuil:

Yeah, I'd be happy to. I mean, as we've seen in the last few years, there's been actually quite a bit of volatility around inventory levels, partly based on the COVID era and supply chain challenges. And so, I think what we're seeing now is a more reversion to the way it's been more traditionally, which is [handling ships] (ph) more in the third quarter than in the second quarter. So, the change from prior year -- but we had good visibility into our seasonal orders already. Most of those orders are in hand. We've got strong expectations for the seasons, a lot of retailer collaboration. And so, I think as we look at it, we don't see it as a red flag. We see it as a more reversion to a traditional order pattern.

Michele Buck:

Absolutely. So, as you all know, we have experienced historic cocoa prices for some period of time now. And while we believe the current cocoa price is not sustainable, we do believe that the future prices will be higher levels than we've seen before this kind of recent historic pricing cycle. Our approach on the pricing has been to take a measured approach. We've absorbed a lot of inflation already, but we do believe we need to pass some of it on. And we're seeing the category hold up fairly well in this tougher environment. We think it's historically been very rational. We think it will continue to be. So, overall, we are not going to price the entire portfolio. We do have a robust internal process where we take a lot of factors into consideration to determine what our approach will be, but that's what gives us confidence. We will be getting about 6 points to 7 points of net price realization. At this point, we don't want to go into a lot of the specifics around the pricing. It was very recently announced, and so it is still out there being sold into customers. And we think from a competitive perspective at this point, we shouldn't go into too much more detail. We are assuming that we'll see historic elasticities, which is a little bit worse than we have seen in our recent price increases. So, we think that that's the right approach as we plan for this on the business going forward.

Michele Buck:

Thanks, Ken.

Andrew Lazar:

Great. Thanks so much. Good morning, everybody.

Andrew Lazar:

Michele, I wanted to dig in a little bit more on market share trends in core chocolate. I know share trends have been weaker I think than expected particularly in everyday items even though Hershey is lapping some share losses in core chocolate last year. And I know last year there was more of a focus on capacity additions, but I guess I was -- I thought this year would mark a return to more innovation, more normal levels of sort of in-store commercial activity and such. So, I'm just trying to get a better understanding of what you think is driving those share losses and maybe when you'd expect to start to see those trends start to inflect, particularly in light of your intent to take some incremental pricing, albeit justified pricing?

Andrew Lazar:

Great. And then, just a quick follow-up on the reduction in retailer merch that's kind of impacted the last couple of quarters that you'll be lapping, I guess, what was like the sort of post-mortem on that, if you will? Typically, some of these things kind of -- the pendulum swings too far maybe in one direction and then key retailers sort of figure out that it does make sense to put -- to have lots of different points of interruption, if you will, across the store because it's such an impulse item. So, I'm just curious like any lingering effects that you expect from that or not so much? Thanks.

Andrew Lazar:

Thank you.

Alexia Howard:

Good morning, everyone.

Michele Buck:

Hello.

Steve Voskuil:

Yeah. The biggest driver on the incentive side is just tracking with what our expectations are from a full year standpoint. And so, we -- at any quarter, we true-up where we're at year-to-date and the outlook for the full year. And that's the benefit that we're -- say, benefit that's flowing through into the incentive comp right now.

Steve Voskuil:

No. We wouldn't expect it to bounce back. We are -- incentives are structured as more than just, say, the headline numbers. There are things other goals and objectives underneath there. There's different parts of the portfolio that have different goals. So, even though the headline numbers may not change that much, some of the underlying incentive calculations can change. And so, as I say, we trued-up every quarter. We're not expecting it to come back. I would look at it as a step down for the second quarter that will continue to pull through the back half.

Alexia Howard:

Got it. Okay, perfect. And then, on the gross margin, you mentioned that this quarter, obviously, you're still expecting 200 basis points decline for the full year. This quarter, you talked about input cost timing favorability. Which input cost was that on? Presumably, it wasn't cocoa, because I thought you had that locked in at the end of last year. So, just curious about the dynamics on input costs.

Alexia Howard:

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

Bryan Spillane:

Hi. Thanks, operator. Good morning, everyone.

Bryan Spillane:

Hey. So, Michele, I guess, a question I think you're going to get or we're all going to be asking over the balance of the year is just consumer receptivity of a price increase and maybe why normal elasticity. And I say that in the context of if you look at your own results, right, it's clearly a value shift, right? Dollar stores, club stores doing well, convenience stores not doing as well. Pepsi is cutting prices, right, on Frito, because they priced too high. There was -- the lift on merchandising wasn't very good. Mondelez is trying to get a $3 price point instead of a $4 price point in front of people's eyes. So, it just seems like a lot of the other snacking peers are adjusting down maybe to start stimulating demand. So, just how you think about that in the context of trying to take another price increase?

Bryan Spillane:

Okay. And then, Steve, if I could just one quick follow-up, I think you mentioned it might have been in the prepared remarks, cocoa and beginning to start laying in a little bit for '25. If we think about the gross margin expectation for this year for '24, should we assume that you've got visibility or you're pretty much locked in on cocoa? So, if it moves around, it's more of a '25 versus '24 factor we should think about?

Bryan Spillane:

Okay. Thanks for that, Steve. Thanks, Michele.

Michele Buck:

Thank you.

David Palmer:

Great. Good morning. Just a quick follow-up on the previous question on pricing. You mentioned the 6% to 7% price increase. Is that consistent with what you would expect for North America Confection in your reported results for '25, or is -- are there timing issues there? Just wanted to check on that. And then separately, your commentary and guidance seems to imply stabilization or at least some acceleration into the second half in North America Confection. I just wanted to get your temperature. What of the stuff that you've talked about, Shaq, the new Reese's, the channel expansion that you talked about maybe with club and then the restoration of merchandising with that key retailer, what about that is the most important to that acceleration?

Michele Buck:

Yeah. I guess, if I was going to zero-in on some of the biggest second half driver, certainly the lap on the large retailer, merch and resets is significant. So, I would put that first and foremost, and we have really good visibility into what that should look like. Secondly, the impact of season, that differential, also large and strong visibility into the sell-in for those seasons and then the sweets innovation is also one of the big drivers. And then lastly, I'd say the continued salty -- we really haven't talked much about salty, but the continued salty acceleration, we have seen the momentum shift on that business. Certainly, Dot's has remained strong, but SkinnyPop is seeing a regaining momentum and we expect to continue to see that in the back half.

Steve Voskuil:

Thank you.

Max Gumport:

Hey, thanks for the question. In the prepared remarks, you discussed consumers pulling back on discretionary spending and C-store weakness. So, I was hoping to get a bit more color on what you're seeing there, particularly around the remark about seeing it really pick up over the last two months. And then, also a bit more color on how long you expect this dynamic could persist? Thank you.

Max Gumport:

Thanks. And then, with regard to the commentary of historic elasticity expected with the price increase on the North America Confection business, is that historic elasticity right around 1 or a 0.9? And just a bit more color on what's giving you the confidence that it will be right around that level? Thank you.

Max Gumport:

Thanks. I'll pass it on.

Tom Palmer:

Good morning, and thanks for the question. You mentioned your view that current cocoa prices are not sustainable. And I just wanted to understand in the context of the round of pricing that you announced, how you're thinking about covering longer-term pricing, so -- sorry, longer-term inflation. So, does this round of pricing kind of cover your view of where cocoa prices might migrate longer term?

Steve Voskuil:

Yeah. No, that's right. We continue to manage pricing as one of many levers. And so, we're also looking at cost reduction productivity, we're looking at formulation, we're looking at all kinds of levers that we've talked about in the past to manage cocoa price, still very volatile. And as I said before, given even where it is today, and it's down from where it was earlier this year, if we kind of took current prices and flash ahead to the future, it's pretty still a very significant year-over-year inflation piece. And so, this pricing action will help. It's not by itself going to mean that we're already at long term covering the total cost, but it's a good first step, and you can expect we'll take other steps across all the levers that we have in the basket to address.

Tom Palmer:

Okay. Thanks for that detail. And then, just any help kind of thinking about the puts and takes as we think about the third quarter versus the fourth quarter in terms of maybe some of the earnings cadence? Obviously, shipment timing is a big factor, but maybe any other help on kind of the progression of gross margin or underlying sales trends?

Tom Palmer:

Okay. Thank you for that.

Robert Moskow:

Hi, thanks. Just wanted to know if you could kind of elaborate on your thinking for marketing support. There was a big increase last year and I think the plan was for another increase this year. Where do you stand on your how much marketing is going to increase this year? Has anything changed? And as you get into 2025, because of these incremental costs that you're going to have to take into account, how do you think about marketing relative to sales into '25? Thanks.

Robert Moskow:

And the next year?

Steve Voskuil:

For next year, I'd expect also to match roughly in line with sales. And we're not far enough down all of our game planning for next year. We'll get more details later in the year, but I think from a planning standpoint, assume that it's going to at least match what we're doing from a sales standpoint.

Steve Voskuil:

You bet.

Jim Salera:

Hi, good morning, guys. Thanks for taking our question. Michele, in the prepared remarks, you talked about in salty strong trends with Dot's and then kind of improvement for SkinnyPop in the back half of the year, but the salty category as a whole has seen some pressure, and obviously more promotional activity probably coming into the category. So, just maybe walk through puts and takes on what gives you the confidence for Dot's maintaining momentum in the back half of the year and then SkinnyPop reaccelerating?

Jim Salera:

Okay. That's helpful. And maybe to drill down a little bit on the Ready-to-Eat popcorn, is part of the softness there just consumer preference for like trading out or opting for another substitute good instead of the popcorn, or is there something particular with that cohort, where the consumption trends are a little bit lighter there relative to something like Pretzels or Dot's?

