Q3 2020 Hershey Co Earnings Call - Live Question And Answer Session
Greetings and welcome to the Hershey Company third quarter 2020 question and answer session.
At this time all participants are in a listen only mode. As a reminder, this conference is being recorded.
I'd now like to turn the call over to your host Ms., Melissa pool, Vice President of Investor Relations for the Hershey Company. Thank you you may begin.
Thank you good morning, everyone. Thank you for joining us today for the Hershey Companys third quarter 2020 earnings <unk> session. I Hope everyone has had the chance to read our press release and listen to our pre recorded management presentation, both of which are available on our website. In addition, we have posted a transcript of the pre recorded remarks.
The conclusion of todays like acuity session Weve also post the transcript an audio replay of this call. Please.
Please note that during today's <unk> session. We may make forward looking statements that are subject to various risks and uncertainties.
[noise] include expectations and assumptions regarding the company's future operations and financial performance, including.
Including expectations and assumptions related to the impact of the cobot Nike and actual results could differ materially from those projected as a result of the COVID-19 pandemic as well as other factors. The company undertakes no obligation to update these statements are based on.
A detailed listing of such risks and uncertainties can be found in today's press release and the company's debt.
Finally, please note that we may refer to certain non-GAAP financial measures that we believe will provide useful information for investors.
Patient information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP reconciliation to the GAAP results aren't fleeted in this mornings press release.
Joining me today are <unk>, chairman and CEO, Michele Buck Hershey, Senior Vice President and CFO, Steve all with that I will turn it over to the operator for the first question.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question queue you.
Let me first start to if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
To allow for as many questions as possible, we ask that you each keep to one question and one follow up.
Our first question comes from the line of Andrew Bizarre with Barclays. Please proceed with your question.
Great. Thanks, so much good morning, everybody.
The morning, Hi.
Hi.
Curious for that for the past several years Michel the majority.
If not all of the Companys organic sales growth has come really from pricing as opposed to volume or consumption growth and much of this is obviously due to the success of the company's new pricing model and the associated selling electricity that that comes with it I guess that said as you look forward into the 21 and beyond I'm curious if there is a sort of focused internally on.
Maybe regaining some better balance between the two drivers and if so how would you expect to see some of that maybe developed more fully next year. Thanks. So much.
Andrew Absolutely I think we've shared before that you know, we do view pricing as an important part of our growth algorithm, but we are very focused and would like to.
Drive to greater balance between price and volume that we have good visibility into Q4 and 2021, yeah. We do expect volume trends to improve or does that we'll be lapping some of our pricing elasticity from last year.
And also a continuation of some of the strong share gains that we've seen to date that will carry into the first part of next year. I think you can definitely kellogg seeing volumes being a more important part of the algorithm next year, yes, we feel good that the calendar programming, we have the innovation and the media is real.
He got to help to drive some of that.
Great great. Thanks, very much thanks.
Yep.
Thank you. Our next question comes from the line of Ken Goldman with JP Morgan. Please proceed with your question.
Hi, Thank you along the same lines of 2021, if I can show you pulled back a little bit on advertising this quarter, it's been a little up and down this year for understandable reasons I'm just curious what your thoughts are in general on what the company's plan is for advertising marketing.
In general as you get into what hopefully will be a more normal a year and 2021.
Sure. So we definitely believe in investing in our brands that is a critical piece of our growth model on the business. So clearly as we mentioned to you we had pulled back on some spend in areas, where we just thought given the pandemic. It didnt make sense for example in refreshments, where we knew consumer.
Usage was down significantly.
But as we looked at 2021 and as we've started to see the momentum that we're seeing and some of the recoveries we definitely plan on.
Taking our investment levels to where we would like them to be more in line with where they have been historically, so you'll see us I'm really going again to to drive the consumer and to leverage some of the behaviors that were seeing.
Thank you and then for a follow up you didn't do any share repurchases. This quarter I think that's the first time in.
Two years and that was the last time to wait before you bought pirates booty I want to ask if the lack of repo is an indication of pending deal of course, but I am curious how you would describe the current environment for potential transactions, I guess, particularly our targets maybe more willing to sell because they can do so off a higher sales number than usual.
Or are they more hesitant because they I guess kind of want to ride this demand waves as long as they can.
If you want to take that yeah, I'd be happy to so first just on the share repurchase I would just echo what you said don't read anything into that I would say for this year, we have taken a little bit more cautious approach to liquidity in general you know going back to the beginning of the year in the cobot.