Jim Salera:

Great. Thanks for the color. I'll hop back in the queue.

Michael Lavery:

Thank you. Good morning.

Michele Buck:

Good morning.

Steve Voskuil:

Sure. Yeah, on the -- specifics on hedging, you're right, I can't really give color around how far out we're hedged for 2025. As I said, our policy hasn't changed. And so, we've got some guardrails. It's fair to assume we've got some level of coverage in 2025, but we're still watching the market and the volatility. And so, we'll continue to, through our normal process, monitor that and take coverage as appropriate. As we get later in the year, as our visibility increases, I would hope to be able to provide a little bit more color. Again, a lot will depend on, as we sit here, for example, on the third quarter call what we see and how much visibility we do have into cocoa and probably some other variables as well. That would be the hope. We'll see how we're sitting when we get there, but we'd love to be able to provide more color once we have the visibility we can give you to rely on.

Michele Buck:

Hey, I mean, we're always looking at the best portfolio to meet consumer needs. We love the categories that we're in. And as you know, we've made decisions to expand and leverage our core capabilities that are so strong in snacking more broadly across snacking with our -- particularly with our launch into salty a few years ago. We also look across our -- even our chocolate portfolio and try and optimize our demand creation. We have certain parts of the portfolio that have more cocoa and chocolate, and certain parts like cookies and cream that may have others, but our goal is always to go where the consumer is.

Steve Voskuil:

Thank you.

Chris Carey:

Hey, good morning. Thank you for the question. I just have one follow-up on levers, and then a clarification on the back half. Steve, just regarding the levers, in the prepared remarks, there was a statement that the pricing was the first step to cover inflation. I couldn't tell if the implication was that you're assessing the pricing in market before perhaps taking other pricing, or pricing is just one of your many tools in the toolkit to manage inflation. And then just regarding the toolkit, where is the most effort being put right now as far as levers to offset inflation, whether that's product reformulation, price pack, incremental productivity, maybe even have some tax savings. Doesn't feel like marketing will be a key source of savings. So, just you've had time to kind of prepare for this. Where is a lot of that work going right now? And then -- sorry for the long question, but just in the back half of the year, the 4 points visibility seems about 1 point is seasonal. Is the rest [Technical Difficulty] the innovation, or is there any of the 6-point kind of destock in Q2 coming back in the back half? Thanks for all that.

Chris Carey:

The question is basically there's roughly 4 points in the back half of shipment visibility highlighted in the prepared remarks. I can get to about 1 point of that being seasonal. The rest of that, is that incremental innovation, or just other proactive initiatives you have? Or is any of that this 6-point retail reduction in Q2 -- I couldn't tell because there was a comment about retail inventory should be in line with current levels into the full year. So, I didn't know if you were getting some of that back, or the rest of the shipment visibility and other things. Thanks.

Chris Carey:

Okay. Great. Thank you.

Rob Dickerson:

Great. Thanks so much. Maybe just a quick question for Steve. Just in terms of those levers, right, I mean clearly, you've outlined the $700 million in gross savings. I think it's through '26. So I'm just curious, kind of given the clear elevated cocoa cost situation, like is there a little bit more flex in those savings maybe to help offset some of those costs, or you just kind of preplan that too well, there are reinvestment needs that have already been earmarked, and we'll see what we can do, but not really? That's the first question.

Rob Dickerson:

Yeah. I guess I would just say like, could you take the $300 million to like $350 million because maybe the cost situation changed? I mean, it sounds like you're not budgeting...

Rob Dickerson:

Yeah, okay.

Rob Dickerson:

Yeah. Fair enough. Okay. Cool. And then I guess, Michele, just kind of a question around some of this kind of ongoing discretionary spend softness on chocolate, because I kind of ask because, I mean, clearly, we've seen a tremendous and kind of ongoing growth on the sweet side of the business, so which you -- I guess, one could argue it's still somewhat discretionary and clearly still a much smaller piece of the U.S. broader confection market. So I guess, just first, kind of maybe like why do you think consumers have maybe increasingly shifted to kind of non-chocolate confection, one? And then, two, maybe how broad is the Shaq-a-licious launch expected to be as we get through the back half of the year? And then, three, like could there be any acquisition opportunities that you would maybe dream of, you don't have to name names, but yes, it could be an area of interest? That's all. Thanks.

Rob Dickerson:

All right, fair enough. Thank you so much.

Steve Voskuil:

Thank you.

Stephen Powers:

Good morning. Thank you so much. So, I know we're late in the call. I wanted to ask maybe kind of a wrap-up and longer-term question. A little over a year ago, you obviously outlined a number of initiatives to drive the next phase of long-term growth for the company at your Investor Day. And a lot of news at that time a discussion around upgraded commercial capabilities, digital network and supply chain optimization, workforce planning, et cetera. A lot of that you've touched upon it in bits and pieces today as well. But I guess when you step back, just given all the volatility you've experienced in the time since that day and kind of what you see ahead over the next 12-plus months, how would you assess your ability to keep pace with the cadence of change and improvement that you had envisioned during that Investor Day? Have you been able to largely keep pace amidst all this noise, or are there areas where the honest assessment is you'll have to do some catch up when the demand and cost environment hopefully stabilizes?

Stephen Powers:

Okay, great. I appreciate it. Thank you.

Anoori Naughton:

Thank you all so much for joining us this morning. We look forward to catching up with you in the coming days and weeks. Have a great rest of your day.

Melissa Poole:

Good morning, everyone. Thank you for joining us today for The Hershey Company's First Quarter 2024 Earnings Q&A Session. I hope everyone has had the chance to read our press release and listen to our prerecorded management remarks, both of which are available on our website.

Operator:

[Operator Instructions] Our first question comes from the line of Andrew Lazar with Barclays.

Michele Buck:

I would -- yes, I would say we are partnering very strongly with that retailer as we always do. And certainly, I think we both recognize some of those opportunities that we can go after.

Operator:

And our next question comes from the line of Alexia Howard with Bernstein.

Steven Voskuil:

Sure. Yes, I'm happy to take that one. So multiple ways to deal with the volatility. Obviously, the hedging program and the financial side is one way to deal and then the supply chain side, making sure we've got diverse sourcing. And we've done a good job of that over the years of really trying to diversify that supply chain footprint.

Alexia Howard:

Great. And then are you able to comment on what you're seeing in terms of the state of the American consumer? We've been hearing a lot about this recently with lower-income consumers becoming more vulnerable. Any comments you can make on how much the SNAP spending cutbacks last year hit you? I don't know whether you're able to quantify that, but just comments on where you're seeing the American consumer headed at the moment.

Operator:

Our next question comes from the line of Ken Goldman with JPMorgan.

Kenneth Goldman:

And then just pivoting a little bit to Salty. Obviously, your sales trends were much improved. I think it's fair to say that there's still maybe some opportunities in margin ahead. I just wanted to get a level of -- or get a sense of the level of how content you are with the A&P investment in that business?

Michele Buck:

Yes. So overall, Salty was on track with our expectations as well. We had very strong Dot's performance. And then, as expected, while SkinnyPop improved, we knew that the majority of that improvement would not occur until we get to lapping the Q2 period and going forward. SkinnyPop does remain pressured along with some of the rest of the ready-to-eat popcorn category. And we think that, that will shift once we get past that lap.

Max Andrew Gumport:

I realize you're not getting into 2025 pricing conversation on this call or commenting on cocoa inflation. Just curious if you could talk about some of the other factors that go into that framework, though. So you've talked a little bit about market share trends, but also what you're seeing with category volumes, health of the consumer overall, the competitive environment, cross-category elasticity concerns just as we try to think through what you're seeing.

Max Andrew Gumport:

Okay. And then turning to the comments on gross margin for 2Q '24. Any help you can give us in terms of the cost absorption that might reverse out in 2Q after a strong 1Q, given the inventory dynamics associated with the ERP cutover? I'll leave it there.

Operator:

And our next question comes from the line of Nik Modi with RBC Capital Markets.

Michael Lavery:

I just wanted to come back to the comments on 2Q. You called out the high single-digit decline you expect from the inventory reversing. But the last quarter, you said how you expect double-digit EPS declines in the first half. I don't, unless I missed it, believe you reiterated that, but would that still apply as well?

Michael Lavery:

Okay. Great. And then just as you think about any of the moving parts with some cocoa volatility or cost, maybe uncertainty at least, how -- you've also reiterated how you just think for the long term and want to approach the business that way. Would it be right to assume that, that does some amount of protection for AMC? How do you think about managing that as one of the variables? And is it something that is in play or is protected? What's kind of the approach there as far as the marketing spend?

Operator:

Our next question comes from the line of Bryan Spillane with Bank of America.

Operator:

And our next question comes from the line of Robert Moskow with TD Cowen.

Operator:

Our next question comes from the line of David Palmer with Evercore ISI.

Michele Buck:

What we've seen is no material change in our elasticities over the past several months. We remain in line with historical levels, which is about minus 1, and that's what we would assume going forward.

Christopher Carey:

One quick question on gross margins. Did the complexion of your gross margin evolved at all through the year? I know there's some timing dynamics between Q1 and Q2, and the full year outlook is unchanged. But is productivity coming in better? Or are parts of inflation coming in worse, some parts of inflation coming in better? Just any insight on how your delivery against this target has evolved over the past few months and evolving over the balance of the year relative to your going expectations.

Christopher Carey:

Okay. Yes. Just the follow-up is on the category comments. The way that I interpreted it was that some of this lower category at the beginning of the year is almost entirely innovation relative to your going expectations of your peer? Or is there anything else that you're seeing, which you would highlight as over and above just that one comment regarding the lapping of innovation for one of your important competitors?

Operator:

Our next question comes from the line of Tom Palmer with Citi.

Thomas Palmer:

Okay. Understood. And on the Salty Snacks side, you noted nonmeasured channels as a driver maybe of outperformance versus what we see in scanner. Where is that really coming from? And is this like other retailers? Is this more on the e-commerce side? And should we think about it as velocity or expanded distribution?

Operator:

And our next question comes from the line of Rob Dickerson with Jefferies.

Michele Buck:

Yes, we're happy to share. So I would say, overall, our views about what has driven the market are somewhat consistent with what that large competitor shared earlier. As we think about it, we think both structural and transient forces have been at play impacting prices over the past several months. It certainly started with poor weather, a poor weather that impacted crop. And then concerns about supply.

Robert Dickerson:

Okay. Great. That was very helpful. And then maybe, Steve, this one's a little bit more for you. I know you have the 2 programs focused on productivity and savings that grosses over the next 3 years $700 million. There's obviously some cost inflation already in the system, could be more forthcoming. I don't really think you've spoken much to the net productivity and savings, and I also don't expect you to give me an actual number.

Steven Voskuil:

Sure. Maybe if I just take cocoa to the side and look at the rest of the business, our model is to offset inflationary costs over time through a variety of levers in the P&L. And that fundamental model is still in place. Of course, cocoa is certainly stressing it in the near term. But longer term, that is still the model to cover inflation.

Operator:

Our next question comes from the line of Jim Salera with Stephens.

Michele Buck:

Sure. So as I look at winning in season, certainly, it starts with the right product portfolio. We feel good about the portfolio. We always have innovation at the seasons, and we feel good that we have the right innovation.

James Salera:

Great. And on the Olympics specifically, if I'm not mistaken, I think it's 2 weeks. And so should we expect like in-store activations on that to run for like 3 weeks or 4 weeks or any way to kind of size that up as we think about that at the end of the summer?

Operator:

Our next question comes from the line of John Baumgartner with Mizuho.

Michele Buck:

Yes. So yes, it is a large market. And I think the approach that we've always taken over time is it is a very well-developed, established market. And therefore, we believe our best chances of succeeding are with a differentiated product.

Michele Buck:

Yes. I mean, I guess one way that I think about it is making sure that we look at each occasion, which really comes down to kind of the pack types across the portfolio and ensuring that we have good entry-level prices based on how the consumer -- well, and I guess price is based on how the consumer perceives value.

Alejandro Zamacona Urquiza:

Just a follow-up on the cocoa pricing discussion. So I'm curious on hearing any comments regarding the recent normalization. So recently, prices have declined 30% in the last couple of weeks. So any comments around that would be helpful.

Melissa Poole:

Thanks so much for joining us this morning. I know there's another call, so we'll let you all go to make sure you can attend that, and look forward to catching up later today. Have a great weekend.

Melissa Poole:

Good morning, everyone. Thank you for joining us today for The Hershey Company's fourth quarter 2023 earnings Q&A session. I hope everyone has had the chance to read our press release and listen to our 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 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.

Andrew Lazar:

Great. Thanks so much good morning everybody.

Andrew Lazar:

Maybe to start off your guidance for 2024 calls for that 2% to 3% net sales growth with volume flat to slightly down so implies over a three point year-over-year benefit from price which seems to be mostly carry over related from actions taken last year. So I guess my question is just recurring outlook embed any additional pricing actions this year to address the currently elevated cocoa cost and if not I guess if Hershey were to take additional pricing actions. Would those benefit 2024 or with the typical timing lag and kind of complexity of the system's transition, would that likely really be more of a 2025 benefit at this stage?

Steve Voskuil:

Yes, the way you laid it out, Andrew, is correct. The pricing that we're counting on that 3% or so, a lot of it's carryover, some of it from 2022 to Easter and Valentine's Day, some we took mid last year on everyday chocolate and then a small increase we announced earlier this year on grocery items and food service. And you're right, when we think about the impact of future price increase, we're really challenged in the first half of this year just because of the ERP implementation, like you said, it puts some limitations on what we can do. And you can imagine enormous collaboration between us and retailers to execute that transformation. So we're trying to keep things very stable during that period. And so further price increases should they come with benefit more the back half of the year and probably more so 2025.

Steve Voskuil:

Sure, yes, it's not banking on cocoa relief and it's not banking on some kind of surge in the consumer or really even a surge in the base business. The biggest factor is really two things driving it. One is the lapse from last year. And as we started out really strong the first quarter last year and then ran into things like softer, salty category growth in popcorn, the ERP implementation in salty, and then the change in strategy at a key retailer. So as we think about the lapse of those, that's one factor that impacts this profile because the lapse gets much easier in the back half. And then the second thing you mentioned, Andrew, are things in our control. So the savings on the agility and automation initiative will get more traction in the back half again because the ERP places some limitations there. The same with productivity in the manufacturing areas, back half loaded. And so those will accumulate as we turn the corner from the first half and pivot from the ERP sort of period of stability to period of driving impacts against those savings initiatives. So it's really lapse combined with the things in our control.

Operator:

Thank you. Our next question comes from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Michele Buck:

Yes, thanks Ken. As we are big believers and our business model relies on media as a key lever to continue to drive our brands over the long-term. We're constantly, we feel good about media going up in line with sales. We also constantly look to try and make those dollars work harder and harder for us. And we've made some pivots in terms of some of our targeting that are actually going to give us expanded reach levels that will be greater than sales. So the impact we will get from that media will be more than the dollar increase, but we will constantly evaluate that. And if we are seeing even better than we expected, we'll revisit decisions and decide if we should be spending more as we always do during the year.

Michele Buck:

Yes, I mean, I think what we saw this year was we did start to see some pressure in the category related to value. The fact that popcorn wasn't quite have as much satiety as some other snacks and we saw some private label entries also get some focus. So I think what needs to happen and then compounded by that, in the back half of the year, we are the number one or number two player depending on the time frame in the category. And in the back half of the year, around our ERP implementation, we pulled back on merchandising and advertising support to make sure that we didn't have issues with supply. So that certainly had an impact as well. So as we've gone into this year, what we think needs to happen, we have done. So we have made some improvements in the value proposition, introduced a value side, a bigger pack. We've sharpened some of our merchandising price points and also increased merchandising. And we are back to a much heavier investment in advertising and innovation that we've had over time. So we think we'll continue to see some of that lap through the first five months of the year and then really rebound to nice growth and market share gains in the back half.

Max Gumport:

Hi, thanks for the question. With regard to cocoa prices, you've previously talked about how there's a divergence between fundamentals and current market prices. I'm assuming you're looking at underlying supply, demand and the stock to grinding ratio, but I'm curious for an update on that front and how that informs your visibility into cocoa for 2024. Thanks.

Operator:

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

Michele Buck:

Morning.

Steve Voskuil:

Sure. If you look at it, kind of break it into two pieces, I'll just say commodities of which I'll just say cocoa and sugar are the two most inflationary. Low double digit inflation, if you look at other parts of the P&L, it's more mid-single digit. So if you sort of average it over everything, it's high single digit.

Steve Voskuil:

Yes, that's correct.

Michele Buck:

Yes, sure. So I would say, a year to 18 months ago, we had started working on some initiatives that we thought could create some real opportunity and value for the company. And executing those was dependent on two things. It was dependent on us getting through the S4 implementation, which we will be through Q2 of this year. And it was also dependent on us doing the unification of our Salty Snacks business, taking those disparate acquisitions we had and combining them together, which obviously we did this past year and also put in place S4 across that platform, across that business unit. That then can become an accelerator for us to really go after what we saw as some opportunities, both in terms of creating greater end-to-end connectivity and also using technology for automation and efficiency. So this is really where we expected that we would be. Certainly with some of the pressure on coca prices, we accelerated that work a bit versus our original timeline, but the work was planned and underway accordingly. And we're trying to be very choiceful about where are the choices that we are making across those initiatives, and certainly making sure that a lot of that implementation won't happen till post S4, till we get through the implementation. So really measuring out when we do what to match with the organizational capacity. Steve, anything you would add to that?

Bryan Spillane:

Steve, you may be the first person that use excited in ERP in the same sentence.

Bryan Spillane:

Yes.

Alexia Howard:

Good morning, everyone.

Alexia Howard:

Can I ask about honing in on the chocolate category in the U.S? You've obviously seen some nice recovery in volume and market share over the last two or three months. It's been fairly sharp. Can you talk about what the main drivers of that are? I imagine that innovation with the Reese's Caramels launch might be a piece of that. Just giving us some idea of what's driving that and whether that trend is expected to continue.

Alexia Howard:

Perfect. And just continuing on the theme of innovation, you mentioned a third increase. Are you able to quantify where you're at in terms of percentage of sales from new products introduced over the last three years? I imagine that that would have come down significantly since the pandemic started.

Alexia Howard:

Okay, perfect. I'll pass it on. Thank you.

Operator:

Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.

Michele Buck:

Good morning.

Michele Buck:

So I'll cover some of that and let Steve cover some of it. We've continued to invest in capacity in brands and businesses across the portfolio that have growth and opportunity ahead. Over the past couple of years, we've focused on Reese’s where we were short on capacity so that we could fulfill consumer demand. And then the other big area of focus we had was on the gummy side of the business in suites. And the first part of this year, we complete and have capacity coming online for that business that we will be able to leverage to better participate in that segment in the back half of the year. Steve?