These are just taking a little bit more cautious approach, we will be revisiting that as we look at next year and I would say in general our capital allocation priorities haven't changed with respect to M&A, specifically, it's probably more the latter I think people are still but the ones that are the most interesting or riding the wave and they still have valuation expectations that looked like they did.
It pre cobot, if not higher but.
But I would say, we're continuing to have an active funnel continue to look at a number of opportunities and we'll continue to update the market as appropriate.
Great. Thank you both.
Thank you. Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, Thank you.
I think the.
The recovery.
Especially the 2021, I <unk> international and and other is.
You have a 2% headwind this year in 2020.
But can you give.
Give us a little bit of color as to the condition of your business in Mexico, with India and China HM.
Is it easy to assume that things can go back to normal or has the pandemic in impaired your commercial capabilities at all.
For the retailers desire to merchandise confectionary products in those markets.
Yeah. So first of all I'd start by saying certainly there's a lot of uncertainty and volatility with the pandemic. We all know that we're seeing the ups and downs Oh, you know occasional increases a spike in markets around the globe that that said I would say that we were pleasantly surprised by our performance in international.
Our team did a great job executing in this very challenging environment and I think that you know we've seen while each market is a little different and the use of the categories a little bit different consumers are really looking during this time for brands They trust.
We've done a great job over the past couple of years building. The Hershey equity. So we were pleased with the rebound that we saw in many of our markets I think I mentioned in India. Our business, we've now up 6% versus that had been down we gained market share across almost every market on our core chocolate category.
So I wouldn't say that we believe our ability to drive the business has been impaired in any market on a permanent basis.
Yeah, just as we are pivoting into U.S., I think weve pivoted to where the opportunities are in international and we feel good about the.
Recovery and you know planned to continue to deliver against that.
Thats kind of trying to dive a little bit deeper into Mexico are there any packaging.
Harman said the government is making on a nutritional values or.
Any concerns about.
About a the category how that might impact the category.
Yeah, absolutely. So the government did put in place front of pack labeling changes in Mexico and that new packaging is now in the market and we are beginning to monitor the trend.
We believe consumers know our categories a treat they know what has sugar and so we expect that we'll see less impact from that than perhaps other categories well, but we will of course keep a close eye on that and I would say, Mexico, Mexico has been one of the harder hit the developing markets relative to cope with it so.
So we feel good about the progress we're seeing but it's a little slower than some of the other markets.
Okay very good thank you.
Thank you. Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.
Thanks, Good morning.
A question on your share gains in the U.S. and strictly in chocolate.
You you really and in your prepared remarks, you touched on this how adaptive you were by market by channel by need state and turn in terms of small cars.
Some of that's related or might be related to supply chain could you talk about that part of it and then I think the reason I'm asking is because if there is a supply chain breakdown or lack of adaptability by a competitor maybe that will represent share gains that they can reverse somewhat in 21 airport follow.
Okay.
Yeah, absolutely. So I would say I believe our share gains are a testament to both our strong brands are a consumer understanding our programming as well as to the supply chain execution and execution at retail both of which tend to be you know core advantages.
For us as a company. So I think we're seeing our category and our brands are definitely resonating with consumers and as you mentioned, we really pivoted with the consumer so very early early on we tried to understand how consumer behavior was changing and we've talked to all of you before about the fact that our category splits a third a third a third take hold.
Instant consumable and seasonal and as we saw consumer shift to more at home behaviors. We very early on shifted the focus and our portfolio to really dial up some doors twizzlers for movie night.
Our baking product activity and then within the seasons, even with Halloween, we made that decision to lean in and drive and build a halloween season versus back away from it and and everything related to that relative to lets start the season. Early so we can get consumers then you pre trick or treat you know lets me.
Sure we were smart about the portfolio that's out there and not overly index to seasonal skews et cetera, and then we worked really hard on messaging to message consumers safe way to celebrate the holiday, we dialed up E commerce as consumers shifted to E commerce, and because we had invested in capabilities and.
We were able to do that.
And then I think a lot of the strong investments, we've made and other capabilities over the years helped us during this time to execute well and some of those go beyond supply chain. So you know we've made investments in better understanding consumer trends, we've made investments in our ability to forecast at a much more granular level.
We've made media investments to target better and certainly we've invested in our plan all along the way, which really enabled us to pivot quickly to safety protocols, and we'll really be able to continue to execute and then we made the decision to keep our retail sales team at retail so as they think about.
You know think about that share gain I would say clearly we would expect it to continue to see share gains clearly through the spring of 21, we would expect that they would moderate after that though we're certainly expecting to to hold onto a share and we will continue to drive our outstanding programming and.
Also continue to execute supply chain with excellence.
That's helpful. Thank you and then just on any sort of one times from this year that that we should be thinking about from a model perspective, I'm thinking about cobot related friction costs. This year, but also you might add.
Add back some s. DNA in parts and.
And other so any onetime type comparisons like we should think about thanks yeah.
Yeah, I think we talked about in the repair prepared remarks on the topline we had about a two point impact. So you can write away say, there's a drop through that two points into profitability. But then if you take a look at the net of cost for Covance, So protective equipment and a employee incentives that we had earlier in the year and you know them against the DMV optimistic.
You shouldn't media optimization that we did as well as the T. any savings there was a net slight positive on those two pieces.
And so that we would expect to mostly go they will have some lingering costs next year, probably less one off in any quarter related to co bid PPD and so forth that continue.
But net it was just a slight positive outside of the two point drag on the top line.
Thank you.
Thank you. Our next question comes from the line of Chris Growe with Stifel. Please proceed with your question.
Hi, good morning.
Good morning, Hi, I had a question for you if I look back at Halloween I'm curious if you split the season apart and you had given some refresher on this last quarter I'm sort of the early season part of the trick or treat season apart how each piece for foreign if you can give us a little color on that we have some information from my arrival I'm curious if you have better information that we have.
And then I'm also curious as I think about that early part because that's more indicative of what you expect for the holiday season, as we move into Christmas and that kind of time, where you don't have a trick or treat the event.
Could that early season, if you start that that season early in particular in stores be more like what we saw in the early part of Halloween thought make sense.
Yeah.
So clearly we saw that within the fees and the early part of the season performed more strongly and the later part that's more trick or treat focused performed a little bit softer now we had anticipated that so overall this season performed exactly in line with our expectation as we look at the.
Total season, we were quite pleased that our sales were actually up versus year ago as was our sell through up versus year ago. So during a time of the global pandemic I think it speaks to the resiliency of the category and the consumers desire to really hold on to and continue to celebrate the.
Ah traditions and fun occasions like this in their family lives.
As we look at holiday holiday is had some different consumer dynamics than Halloween and so we believe it will behave a little differently I don't think we're going to have some of the pressure that we anticipated we'd have coming into Halloween.
The category should be quite strong consumers use the product in you know in different ways. It's much more about family occasions, we aren't as big in gifting some of the areas of the category that might be a little bit more hard hit. So we expect solid result, given.
Given that you too at home consumption.
Okay. Thank you and then just a follow on to that does that are you shipping in shipping in the holiday the product early and would that have been an incremental but do we see some of that in the third quarter more than we would have seen historically.
Yeah. We did just like we did with Halloween started shipping in holiday a bit early so you do get some pick up in the third quarter for that that'll take away a little bit from the fourth quarter, you know maybe on the order of 50 basis points.
[laughter] that to drive the consumer behavior early as well just as we did with Halloween you know as Halloween was still on the floor holiday was also out there. So they can consumers could also you know gravitate to the holiday pretty quickly.
That's helpful.
Yes, strong Halloween sell through really helps us because it helps us get that fast start to holiday because it clears the space to be able to play publicly on the floor.
Okay.
Thanks, so much for the color.
Absolutely.
Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.
Hey, good morning, Fellas, congratulations on a good quarter sales.
Well.
I want to pick up on the docket Christians questions and tease out trying to tease out a little bit more of the outlook on holidays going forward.
The Halloween early part selling was when I was talking about for everything as expected I think a big part of that's due to the merchandising programs that reach loose out it seems like they started bigger and earlier than they usually do.
Has that you think influenced how they're going to approach obviously since going forwards and said some more directly you expect retailers to provide more more merchandising support behind the category into the holiday into Easter than they otherwise would coming out of the success they saw hollaway.
So we always had pretty strong merchandising support at every season and one thing we always think about with season is when we get it on the floor, because we know that consumers will buy that holiday or seasonal product, whether its east or wherever early.
For in home consumption it was to get it out there it's kind of spark the trigger I love you know Fundaments earlier, so I don't know that I could say specifically that.