Pamela Kaufman:

Great, thank you. And in the prepared remarks, you pointed to 200 basis points of gross margin contraction this year. Can you walk us through how you're thinking about the puts and takes around gross margins in 2024? And if you could give some color on the cadence of gross margin progression this year.

Pamela Kaufman:

Okay, thank you. And just one more quick question. How are you thinking about the outlook for cocoa prices from here? And how is that influencing your hedging strategy?

Pamela Kaufman:

Thank you.

Robert Moskow:

Hi, thanks. I guess I have two questions. The first is market share assumptions in the U.S. for 2024. Is it fair to say that you think you can grow share in confectionery? And the second thing, on the pricing strategy, Michelle, nothing's changed, but this is a different strategy than what you've had in the past. The idea is to kind of squeeze out the pricing in maybe more frequently and in smaller increments. And I guess, is that still possible to do in an environment like this when the input costs spike so significantly? It sounds like that, it sounds like you're doing it this year, but, is it more difficult to execute when you see this much volatility in the inputs or not?

Robert Moskow:

Got it, so you can be flexible depending on the cost conditions.

Operator:

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

Steve Voskuil:

Yes, we're not applying the same approach we did with Salty in that respect. We'll still be building inventory in the first quarter, we'll still be draining that inventory in the second quarter just to de-risk the transition, but we are not going the extra step of like freezing from all activity in store, merchandising promotion. We have a full merchandising and promotion plan. Those are going to proceed, they were planned well in advance and we have full confidence in being able to support them. So that is a difference.

Michael Lavery:

Okay, that's great color. And then can you just give us a sense on elasticities maybe both how they currently look versus history and then also what your assumptions are in the guidance as far as how they might progress over the rest of the year?

Michael Lavery:

Okay, great. Thanks so much.

Tom Palmer:

Good morning. Thanks for the questions. Maybe just first-off on the pull forward of the productivity and cost savings, I just wanted to follow up from the earlier question. Are there new found savings embedded in this or are these largely initiatives that would have been done in future years? Just maybe clarify that piece of it.

Michele Buck:

And we've really beefed up or are beefing up our capabilities in technology. We hired a CDTO in the fourth quarter who's really bringing us capability and further expanding what we can do as a company, we believe.

Steve Voskuil:

Sure, yes. So we have sort of three pricing components that are embedded into the Outlook. I touched on a couple of these earlier. There's the Easter Valentine's Day action that was taken in 2022, that's reflected this year. There's everyday chocolate increase that we executed mid last year, that's reflected. And then there's a small new price increase on some grocery and food service items that really went just into effect this month. So that's happening right now. Those are the only assumptions that are embedded in the outlook right now.

Operator:

Thank you. Our next question comes from the line of Chris Carey with Wells Fargo Securities. Please proceed with your question.

Steve Voskuil:

It's going to be less contraction. Yes, the contraction will be more significant in the first half, less in the back half.

Steve Voskuil:

Sure. On the segment margins, you're right. The confection business is going to bear the brunt of the margin impact due to cocoa. Salty margins are up for 2024 year-over-year. And that's even on the back of some pretty heavy investment. And so we feel good about the journey that we're on there. It's not impacted, obviously, by the cocoa component. On the second question, could you just say the question again? I want to make sure I heard that one.

Steve Voskuil:

Sure. Yes. Well, let me first say we're not cutting to the bone. That's not the intent of the program at all. We want to continue to protect the brands and the capabilities that give us differentiated opportunities in market. When you look at operating expenses, if you look back over time, definitely getting more fixed cost leverage, the business is bigger. Even with a little bit slower growth year in 2024 than we've seen the last couple of years, we get significant leverage. We have efficiencies elsewhere in the P&L, efficient driving efficiencies through the P&L is an every year activity. And that's not new. And we've also seen more efficiencies in the international business. If you think back, the margins were quite a bit lower a couple of years ago before we made some of the transformational moves there. So a combination of all of those things have led to the improvements that we're seeing, but we're not cutting so far that we feel we're putting in jeopardy any of our key capabilities or growth potential.

Operator:

Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Michele Buck:

Yes, I mean, I'd say first of all, overall with the consumer, certainly I think there is some increase in consumer confidence. We've seen unemployment rates, employment be stable. However, we do continue to see some value-seeking behavior in some pockets of consumers. We believe that the behavior across confection has largely normalized and we think that we have some of the right steps in place to kind of offset that satiety issue that we've seen with popcorn in areas like adjusting value across different pack types, enhancing marketing communication in ways that, build the value proposition. So we do expect that we'll start to see some normalization in popcorn as we go through the year.

Michele Buck:

Yes, no problem. We continue to feel great about the salty snack business and their long-term potential. We've seen such tremendous growth over time. There's no change to our long-term outlook. Our long-term outlook and the algorithm has always been around mid-single-digit growth. We had never expected low double-digit on the long-term. We had expected originally that this year might be a bit stronger but not on a long-term basis. So no change to that long-term outlook.

Operator:

Thank you. Ladies and gentlemen, our final question comes from the line of Jim Salera with Stephens Inc. Please proceed with your questions.

Michele Buck:

Yes, it's really some of both. Certainly there's power to that visibility of all of these great brands together. Our salty brands now are two of our top ten brands. So they have the velocity that warrant being with some of our other really major brands. And then of course it does encourage some of that cross household purchase as well.

Michele Buck:

We still do have some distribution upside on Dot's. So I'd say more than several points of distribution upside still remain.

Operator:

Our next question comes from the line of John Baumgartner with Mizuho Securities. Please proceed with your question.

Michele Buck:

We always really do look across the entire bundle. And certainly, we have some trade spending increases in 2024. And so we look at what's the right bundle across DME, across marketing, consumer marketing and trade that we think will have the biggest impact and most efficiently on driving revenue. So it is some of balancing the total view of all of that spending together, which is a big area of focus for us. How do we make it all together work as hard as each individual piece.

Operator:

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. Poole for any final comments.

Operator:

Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.

Melissa Poole:

Good morning, everyone. Thank you for joining us today for The Hershey Company's third quarter 2023 earnings Q&A session. I hope everyone has had the chance to read our press release and listen to our 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 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 that 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.

Andrew Lazar:

Good morning, everybody.

Andrew Lazar:

Thanks. At Hershey's Analyst Day earlier this year, I know that the company expressed confidence in sort of generating the high end of its sort of long-term growth algorithm for 2024. And we know some things have changed since then. There's been some more inflation. You talk about what seems to be the need for maybe some more aggressive investment spend behind stepped-up innovation as well as some shifting between trade and consumer spend and some consumer behavior shifts. So I was hoping maybe you could take us through, I guess, some of the key puts and takes for next year, how you're seeing all of this rolling up at this point? And basically, if 2024 can still be sort of an on-algorithm year even if not necessarily at the high end.

Steve Voskuil:

No. I think you hit all the key pieces. Obviously, the next time we talk, we'll have a lot more details on next year. So…

Michele Buck:

We have not announced any incremental price increases. We always evaluate the marketplace and have a lot of factors that we consider to determine how to best grow the business. Pricing is certainly one tool. I mentioned productivity. Now that we're in a better shape from a capacity perspective, we have more ability in our supply chain to activate productivity, and then we also look at productivity across every line item of the P&L, whether its trade, media, organizational processes and make sure we're really leveraging the best capabilities and investments to drive the business.

Operator:

Thank you. Our next question comes from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Steve Voskuil:

Sure. Yes, I'm happy to take it. It is an important question, and we'll address it a lot more fully on the next call. I think, the key right now is there are a lot of moving pieces even since we had that call, and some things are progressing in a positive way. We talked about productivity a little bit already. Productivity was one of the upsides we talked about on the call, we're having a great year from a productivity standpoint, and I expect that to carry forward. As Michele just said, we'll continue to look at pricing in all variables, pack price architecture, regular pricing and other places for productivity. And then we're watching the commodity markets closely. And there's been a pretty significant change there, too, from the beginning of the year. And so as we get together next time, we'll be able to pull all of that together and give you a better picture on how we feel about what we said back at the investor conference. But right now, we're still looking at, as Michele said, a pretty dynamic environment.

Michele Buck:

Yes. And really, what we saw from the key retailer was a reduction in merchandising, which did pull back on shipments into that retailer. And this is really about their strategy to improve the shopping experience for their consumers and also to make fulfilling online orders easier for their pickers in store. This was a change that impacted many categories. Confection was one of those, and we had a disproportionate impact because we have had a very high share of merchandising. And therefore, that pullback impacted us, but it impacted many other categories in both edibles and nonedible. Now this, I want to point out, this is really related to every day. So as you think about Q4 and the importance of Halloween and Holiday this did not impact season. So we don't expect the same impact in Q4 given how much of our business is seasonal. We do think that this will be a headwind in the first part of 2024, where we're lapping higher levels of March.

Michele Buck:

Sure.

Max Gumport:

Hi, thanks for the question. First, I just wanted to follow up on your commentary on the retailer merchandising reduction. It sounded like it was to help improve the shopping experience and the e-commerce and picking ability as well. Is there any reason to think other retailers could follow the same path? It sounds like it's just one key retailer for now. But are there any reasons to expect other retailers will follow?

Max Gumport:

Great. And then on Halloween, it sounds like it's up slightly so far. I know there was a low double-digit expectation. And I know that this year, shopping patterns have been a bit more normal, so less shopping earlier in the year. So I think that would be one key reason to think you can still get to that low double-digit number, but I just wanted to make sure you still have visibility to low double target for Halloween this year. Thank you.