We can anticipate that retailers are gonna merchandise it even more than they ever have I do think that they will be focused on making sure that they definitely get out early to capture the early part of the season since that is the piece that you know is a bit more stable.
There were a few retailers you know as you can imagine with the uncertainty of Halloween and the fact that all these decisions about what to do with Halloween really had to be made in early may when things were quite uncertain in schools were closed in bars and restaurants and all of that.
There are a few retailers who went pulled back on Halloween.
And based on the results of the season. This year, they will likely have more confidence going forward, which should help to make it for an even stronger Halloween next year and probably also build confidence for the other seasons like Easter.
That makes a lot of sense and then one more question on the.
Sticking with Paul wants to Chris is questions, which I thought was solid up the the early part of the season of course, the latter part of the season.
The earlier parts used was exceptionally robust and you said late part was a bit softer in somewhere in your remarks, I think you said all in total holiday. So both <unk> early part Lipar finished down mid single digits for the category I think why not adequately to get the category down mid single digits, we're going to have to see some pretty pretty sure.
[noise] declines.
Coming through the retail sales data next couple of weeks as we as we capture that late part of the season I'm thinking about it right am I interpreting your comments correctly.
Yeah, Yeah, you are interpreting them correctly, so category was down mid single digits overall as much as our business was actually up and we will see some of those declines.
Yeah, Jay Thank you very much.
One other thing to keep in mind, there is a little bit of a timing impact from the Nielsen and IRI data given that the season was on a Saturday versus a Thursday and based on retail reporting date. So you will probably even see it down even more and you'll have to wait till kind of mid November. So you see some of that those last couple of days being reported so some of that when you see will be just the timing shift because it.
Days, a week and some of it will certainly be the declines in trick or treat at the end.
Understood. Thank you.
Thank you. Our next question comes from the line of David Driscoll with de de research. Please proceed with your question.
Great. Thank you good morning, and congratulations on a great execution in the quarter.
Thanks, David.
I had two questions. The first one just a two.
Two relatively small ones on the other expense commentary I think through the through the year to date period. Other expense it is only a.
Small number but your full year projection the hundred to $110 million on that means it's fairly massive number in the fourth quarter am I doing the math right is that is that correct on how the the pattern lays out the other expense and then related just another follow up on your volumes expected in the fourth quarter I think in your prepared comments.
He said north American organic growth similar to third quarter, but pricing only like a half point. So that would mean volume is something like five percentage points positive in the fourth quarter My doing those two pieces right any color you can give on those two comments.
I'd be happy to do so on the tax side and other expense you're exactly right. We will have a large other expense in the fourth quarter. So that's consistent with what we've been saying even in the early guidance earlier in the year and then along with that a lower tax rate in the fourth quarter. It can do the math on the tax rate you also have to solve for a lower tax rate. So that's how the those two lines will play out and yet.
On the volume up in the fourth quarter, you're thinking about it the right way yeah. We do have some inventory replenishment that will happen in the fourth quarter. We saw that in the third we'll see some more of that or that continue into the fourth. We're also lapping some elasticity after the price increase last year and then this continued strong share gains. So three things are part of driving that fourth quarter bye.
Im.
Michelle a bigger picture question her she took pricing in most of the portfolio outside of the seasonal candies and 2018 and then in 2019, given the negative impact to Halloween for the entire category would you agree that now is probably not the time for seasonal pricing.
These actions, maybe just gets delayed to 2022 or sometime later until we get a normal consumer environment essentially I'm, just asking you to assess your your ability to pass through cost increases through pricing actions, so weird environment and I don't know how its altered that calculus. Thank you.
Yeah, So obviously I can't speak to any specifics about our specific any upcoming specific pricing actions. What I can say is you know there's been no change to our pricing strategy of smaller more frequent increases and that doesn't necessarily mean, we're going to have the same amount of pricing every year or that we would do.
As announced pricing at the same time, Yeah. We did for example, I'm actually have a small price increase this past year on our foodservice business in the third quarter. So you know if we look out over time, we have been able to price at various times.
At various economic condition. So what's important to US is we do think pricing is an important part of our algorithm, but as we've talked about before we really want to grow through balanced growth across the levers distribution velocity innovation, a price et cetera. So.
Yeah, we know that but that is certainly the one piece of the portfolio that we have not yet price and I think it's fair to say that you know given that we haven't announced a price increase at this moment in time, the magnitude of pricing and 21 would be less than we've seen in prior years at least at this point.