Max Gumport:

Thanks very much. I’ll leave it there.

Michael Lavery:

Thank you. Good morning.

Michael Lavery:

Just I was wondering if you could catch us up on Cocoa. Obviously, we see the market rates or the spot rates. But you've always done, I think it's anything from three to 18 or maybe even more months of hedging and contracting. And, can you just give us a sense of maybe what, if anything, you expect the market to do, how you're positioned relative to that? I know the pricing question came up a little bit earlier and you haven't announced anything, but is there any reason to believe that you would have any different approach than normal where if it remains an elevated source of pressure, you could take the pricing to cover it? Just some thoughts on how all that looks from your seat?

Michael Lavery:

Okay. Great. That's helpful. And just to follow up on buybacks, you mentioned you didn't have any in the quarter. Obviously, the stock has been more attractively valued from a buyback perspective. How do you think about that going forward? Is there, how are you saving for M&A or is buyback something you might ramp back up?

Michael Lavery:

Okay. Great. Thanks so much.

Operator:

Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.

Michele Buck:

Hi, Pam.

Michele Buck:

Sure. So, I would say we're certainly continue to feel good about our category and the price realization potential in our category as we have had over the years. We focused a lot on the value equation, investing in our business and our brands to keep that strong. At the same time, we're also cognizant that, it is a different time today. We know that value and affordability continue to be top of mind for consumers as budgets are stretched, some less government assistance, the restart of student loan repayments, higher interest rates. So we've heard from consumers that they're needing to make difficult choices. So we are certainly focused on that, and making sure that we're really focused on our value equation in terms of selling to value channels, having the right opening price points, et cetera. Food has been more resilient than some other categories but we know that some of the Snap households are reporting that they're eating and buying left. So we're very cognizant of that. And we've also seen some increase in sales in some of the perimeter categories where there's been deflation versus some of the inflationary categories. That said, where we focus on, where are the growth levers that we can continue to drive, to engage consumers and that is having the right levels and the right media targeting approach to continue to keep our brands relevant. But with both the media and the creative, we know that that's important. We didn't have as much innovation this year as we think was ideal on the business, and we've really stepped that up for next year. Feel great about Reese's Caramel in particular, and we'll share some of the other innovation that's coming as we go down the pike. Seasons continues to be a big piece of our business and winning during those seasons, getting that merchandising and it is a time where there's a lot of emotional connectivity with consumers. So it's a natural time for them to come in the category. And we continue to have distribution opportunities, both in terms of some places where we were short on capacity. And we had to pull back on some core items that we're now going to be able to supply as well as some of the innate distribution opportunities that we have on the Salty business. So those are some of the places that we're focused on to really drive growth.

Michele Buck:

Yes. So I'd start by saying that we have seen some softening in Salty Snacks overall. Volumes held fairly steady throughout the quarter. But growth decelerated as pricing lessened. And there was also some growth that shifted to non-measured channels. Again, we know that affordability and value are of increasing importance to consumers. And we're also seeing them really prioritize some of the more satiating snacks. So as we look at our business, certainly, we're seeing a lot of strength in Pretzels in the category as well as our Dot's distribution opportunities. And as we look at ready-to-eat Popcorn, certainly, we do know that consumers are focused a little bit more on satiety. And we've had some retailers focus on private label and merchandising in particular. As we go into next year, certainly, we'll be focused on productivity in the category. We know that some of the branded items have greater productivity and making sure we're working with retailers on taking full advantage of that continuing to invest in those brands to really grow household penetration and connectivity with consumers. And then certainly, as we look at this year, S4 impacted some of our ability to execute and really lean in as we had to focus on pulling back a bit on support on the business during Q3 and Q4, to enable that build that we needed in inventory and just to make sure that we could move through that very smoothly, and that will be a headwind for us next year.

Operator:

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

Steve Voskuil:

Yes. We have to do. So I'll start with the sales side. So the biggest driver between Q3 and Q4, and Michele said it before, was seasonal timing. We have a big seasonal timing benefit in Q3 at some at the expense of Q4. Now Q4 also has seasons. We've got Holiday as a big factor and maybe even some early Easter shipments potentially. But Holiday is not as big as Halloween. And so just from a seasonal impact, that's one of the factors. We've kind of modeled historic elasticity. So we saw some of that coming in, in Q3, and we've modeled that more fully into Q4. And, we also have a slight inventory headwind on sales. So those are some of the drivers. I would say, as I think about the guide on sales for the full year, and I guess the implied Q4 around 8%. I would say there's probably less likely to be upside to that number. And if some of the risks would persist, we've got a lot of mitigating actions, but if some of those risks would persist, it's probably more likely to be around to the lower side than around to the high side of guide on the top line. On the margin side, yes, a couple it sort of reverses some of the benefits that we had in Q3. So you're losing some of the fixed cost absorption benefits that we had in Q3 with the higher volume. So we've got a little bit less pricing coming through in the fourth quarter that has an impact and then a more difficult lap also as part of that. So nothing structurally different in Q4, but reversal of some of those benefits that we saw in Q3, just manifesting themselves in Q4.

Operator:

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

Michele Buck:

Yes. So certainly, people are making choices across snack categories. And one of the things that we do factor in is kind of looking at cross category price elasticity, in our models. So that's always the case. I think the past two years, in particular, have just been a little bit unique in terms of what's going on in the marketplace overall. Inflation and pricing. So seeing some different dynamics there.

Steve Voskuil:

Sure. And we'll talk more about this when we give the 2024 guide too, including the inventory build and the takeout. But yes, you're right, it's more of a sales movement in first. So there's some inventory build we'll do in advance to risk mitigate just like we did for Salty here. And then we would expect to see that bleed out in the second quarter, mostly in the second quarter. So there'll probably be some higher sales or higher inventory build and some fixed cost absorption on the front end and then the reversal of that in Q2. And there'll be some costs. We'll talk more about the cost profiling, some of that we take through, the regular P&L and some of that gets non-GAAPed out, but we'll give more clarity to that as we give 2024 guidance.

Robert Moskow:

Right. Okay. Thank you.

Operator:

Thank you. Our next question comes from the line of Chris Carey with Wells Fargo. Please proceed with your question.

Michele Buck:

Good morning.

Michele Buck:

Yes. So, I don't have any different views on the category. Snacking continues to be very strong consumer behavior, and I love our portfolio of having a very strong leadership presence in both Indulgent Snacking and Confection as well as participating in savory snacking, especially with the brands that we've acquired that have very strong consumer engagement and growth potential. So continue to feel very good about those. I think relative to the trends improving, we can't talk really about 2024. We'll come back and talk a bit about that more. But we continue to feel that we'll see similar trends in Q4 as we've seen in Q3 relative to takeaway. I mean, some differences in shipments related to S4 because the inventory will now be coming out. We built inventory in Q3. So from a shipment perspective, we'll see that difference. But from a takeaway perspective, we anticipate a continuation of what we saw in Q3.

Operator:

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

Michele Buck:

Yes. So, Seasons is between 25% and 30% of our total business on a full year basis. It varies by quarter. Obviously, Q4, we have Halloween and Holiday. So it's a much bigger percent then and of our growth, probably about the same proportion of our growth, about a third in the back half of this year.

Michele Buck:

Yes. So we think our Seasons business will be very solid in 2024. One of the key things to anticipating the next year is always realizing what your sell-through is on each current year season. So we need to get through Halloween to see what that sell-through turns out to be. We have, as mentioned earlier, a few more days about a week that we need to be able to look at that and then obviously have strong sell-through in holiday. So we need those data points, but we feel good based on where we are to date, but we'll have a better feel afterwards. The other thing that will impact 2024 is there will be a shorter Easter depending on where the date falls. And this year, Easter in 2024, I think, is March 29. So it's on the shorter side, which creates a shorter season and a little bit of pressure perspective, it just won't be as large as in years with a long season.

Operator:

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

Michele Buck:

Good morning.

Michele Buck:

So from a short-term perspective, to-date, our data suggests we are winning share of Halloween. So we are pleased with that and feeling good about that. As it relates to the everyday business, there we will need to wait until 2024 to see improvement, driven by some of our stronger innovation that will really help the everyday business.

Michele Buck:

Yes, absolutely. I mean I think you've captured it correctly. It certainly is very early days. We don't believe the GLP-1s are having a material impact on our business at this point in time. And I think we all know there's a lot of data coming out. There's still so many unknowns regarding the rate of adoption the impact on food choices, the medium- to longer-term impacts on consumers, and we're doing more work constantly to understand those future potential impacts on our categories. We have a robust planning and forecasting process, and we try and factor in all of those consumer behavior changes that we're observing, inclusive of GLP-1s and thinking through all of those right strategies that will be important for us if they do increase in adoption. One thing we feel particularly good of is the emotional nature of our categories and our brands and the role that they play in moments of celebration, Joy as you think about the Seasons but we will continue to adapt our portfolio as we have over time to make sure that we are providing consumers with what they're looking for, whether it's the products, the ingredients, the innovation, certainly, there are opportunities around portion size and pack type. And I think a lot of companies have been focused on that as you think about the potential impact of GLP-1s. And then certainly, we're always looking at opportunistic M&A as well as we have in the past.

Michele Buck:

Thank you.

Rob Dickerson:

Great. Thank you so much. Michele, I think in the prepared remarks and you mentioned it previously, you've commented on products, I guess, on the perimeter of the store. I'm assuming where you're kind of speaking to kind of more fresh bakery and you also spoke to kind of more satiating foods. By the -- on the Salty Snacks side, you commented on snacks right?

Rob Dickerson:

Is this, is this all kind of around the price point demand? Are you just trying to basically find more value at an appropriate price. And therefore, even though you let's say, you need a candy bar now you're on a cupcakes. Just trying to figure out exactly what you're speaking to? Thank you.

Rob Dickerson:

Okay. Makes sense. Thank you. And then just quickly, International segment. Slowed somewhat materially, especially on the volume side. And I know you called out kind of a competitive dynamic, the moderation in category growth. If you kind of optically, at least when we see the numbers in Q3 relative to the year ago and vis-à-vis what we saw in Q2. It does seem like it's almost somewhat sudden and I don't know if I'm missing something. So maybe if you could just explain what that drop is and maybe it's fully defined by just the shift in the non-U.S. holidays? Thanks.

Rob Dickerson:

All right. Super. Thank you so much. I’ll pass it on.

John Baumgartner:

Good morning. Thanks for the question.

Steve Voskuil:

Good morning.

Michele Buck:

So as we look at the market share overall in confection, certainly, we've had a negative impact from category mix with faster growth in refreshments and sweets. And with the incremental capacity we've added going to be able to unlock more of the potential for us on share within sweets. The innovation that we've talked about, in addition to helping the everyday business innovation drives merch and so that's going to be very helpful in terms of helping promo. And then also we're working through the one retailer partnering very strongly to make sure that we can adhere to some of their direction and at the same time, make sure that we're recognizing the impulsive and expandable nature of our category and making sure that we have the right plans to take that into account. We have continued to invest in our brands, and we will continue to going forward. So at this point in time, I wouldn't say that we're anticipating a very large, substantial change in our investment levels. We have strong levels in trade and consumer on the margin, we are always open to adjusting those as we see fit. And we also are really focused on making sure that the allocation is as strong as it possibly can be between trade and between media as we look holistically. We haven't seen a big, huge increase, frankly, in premium, a bit of an increase in private label, but it continues to be a very small part of the category.

Michele Buck:

So no category really benefited, because it was an overall reduction in merchandising. So it was more of a focus on consumer experience for more open aisles and also to enable growth and support of omni-channel and the digital business from a picking of products. So we are counting on trying to drive and the retailer counting on increases in everyday velocity to be enough to offset that. And we're certainly partnering really closely to make sure we have all the right programs and plans jointly to jointly drive the category, as you mentioned, it's highly profitable. It is expandable consumption and there is an impulsive opportunity. So we continue to work hard to drive that.

Operator:

Thank you. Our next question comes from the line of Jim Salera with Stephens Inc. Please proceed with your question.

Michele Buck:

Yes. I mean I think it helps us in terms of household penetration because we are still in the process of building the household penetration on that brand. Frankly, the business is quite big given the relatively nascent household distribution. So Club is always a great venue to get that. And we continue to have some distribution opportunity on the Pretzel business overall. So we continue to be excited by that and excited that the velocities have held up pretty well despite those increases in distribution. And we also have some opportunities for select innovation. We introduced Cinnamon Sugar, which has been a great hit in the marketplace as well.

Michele Buck:

Yes. I mean I think one of the biggest things we've seen from our consumer work is the society of the category. It's a very satiating snack. It's very filling. And therefore, even though it is a premium product and some of the price points are high, it delivers on that value equation with very strong society. And I would say it certainly is a very differentiated product.

Operator:

Thank you. There are no further questions at this time. I would like to turn the floor back over to Ms. Melissa Poole for closing comments.

Operator:

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Melissa Poole:

Good morning, everyone. Thank you for joining us today for The Hershey Company’s second quarter 2023 earnings Q&A session. I hope everyone has had the chance to read our press release and listen to our 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 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 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.

Andrew Lazar:

Great. Thanks so much, and good morning, everybody.

Andrew Lazar:

Good morning. I want to ask a bit about the pricing versus volume commentary regarding the full year sales growth outlook. And the comments sounds like you expect price to be a bit better in the second half and maybe volume is a bit worse than originally planned. So just two questions on this. First, how do we think about the balance between the two in the second half and could volume be down year-over-year in 2H? And then more specifically on volume, is the weaker than anticipated volume fully due to just the new pricing actions or are you reflecting a tougher consumer or a competitive environment in that outlook or both? Thanks so much.

Andrew Lazar:

Great. Great. Thanks so much. I will pass it on.

Melissa Poole:

All right. Let’s come back to Bryan.

Ken Goldman:

Hi. Thanks so much. You have done a great job obviously implementing pricing to offset inflation, but cocoa and sugar are up a lot more. I know you can’t talk about pricing that hasn’t been announced to the trade yet. But is it reasonable to think that you are maybe considering another list price increase and at what point do you start to ask how high is too high, how do you think about elasticity in the consumer in that environment? I just wanted to get a sense for kind of the puts and takes as you think about how to deal with and manage maybe what continues to be an inflationary environment for you?

Ken Goldman:

Thank you. And then just on the comment about increased competitive, I guess, innovation in confectionery in North America. How incremental is the innovation that you are seeing, any real surprises in there versus your prior expectations? It’s been such a -- I don’t want to say a benign competitive environment, because, obviously, you have some tough players in the market, but is it getting more intense than what you would have expected, I guess, is what I am going for there?

Ken Goldman:

Thank you.

Max Gumport:

Hi. Thanks for the question. With regard to the increased chocolate capacity this year and the additional co-manufacturing capacity secured in sweets for next year? Is there any way you can help us dimensionalize how sizable those capacity increases are, just as we try to get a sense of how impactful these additions could be for volumes in the second half and also in 2024? Thank you.

Max Gumport:

Great. Thanks very much.

Operator:

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

Michele Buck:

Good morning.

Michael Lavery:

You have got the integration in salty snacks and the transition to SAP that you have been talking about and those never seem to be totally smooth or easy, you mentioned there’s some hiccups that you have seen. But can you just maybe give a little sense of what those look like in a little more detail, and specifically with an eye on just having a sense of what’s to come, what have you learned and how confident are you that the rest of the year can avoid some of those hiccups or just be even smoother still?

Michele Buck:

Okay. That’s helpful. And just back to pricing, you have got delays in some of the timing between the announcement and implementation, and then the seasons, of course, have a staggered effect and with just some of the maybe layers to it. Can you give a sense of just what you have announced already or put in place already has as an impact on 2024? It looks like at least the low single-digit, maybe my math, I guesses or estimates close to it, 3 points that you might already have in hand. Is that about right or what are some of the moving parts, just so we have kind of a little bit further look ahead of what’s already put in place?

Michael Lavery:

And just to clarify, that’s without any other -- that would be before there’s anything else that might still be to come, right?

Michael Lavery:

Perfect. Thanks so much.

Pamela Kaufman:

Good morning.

Michele Buck:

Good morning.

Steve Voskuil:

No fundamental changes. We had expected this year to be a year to invest in brands, and again, as we have capacity coming online and leaning into seasons, especially if we get to the back half, a significant increase in brand investment was planned and we are executing to that plan.

Pamela Kaufman:

And then just in the prepared remarks, there are comments about some private label launches in your Salty Snacks categories. You are generally in categories that face very little private label competition, but considering the launches that you alluded to. Just curious to hear how you are thinking about managing private label competition in your categories and how you are addressing it?

Pamela Kaufman:

Thank you.

Nik Modi:

Yeah. Thank you. Good morning, everyone. I was…

Nik Modi:

Good morning. I was hoping you could just kind of address the Halloween season as it relates to some of your competitors still struggling with supply chain and have cut back their orders. I am just curious, do you -- how can you take advantage of this, do you have visibility at this point in terms of maybe securing some of that missed opportunity by some of your competitors? Just wanted to get some clarity on how you think about that as it relates to the third quarter?

Nik Modi:

Great. And then if I could just clarify, in terms of the execution issues in Salty Snacks, what exactly happened, so you talked about systems changeover, but can you just provide just the details on exactly like what the problem was?

Nik Modi:

Great. Thanks so much. I will pass it on.

Alexia Howard:

Good morning, everyone.

Alexia Howard:

Can I ask, first of all, about market share trends in U.S. chocolate? It sounds as though capacity constraints and other issues have caused some of those declines. Do you have a view as to when those market share trends should start to improve and turn positive again?

Alexia Howard:

Great. And then as a…

Alexia Howard:

I am sorry. No. I was going to say, moving on to Salty Snacks, you talked about a double-digit decline, I think, in the fourth quarter because of the transformation. Is that choppiness expected to persist into 2024?

Michele Buck:

No.

Alexia Howard:

Great. Thank you very much. I will pass it on.

Operator:

Thank you. Our next questions come from the line of Matt Smith with Stifel. Please proceed with your questions.

Michele Buck:

Good morning.

Steve Voskuil:

Sure. Yeah. We are pleased with the gross margin performance through the first half and we have had a few things, I think, that have broken our way. We have seen less inflation in things like packaging and logistics and even some material costs. Our productivity progress has been strong. I think we feel really good about where we are at the midyear mark on productivity, and then, of course, we have had pricing drop through. So all of those have worked in our favor and will continue to some degree as we go to the back half. If you look at the back half, taking the volume impact, we are going to have some more fixed cost absorption impact that will be a little bit of a weight. And again, we have got hedging against commodities, but still from a year-over-year and beginning of the year, end of year perspective, we still have a bit more cost for some of the inflationary commodities, cocoa and sugar, smaller weights, and again, smoothed out by hedging, but still some impact. Those would probably be the two biggest drags as we look to the back half. But again, overall, I still feel confident in taking our guidance up and the team is doing a nice job managing the cost side.