Yeah, we've been pleased that weve seen conversion to be pretty good this year, even in a very difficult economic environment and I think that continues to demonstrate what we've seen over the years, which is the category is very resilient. Our brands are strong we continue to invest into our brand and that does.
Allow us for an even greater amount of pricing power.
Really helpful. Thank you so much.
Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.
Yes, hey, thanks, Good morning, I guess building somewhat on earlier questions I'd love a little bit more color around just your general mindset heading into 21 as you work through your planning process. Yeah. Clearly there there are parts your business that had been under pressure this year international movie theaters, bending specialty et cetera, and how.
We all those set up for at least directional recovery in the year ahead, but at the same time youve been getting a lot of sure. He's got a great success at home categories like beginning with initiatives like small cars.
All of which is a classic momentum, but you know again could set up for a difficult year over year comparisons.
So as you saw them altogether I guess is there a way to frame.
Frame your thinking at a summary level to what degree those various puts and takes sort of just net each other out in your mind or are you approaching 21 planning thinking we've got you know either and that easier not harder set up versus what.
You know one when my kids were typical.
Thanks.
Yeah. So we're pleased with the momentum is.
We are seeing and I would say you know youre called out and what you shared about some of the ups and downs on the business I think are very accurate. Yeah. We believe we're seeing that our category and our brands really resonate with consumers.
And especially at a time like this where they're looking for some of those moments of goodness moments of happiness. We're really pleased with how we've been able to pivot with the consumer and also pivot with our capabilities to be able to execute well in this environment.
And we feel good about that more momentum and our ability to continue pivoting. So you know this year, obviously it was consumer shifted to take home and so we dialed up smaller as we dialed up Twizzlers and we dialed up baking and we you know leaned into creek the season to make sure that we could capture that opportunity you know, giving consumers new ways to participate.
Halloween that frankly, we believe those things like candy slides and candy graveyards Oh, the creative things people did well probably become a part of their ongoing traditions and they have just as all you know as I mentioned, we were able to dial in and accelerate E Commerce and I think as we look to next year. We are prepared if the consumer pivot yet again.
And to be able to pivot with them I think weve built and we've demonstrated ability to execute well during this environment and also to pivot from an executional perspective, whether it's at retail or in our manufacturing facilities. So we're very focused on that you know we captured as well.
Don't cultural.
ER positive effects I think capabilities, we've built in terms of operating in this environment that you know, perhaps allow us to make decisions more quickly and we think that as an enabler for us going forward. So we feel we feel good about though as we look to the future.
Thanks, Michelle I don't know if you want to take this one or Steve, but I just as a follow up sort of unrelated just any comments you might have on just current levels of promotion the promotional environment and what you expect to see there the balance of Fourq, you and that's a 21. Thanks.
Yeah, we don't see any significant change relative to promotional activity.
We didn't really see it this year, we didn't execute anything significantly differently and nor do we expect to see anything in the future.
Okay perfect I appreciate it.
Thank you. Our next question comes from the line of Nik Modi with RBC. Please proceed with your question.
Yeah. Good morning, everyone I'm, Michelle I was hoping you could provide some context on the partnership with Google that you used during the holiday period and you know do you believe this capability can be leveraged well. This holiday season, but also kind of in your everyday business are you kind of look forward.
[noise] you know we are continuing to.
Leverage different types of data and analytics and insights more and more across the business and you know we continue to really try and stay on top of tracking consumer sentiment and leveraging data and analytics to tailor copy to tailor messaging to tailor media, so more and more.
Sure we are operating in a more sophisticated level relative to using multiple data sources and also using that to reach consumers at the right places with the right message at the right time.
And I guess, what I'm trying to get at is you know is this kind of new way of of kind of targeting consumers like the return that you see from what you've done like can you just give us any kind of understanding because one thing I've noticed thing across the entire CPB landscape is companies are spending more money.
We're spending more money on the same message and in fact, you know new consumers are being recruited usage occasions are changing and so it really requires a change in how you talk to those consumers and so I find this you know Google partnership you know incredibly compelling for you guys. So I'm just trying to get better context on how it's changing the return profile of your spend.
If you can provide any context on that.
So we have a continuous focus on optimizing media and the returns on our media. We always have we had strong media ROI is forever and our challenge is how do we keep making them better and then we continuously optimize based on that so right now you know it's it's.