Steve Voskuil:

Yeah. Yeah. We will get some benefit. Again, salty is not the biggest business, but we will get some absorption benefit as we build inventory in salty. Yeah.

Steve Voskuil:

Thank you.

Cody Ross:

Good morning. Thank you for taking my questions. A couple of housekeeping ones and then a longer term one in nature. First one, I think, you spoke about inventory headwinds in the quarter. I think they were lapping the inventory replenishment last year and the pull forward of sales into 1Q from 2Q. Is that correct, and if so, can you quantify each one for us?

Cody Ross:

Great. Thank you. Other housekeeping question, just as far as the 4Q, I think, you guys said that, sales should be down double digits in the salty business due to the ERP implementation. Can you just quantify that for us or give us an expectation for magnitude? And then just one last one.

Cody Ross:

Yeah. The dollars that you are expecting from the implementation.

Michele Buck:

Yeah. No. That’s a double-digit decline. So we not going to go any more specific than that.

Michele Buck:

Yeah. I mean, I’d say, the categories that we are in have always been very competitive. But the good thing is we have rational competitors. And what we are seeing overall, I’d say, is pretty consistent with what we have seen historically. We have seen some higher levels of innovation as supply chains have gotten stronger and people have been able to support innovation. We have seen some increases in private label, I think, with the economic environment in both confection and in salty. But frankly, the results of those entries have been somewhat mixed, and certainly, our brands have held up really well. We continue to focus on driving sustainable profitable growth. As it relates to infection and promotional activity, display has always been important for that impulse-driven category and so we didn’t see as much of the change in promotion as perhaps some other categories have seen. So that’s been much more stable for us and we anticipate we will continue to going forward. So we will continue to invest robustly to drive our brands with innovation, marketing support, what we think is the right level of promotion.

Operator:

Thank you. Our next questions come from the line of Jason English with Goldman Sachs. Please proceed with your questions.

Michele Buck:

Hi.

Steve Voskuil:

Yeah.

Jason English:

Okay. So you canceled promotional activity on your retailer. Is that because of supply constraints or what drove that decision?

Jason English:

Okay. Switching gears, kind of coming back to Mr. Goldman’s line of question earlier, I had a couple of other lines of question on competitive activity. Your release has a tremendous amount of focus on market share and rather than driving category growth and we have seen the category actually weakened quite a bit in recent data. It’s a two-part question. First, what do you attribute the accelerating volume declines in chocolate confection to be driven by? And second, are you incenting organization on share and assuming you are based on the heavy emphasis in the release and prepared comments, how do you manage the risk of us getting back to where we were five years, six years, seven years ago, where it was sort of you always duking it out promoting away value in the category rather than what has been a much more, I would say, constructive competitive environment we have seen over the last couple of years?

Steve Voskuil:

And we have got a lot more tools and sophistication today to look at the ROIs for how we are deploying things like promotion and there’s no intent to get into an arms race of bad returning investments like that. We will have -- we want to win with innovation, which we talked about in the remarks not just spending.

Jason English:

Okay. And I am going to cheat with one quick follow-up related to that question. But to my point on how are you been sending the organization, your sales force in particular, is the market share component to the bonus or is it just deliver the revenue?

Melissa Poole:

Sales activity based margins that enable a balance between sales and profitable sales.

Jason English:

Got it. That is helpful. Thank you very much. I will pass it on.

Operator:

Thank you. Our next questions come from the line of Connor Rattigan with Consumer Edge Research. Please proceed with your questions.

Michele Buck:

Yeah. We have been very focused on strategic revenue management and pack price architecture on both confection and the salty categories. I think a few years ago, we talked about evolving our pricing approach from just list pricing to how we look more holistically at strategic pricing. And in these categories in particular, it’s a big opportunity. We continue to focus there in confection and on salty it’s certainly something that as we acquired these businesses was a real underdeveloped area of opportunity.

Operator:

Thank you. Our next questions come from the line of Rob Dickerson with Jefferies. Please proceed with your questions.

Steve Voskuil:

Yeah. I mean, we will take -- those are all the kind of considerations that we look at when we think about 2024 and beyond. And again, we look at the whole P&L, we look at market share, we look at what competition is doing. And clearly, we look at commodities and where we think they are headed. And so I don’t want to get more specific on the construct of the 2024 plan, but those are the kind of things we will consider. Again, we have navigated this before. We have got a lot of levers at our disposal. Pricing and revenue is reset just one of those levers and it will be interesting to see what happens in the cocoa and sugar market. I do think in those cases there’s still a lot of speculation. And again, our hedging strategy gives us an element of smoothing and protection to a degree to that. But we will be watching to see how these markets hold up, because they are at pretty high levels atypically and it’s not driven by fundamentals to a large degree.

Michele Buck:

Sure. So we get a lot of visibility to the seasons, because we plan with customers in advance relative to needing to build inventory for the season. So we have a lot of good visibility in terms of what is being bought and we have very strong programs to drive sell-through. So that gives us a lot of confidence. We know that during difficult economic times, consumers are particularly interested in enjoying kind of the simple things in life, like these seasons, like Halloween and so that’s another kind of tailwind of focus relative to our conviction and why I think we and our customer partners really want to lean into Halloween.

Steve Voskuil:

No.

Rob Dickerson:

All right. Super. Thank you.

Operator:

Thank you. Our next questions come from the line of Chris Carey with Wells Fargo Securities. Please proceed with your questions.

Steve Voskuil:

Good morning.

Chris Carey:

So just a question kind of clarification around salty. We have seen some deceleration in consumption, namely volume in recent scanner data. And I am just trying to understand and apologies if this has kind of been addressed in some form, but just to clarify. Was any of that because of lack of supply because of a shift in promotional programs? Said another way, as supply ramps in Q3, it sounds like there’s some shift in promotional programs, would you expect the consumption trends? I realize what you are saying about your reported results in Q3 and Q4, but would you expect consumption trends to pick up or is what we are seeing perhaps more indicative of underlying demand? So I just want to maybe understand how you think about the balance of those things?

Chris Carey:

Okay. That’s helpful enough. Thanks so much.

Operator:

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

Michele Buck:

Good morning.

Michele Buck:

I don’t think that we have seen anything significant across channels. No.

Steve Voskuil:

Sure. Yeah. I’d be happy to. No fundamental changes in our capital allocation philosophy that we talked about back at the Investor Conference. It is a great dividend increase. When you look at that and you look at our target for payout ratio and so on. We are still, even with this increase a little bit behind where we would like to be and where we have been historically. So that just reflects the great earnings progress over the last few years, but pleased with the 15% increase. And you are right, as we look forward, as capital spending moderates off some of the really high spending we have had here recently, we are going to look for other ways to be thoughtful with the capital and returning cash to shareholders through repurchases, for example, is our stop gap when we don’t have better-returning alternatives and so still that’s not going to change.

Steve Voskuil:

You bet.

Robert Moskow:

Hi. Thank you for the question. Similar to Bryan about elasticity look slightly different. I want to know if you have seen any differences in elasticity within the portfolio, like, multi-serve bags versus single-serve, especially heading into Halloween, some of those bags can cost $20, $25 at retail. Have you seen any observations in consumer behavior about just the absolute price points affecting demand?

Robert Moskow:

Okay. So -- and any -- so no real change in like single-serve demand affected by traffic or just the absolute price point of the bars getting up there?

Robert Moskow:

Okay.

Robert Moskow:

All right. Thank you. Yeah.

David Palmer:

Hi. Thanks. At your Analyst Day, you provided guidance of North America Confection organic sales in the low single digits including flattish volume. Could you remind us again of the drivers to sustain that sales growth with low single-digit pricing at flat volume as perhaps competition returns in a more fulsome manner? Thanks so much.

David Palmer:

Thanks very much.

Operator:

Thank you. I am showing no further questions in the queue at this time. I’d like to hand the call back over to Ms. Melissa Poole for any closing comments.

Operator:

Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

Melissa Poole:

Good morning, everyone. Thank you for joining us today for The Hershey Company's first quarter 2023 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.

Andrew Lazar:

Great. Thanks so much. Good morning, everybody.

Michele Buck:

Good morning.

Michele Buck:

Yeah, thank you, Andrew. Yeah, you're exactly right. For the first quarter, the timing impact was about half of the - half the beat on the sales line and also strong performance in international. So those were the two big drivers and we look to the balance of year. Obviously, the timing is going to wash out in the second quarter, but we do expect to see a little bit better elasticities in the year to go period. We still see a moderating versus some of the strong performance we've seen the last six to nine months. But a little bit more improvement and we're spaced that a little bit more on media investment that we also have incrementally in the year to go plan. So between, I would say, with the strength we saw in the international business, what we're seeing on the back of improved elasticities a little bit in the year to go period, that's what gives us the confidence in the race, right?

Michele Buck:

Yeah, 2Q will be probably our most challenging quarter. I look to the balance of the year. We're going to have the timing piece shift back out, but then also recall last year it was a big inventory till quarter as well. And so, when you look at the laps, it's pretty tough lap. That combined with that point and a half coming out, we'll put, more to the mid-single digit range, probably from a sales standpoint. And that will put more pressure on the EPS side than the rest of the quarters.