Big spend area for us so it's an area, we're very focused on elevating and it is about you're making sure right now I would say some of the biggest opportunity is that opportunity Oh, even more precise targeting and then once you have that targets the ability to alter the message. So and then we alter our media mix Accordingly, and I would say.
Hey, we see you know significant movement in that mix on a year to year basis, as we get better at that I think weve raised you know some of the opportunities of how we've gone just buried deep relative to.
Specific seasons, whether some or by ZIP code or whether its specific you know holidays I'm looking at sell through at the store level basis to be able to dial up media on a ZIP code level basis. So you'll you'll continue to see more of that frankly, that's just becoming a way of of how we operate now.
Great and last question just from an innovation standpoint can you just provide any context on kind of whats remaining in terms of innovation. This year and how things are going to work and 2021, if there's any clarity you can provide on on on the launch timing.
Yep. So we feel very good about our innovation some of the innovations that we are excited about that are new to the market include the recent pretzel product a risk up with presses in it.
We've had a a range of kit Kat flavors, we know on a global basis, a big Pete part of the kit Kat portfolio, our flavors. They tend to do quite well we are on a very small level lunching snack cakes under a research trademark which you know.
Delivers that Reese experience in a slightly different type of product form and we feel good on that versus basis. Some of the early test results.
And we will have more coming some items on our take on side of our business that won't get to now till early next year, which is typically the time, we announced those things just given reset windows no major change in our innovation strategy. We think it's working very well for US we think it's rightsized and.
We think it's delivering much more sustainable results.
Great I'll pass it on thank you.
Thank you. Our next question comes from the line of Michael <unk> with Piper Shannon. Please proceed with your question.
Oh.
Thank you good morning.
Good morning.
You've talked about the increase in E commerce sales, even if it might have decelerated a little bit, but it's that's up very strongly you've said in the past the baskets and dollar ring or or higher online.
That's still holding true with the growth that you're seeing now and on the margin side, you've mentioned that theres, a small gap, but that it that you were measuring it and that scale would help that is is that coming along the way that you would have expected how does that look now.
Yeah, I mean, we've generally seen larger basket sizes in general across most channels. This year as people are you know doing fewer trips and you're more quantity per trip. So I think that's been somewhat up just an underlying dynamic given the the pandemic impact in the market.
Right.
For us our ecommerce business, we've seen very significant growth across the board, but particularly in click and collect where people actually go in and pick up their their groceries and also into local delivery models as well versus kind of national deliver the margins that we have are similar to what we see in brick.
Some order.
Okay great.
Two areas it excuse me in those two areas, where we have you know similar products, obviously that we sell in bricks and mortar.
Do you have anything.
Yeah, I would say is that you know we said in the past, but overall E. Commerce margins are up a little bit dilutive and it's there as Michele just said and click and collect in local delivery very similar not much impact and that's right two thirds of our E. Commerce business. The piece that is more dilutive is the ship to home and in particular cone chip and that's it.
Well, we continue to work with our customers and look at our overall investment with those customers and joint business planning to drive efficiencies overtime, so that those margins along.
Okay. Thanks, and just one follow up on smaller as I felt that.
Your your data analysis and insight there too.
[laughter].
Push that the way that you did was was interesting as you're seeing you know cases rise again now but are you replicating that are you seeing similar results.
Is there a bus Moore's.
Search, we should expect and and would it be right to assume that those hersheys milk chocolate bars or probably some of the highest margin ones that you have.
[noise]. So we have really expanded some orders from the at one point. It was a very focused time of year to really capturing some more as a year round opportunity, especially if you, especially if you think about how different weather is across the entire country. There are lots of opportunities to continue to expand.
Yeah. So we're very focused on that you know we're also very focused on the upcoming baking season, where we know that consumers will be spending time at home, it's already a natural baking season, and so well be looking to.
Really optimize we're able to drive you know leveraging insights around that season as well.
Okay, great. Thanks, a lot.
Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question.
Hi, guys good morning, everyone.
So just just one one question for me and I think there was a little bit of a commentary in the prepared remarks about.
Some color you know inflation and cost of goods sold so maybe Steve could you just give us a kind of a a lay the land right now in terms of.
You know what commodity costs and just cost of goods inflation looks like currently you know in the <unk>.
Context of seems like freight costs are going up you've had some competitors talk about.
Ah cocoa prices going up.
So just trying to get an understanding of you know directionally, where where inflation is headed right now.
Sure Yeah for Us I'd say overall, it's been relatively stable. So on the commodity side a relatively stable you know you saw a big move in sync in commodities across Q2, and Q3 and of course, we've talked in the past, we mitigate some of that volatility with our hedging program and I would say today. They are fairly stable there are increases in freight costs there too.
Our teams do a great job of a longer term contracting which helps mitigate some of that increase so that hasn't been a real material impact for us we have seen some increased warehousing costs and part of that volume and flow through along with the share gains and the volume increases that we've seen.
So we called that out in the prepared remarks, but untold only sitting at this point I would say overall Cogs is fairly stable and we'll give more guidance on 2021, when we get on to the fourth quarter call, but I guess, we can infer from that at least from where we sit today that you know that it's stable is it something that looks like it kind of carries into.
Next year unless something changes.
Yeah, I think that's fair you know next year as we get the you're going to have the 2020 and 2021 comp prop of cocoa start to bear the lids. So you know there's that to consider and then there's other things obviously on the gross margin side as Michelle said, you'll have a little bit more volume driven than price driven mix driving gross margin next year, we'll have our continuing prone to.
Activity goal.
And I get a lot more on that to come when we talk on the fourth quarter call Alright. Thanks, Steve That's a that's very helpful have a happy Thanksgiving everyone.
Thank you.
Thank you. Our next question comes from the line of John Baumgartner with Wells Fargo. Please proceed with your question.
Good morning, Thanks for the question.
Good morning, good morning.
So I want to follow up on the Reese's snack you mentioned that it's small right now but her she went down this path about 15 years ago, when it didnt really translate into anything material. So I'm curious what the data tells you in terms of changes the landscape now does this maybe mark in new sales over the snack section evolution and I guess, where do you think it slots in <unk>.
Compete against the Twinkies or cookies, just where is the target market or any any big picture thoughts would be appreciated.
Yeah, absolutely. So you know I think we've approached this in a very thoughtful and measured way, which was not a mass launch where we just throw it out there and tried to make it as big as we possibly could at one point in time, but we did a very targeted in market launch for an extended period.
Of time, so that we could really learn about the proposition. We spent a lot of time in terms of developing the product to make sure that we really understood. Some of the drivers of liking in the snack cake area and we haven't really thought about where how where and how we wanted to to play and law.
So this for example is very C store focused it is you know a.
A single serve type of items that were keeping it as a as a focused launch.
It is definitely bringing the great chocolate peanut butter taste profile that we have on recent to the snack cake market. So yes. It is you know playing in that snake snack cake area versus other snack cake brands.
We know that we had participated in this category for many years through licensing and we learned through that that our brands could participate and extend to the category. We also know that morning, snacking has been a growing trend and our confection item skew more to afternoon and evening. So this is a chance for us.
To participate in some of that growth because that is where these snack cakes get utilized. So again, we're going to have a very focused rollout will put it in locations, where we think we can garner incremental space and where we think there's a strong consumer fit and starting at C store and looking at other select areas.
And then if it continues to perform well, we will expand but we will watch it closely and take a measured approach.
Great. Thanks, Michelle.
Yes.
Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.
Good morning, everyone.
Hi, Leslie.
Hi, there can you talk about the the C store channel specifically, it's obviously been under pressure because of the pandemic, but I imagine that that happens and sequential improvement and that could you maybe just give us some.
Some numbers about how that channel is that its recovery.
Absolutely. So as you said, we've continued to see strength in food and mass and dollar as consumers eat more at home.
On the C store classes did see a bit of recovery in the third quarter. So we saw a the business grow in the low low single digits in the third quarter, which is definitely an improvement versus those early pandemic trends.
It did then slow a little bit as summer ended and those summer road trip decreased with kids going back to school.
Our business has tracked pretty much in line with the channel and significantly ahead of the category. So we have share gains of about 100, and what 20 basis point in Q3 in that channel. So I'm seeing some some rebounds and some recovery versus versus where it wasn't the path as people are out about.
A little bit more than they work.
Great and then as a follow up full lottery on Brian's blamed question about for each call I remember back in 2018 as freight costs spiked back then that quite a bit of a headwind for you. It seems as though it's not so much of a problem. This time around are you able to tell us roughly what proportion of called.
A flight to actually write conveying.
And how much about is already contracted out and what you've learned since 2018 to make the situation. This time around.