Operator:

Our next question comes from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Melissa Poole :

Sure. So there is no change to the number of lines. There are five lines and I think there's one that we just didn't specifically call out in our remarks. So, so no difference there. Relative to Weaver, we feel very good about the acquisition. Weaver manufacturing is currently a come in of SkinnyPop. We acquired two plants and really what it gives us are three things that gives us sufficient capacity to be able to support growth for several years to come. And as you know, we are seeing very strong growth on SkinnyPop. It provides us with resiliency and also flexibility just so that we can continue to support the strong growth that we are seeing. As you know, as you look across our business for strategic categories and businesses that we are in, we do like to have at least some degree of own manufacturing across our network. And we also feel pretty good about the investment return at the investments that we made. We believe, given the quality of the assets, the fact that facilities are on the newer side that it is faster and cheaper than if we needed to build this on our own.

Melissa Poole :

Sure.

Cody Ross:

Good morning. Thank you for taking our question. You're implementing a high-single-digit price increase on 50% of your confection portfolio effective at the end of May. I believe that's correct what you announced at the Analyst Day. How much do you believe will benefit fiscal ‘23 versus fiscal ‘24? And can you explain the mechanics of the benefit by the year?

Cody Ross:

Great. Thank you. And then, just a quick question on gross margin. Your gross margin came in higher than both yours and the street’s expectation this quarter. You raised your outlook to expansion of 70 to 80 basis points for the year. What gives you confidence to raise your outlook this early in the year, especially in context of your retail Partners, who are struggling to expand gross margin this year based on their guidance? Thank you.

Cody Ross:

Thank you very much. I’ll pass it along.

Nick Modi:

Yeah, thank you. Good morning everyone. So just a quick clarification. Hey, good morning. On international, I saw the comment you put in the prepared remarks. But maybe any more context on exactly some of the specific initiatives outside of a recovery in travel. I'm just curious, on there was a very strong number relative to expectations. And then, if you could just touch on the market share commentary you made in the U.S., kind of what's driving some of that? You talked about the mix, but I was kind of unclear exactly what that was referencing.

Nick Modi:

Yeah, I was just, I was just hoping you could provide some context on the US share commentary you had in the prepared remarks and the press release? You had referenced I think in the prepared remarks, mix was a driver and I was just unclear. But if you could just provide any context on some of the market share trends that you are seeing?

Nick Modi:

Great. Thank you. I’ll pass it on.

Pamela Kaufman :

Hi, good morning.

Michele Buck:

Good morning.

Melissa Poole :

So, I'll start by talking a little bit about the trends and I’ll let Steve talk about elasticities. Certainly consumer behavior continues to evolve and we know that many consumers have made changes to their spending to respond to inflation in the marketplace. We certainly continue to see that food has performed well compared to other categories, specifically food at home as it's a much more affordable option for consumers versus dining out. And we also know snacks and candy continue to perform even better than broader food and elasticities in those categories have continued to remain pretty strong. And we do expect that we'll continue to see strengthen in those elasticities. We know the consumers are being increasingly mindful about where they shop. They are looking for more affordable options. Whether it is the channels in which they are shopping, whether its private-label, whether it is deals and increased promotion. And we are constantly carefully monitoring those trends, just to make sure that our media and our in-store activations are really optimized, so that we can align to the trends that we're seeing. Steve, do you want to talk a little bit about elasticity - on the elasticity side?

Pamela Kaufman :

Okay, thank you. And my second question is just on the ERP implementation within snacks. Can you touch on what benefits you expect to realize from it? And what impact is factored into your guidance for this year from the ERP implementation?

Melissa Poole :

And Pam, I think we did on the last call. We might called out the impact. It's about a half a point headwind for us for the full year related to that transition all focused in the fourth quarter results.

Operator:

Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.

Melissa Poole :

Yeah, I mean, I would say, the recovery that we anticipate is really driven by the increasing Investments that we've continued to make over the past several years in capacity. Obviously, some of them take some time to be able to get equipment, get it up and running et cetera. And so, that's the point at which we believe we start to get ahead. So, I think we've pretty consistently talked about and end of ‘23 and ‘24, that we anticipate being beyond many of these supply issues. But yes, I would It's a predominantly, they've been focused on capacity. Certainly, in the early years there were some other industry dynamics, as well. It's even - I'm not sure maybe your question, the 5%, just to clarify, that is actually that the pound number not a sales number. I mean, we were clear enough in the remark. So that that 5% growth in production pounds will be well ahead of what the guidance calls for volume and that's kind of how we catch up.

Melissa Poole :

There will be a carryover into ‘24 from those, as well as some additional capacity expansions that we have coming online. So there will be a low-single-digit increase in pounds production available next year as well from carryover and some new initiatives.

Operator:

Our next question comes from the line of Max Gumport with BNP Paribas. Please proceed with your question.

Melissa Poole :

So we always partner very closely with our retail customers to try and do what we believe is best to meet consumer demand and also to drive category growth, which is good for both of us. So we continue to have very collaborative discussions with our retailers relative to our pricing implementations, which also includes a lot of discussion about with the right plans to have business reinvestment that will enable the support of very strong unit conversion.

Steve Voskuil :

Yeah, the big – I think the biggest factor is it is still early in the year. We still have a lot to play out and so we're certainly taking stock of the upsides that we saw in the first quarter. But we're still being cautious also on what is to come in or the world has changed a lot over these quarters there is still a lot of volatility potentially ahead. And so, we're factoring that. And then also, as we go forward, particularly in Q4 the laps get tougher. And so, that's the other factor weighing in the guidance.

Steve Voskuil :

Thank you.

Bryan Spillane :

Hey, thanks operator. Good morning, everybody. I just wanted to ask a question about seasonal, you talked about the, - what part of what impacted market share on seasonals in the first quarter was capacity constraints. And I think, right, we've talked about more capacity available for seasonals as we move through the year. So if can you just kind of talk about that and how that sets up for especially the fall or the third and fourth quarter? And whether you feel like you'll be adequately supplied with seasonal products there?

Bryan Spillane :

Okay. Thank you.

Michael Lavery:

Thank you. Good morning. In the press release, you had mentioned just the ability to sustain momentum into 2024 and beyond, obviously it's early. But just kind of caught my eye that you would call that out, what are you seeing at that would you drive a reference that come up that far ahead and how much color can you give on how you're thinking about 2024 right now?

Steve Voskuil :

Yeah, I would agree. I just point to, as Michelle said, capacity – having capacity available as we exit the year to be a little bit more on the gaps from that standpoint versus some of the limits we've had in the last couple of years the salty aspirations that we have talked a lot about that at the conference coming off of the back of the ERP and rolling into next year, we're excited about that. And then the commercial capabilities that we talked more about at the conference, as well that being able to help drive sustainable growth in the US business in particular. So, those are just some of the reasons that it we feel pretty good about the momentum.

Melissa Poole :

You know, I would say it's too early. We've just started the support on air. We feel very good about all the work that we've done in terms of understanding the dots consumer and the consumers’ relationship with dots. And so we feel good about the messaging direction, the creative execution and certainly it's scored incredibly well and the responsiveness that we tend to see across our snacking categories with advertising investments. So more to come and we'll share more as we have actual in-market results on that. But we think that will clearly only help us given that we haven't been investing in that brand in the past.

Operator:

Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Steve Voskuil :

Sure, we are pursuing a price strategy in international. It's just more modest of what we're seeing so far. And it’s offset by some of the other laps that we had in the quarter. They are having some impact on how much of that price is coming through, but we should see more price come through in the next three quarters.

Steve Voskuil :

Sure. Yeah, great question. So we – we do - the short answer is, yeah, we do feel good with that additional capacity in place or coming in place for the Weaver acquisition will be very helpful to support the growth of that business for a time to come. And I also like the fact that, we're buying well-maintained state-of-the-art manufacturing facility. What we're not doing that is still much more capital efficient than building from whole cloth. And so, it is capital efficient to pick up assets this way, as well. So, as we look to the future, I feel good about the capacity that we're going to have installed on both the confection business and the salty business. And that will have an impact on free cash flow as we look to the future.

Steve Voskuil :

Thank you.

Jonathan Feeney:

Thanks very much. Could you comment on the role of fate, not just recent distribution growth, but distribution growth over the last 12 to 18 months in the salty snack business driving at really outsized volume growth? Because, I guess, I'm trying to understand how when you take these products whether it's dots most recently or others into new markets, is there a necessary to care like, you have all this great innovation into Hershey capabilities and then that kind of seasons and it slows down. What data or insight can you offer to help us understand that and may be if you think about what a sustainable organic volume growth looks like for salty snack going forward? Thanks.

Jonathan Feeney:

Thank you very much. Much.

Operator:

Our next question comes from the line of John Baumgartner with Mizuho Securities USA. Please proceed with your question.

Steve Voskuil :

Good morning.

Melissa Poole :

Well, C store is really a core capability for the company for our base core CMG businesses. Certainly we realize its importance in reaching certain specific consumers and really certain specific occasions when consumers are out and about. So it is a priority for us. We have been focused on that. I think in SkinnyPop, we are certainly making progress. But there's more opportunity to go. And so, it'll remain a focus for us going forward. I don't know if I'd say that there is any key barrier. Certainly, there are folks who have DSD capability more broadly. But we've done a good job with our CMG business, where we don't have it building distribution in convenience stores. So, we feel very good about that. And then across our salty snacks network, we do have both warehouse and DSD capability. And we're really working right now to optimize how we best utilize each to maximize the potential of the business.

Michele Buck :

Yeah, and beyond just the capacity and one of the things that gives us the opportunity to optimize the supply chain network more, broadly. So if you think to the future, other assets are potentially coming in, if you think about some of the strategies we talked about around price pack architecture, and being able to make sure we have the right packs and mixes to support the business going forward. So by having all of that in our hands, in our control, just gives us more flexibility and agility to deliver that growth plan.