Well manageable thank you.
Sure.
So yeah freight cost right now, we don't see as a a material impact if it continues to rise it will have a bigger a bigger impact right now again because were contracted in our teams do a great job of managing those contracts its not having as material in that you know, it's roughly 10% of Oh.
Cost overall, and so it's not immaterial, but right now I'm not seeing enough movement, there given the contracting to really drive a material impact on overall Cogs.
Great. Thank you very much I'll pass it on.
Thank you.
Question comes from the line.
Consumer edge. Please proceed with your question.
Good morning, Thanks, very much and thanks for a great Halloween.
[laughter] personally personally and professionally.
Most of my financial ambitions and spend to give out full size candy bars, which I was again able to execute some thank you.
Two quick ones [noise].
I noticed in the data your pricing in North America you Yeah.
Plus one nine on the take away plus three three is what you reported is that just the math or is there some.
Shrinking or different mix within retailer margins there as my first question and secondly, exactly when you look good.
Today's velocities generally tomorrow's distribution in your velocity has been fantastic. This is a weird year a lot of People's velocity is fantastic, but do you anticipate gaining shelf space in that every day place you'll walk. It. These still baking items you look at these take home items like this is phenomenally better velocity forget.
About just the total sales that you're seeing there you anticipate significant share gains, perhaps structural ones I'm talking share of shelf here as retailers do resets for holiday Inn for going forward. Thank you.
Sure. So two parts to your question the first was around price and some.
Some of the discrepancy and yes, there is a mix impact honestly it might be best if Melissa goes and takes you through a deep dive on that because [laughter], there's some complexity associated with it but the piano is definitely accurate.
As it relates to velocity Oh, yeah, good velocity I like your phrase today's lofty as far as distribution I do think that's very accurate as we look at the.
The seasons, you asked about holiday you know, we certainly have been able to garner incremental distribution incremental SK use throughout the year, both in terms of everyday and seasons, because we've been able to deliver and the items that we then put on shelf I'm not only because we supply them.
But then they moved so we do feel good about that yeah. We'll continue to take a very disciplined approach and be very careful that we don't over skew. So we really have to look at the.
The productivity of every SKU and as long as it's good we will be there, but yes, we have been able to gain some distribution and going forward I anticipate that we will continue to be able to perhaps even through the first part of next year.
Thanks, very much and I'll follow up with Melissa.
Very good.
Thank you. Our next question comes from the line of Ken Zaslow with BMO. Please proceed with your question.
Hi, good morning, everyone.
Good morning, Ken.
I just have one quick question everything has been asked and answered you make reference in the prepared remarks about pirates booty is tracking ahead of your strategic plans can.
Can you talk about what are the key learnings that you've developed.
We are using the CEO.
That has really helped you kind of make this a better acquisition and implement it where are you.
She learnings in it and what do you take forward to future learnings into future acquisitions.
Wow so I.
I think a lot of learnings along the way I guess I would start with you know there's a business model for brands that that we as a company our best with and that is you.
Branded item, where you know brand matters, where the business has significant scale, you know probably close to that $100 million Mark and it needs to be a business that has a high gross margin because that's what that's what our business model is we're a branded company, we invest a lot in marketing and we have high margins that enable.
Just to kind of invest and grow invest in growth and we that's that's our model. That's what that's what we need. So I think that was one of the biggest learnings was to help us select viasat.
I think secondly, really understanding the strengths of the brand and really being able to do the right deep dive on which keep your eyes, we think.
Predict the ability for a brand to scale.
And then I would say.
You know really trying to scale the business, well and I would say hey, we've learned lessons the whole way along the way as you know in the past we bought some businesses that are too small we bought some businesses that you had lower margins and we had some that we perhaps didnt execute on the scaling as well and I think we got a very focused exit or effort on the scaling as well and we've gotten much better at that.
Relative to supply chain relative to the talent that we need when we buy a company like this where we want to keep the entrepreneurial spirit, we want to keep people who know the brand in the business.
But we also have to be focused on the point that were also at a point, where we want to scale. The business. So I mean again I go back to the scale the branded nature of the high margin are probably the biggest ones and then picking the right underlying keep <unk> that that say, it's a sustainable business because if we can do that we can make at home.
Right I really appreciate it thanks, hey, well thank.
Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Ms. pool for any final comments.
Thank you all for joining us this morning, I will be available after the call to answer any additional questions. You may have have a great day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.