Q1 2021 Hershey Co Earnings Call - Live Q&A Session
Greetings and welcome to the Hershey Company first quarter 2021 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 Poole Vice President of Investor Relations for the Hershey Company. Thank you you may now begin.
Thanks, Rob Good morning, everyone. Thank you for joining us today for the Hershey Company's first quarter 2021 earnings Q&A session. I Hope everyone has had the chance to read our press release and listen to our prerecorded management presentation, 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 the transcript and audio replay of this.
Carl 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, including expectations and assumptions related to the impact of the COVID-19 pandemic 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 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 it.
Ordinance with GAAP reconciliations to the GAAP results are included in this morning's press release, joining me today are Hershey as chairman and CEO, Michele Buck and Hershey Senior Vice President and CFO, Steve Voskuil with that I will turn it over to the operator for the first question.
Thank you.
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Thank you and our first question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Uh Huh. Thank you for the question and obviously, a really great results.
Just wanted to get a little more color on.
Your gross margin expectations for the year.
Talk about transitory reasons for why gross margin would be down.
In first quarter I think are you still guiding to gross margin expansion and to what extent do you need like the incremental pricing to get that gross margin to turn the other way.
And and I would think some of these higher costs that you're talking about like freight co packing.
It sounds like you'll you'll need to keep doing those things beyond just first quarter, maybe a little more color there.
Well, let me take that one sure happy to so yeah, we are still calling for modest growth margin expansion on a full year basis and he noted that we had in the remarks, there were some transitory impacts in the first quarter.
Lapping from last year. Some also costs in response to the higher volume as we look forward for the rest of the year some of the things that our strength for us the productivity gain the additional volume the pricing that you referenced all of that will be part of building that growth margin yeah. So.
So far for the first quarter and even as we look out for the year I would say our inflation assumptions are largely tracking to what we had in Atlanta and the one exception that we noted with packaging and I think that is one we'll watch our expectation is that inflation will moderate some as the as the year plays out impacted a bit by weather in Texas for the first quarter. So that's one.
We're watching and then any carry forward of the incremental cost to support the higher volume and with more runway here in the balance of the year, we'll have more opportunity to optimize between customer service and manufacturing capacity and the cost to support.
So we're keeping a close watch on all of those but yes at this point, we still see some growth margin expansion over the course of the year.
Okay, and one follow up the new price increase on grocery and non chocolate can you give us a sense of what it represents.
Both in absolute terms and also on an annualized basis once it is fully flow through.
So we see it.
Total pricing for this year across all the price increases order of magnitude about 100 basis points about half of that is the non chocolate piece and again referenced there we havent price that part of the portfolio. Since 2014. So this is in line with our broader strategy, we've talked about of rotating and refreshing pricing in parts of the portfolio.
No.
Okay. So on an annualized basis does that mean, it's you know one.
1%, 2% to the total business or Oh, yeah annualized it's about a point for this year, it's about different baselines.
Alright, Thank you very much.
Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your questions.
Good morning, Thank you.
Good morning.
Just following on pricing a little bit you said the point to point and a half expectations for the year.
And that a lot of that reflects the pricing you just took and some of the promotional benefit in the first quarter.
You also just mentioned that the packaging inflation should moderate you've got some relatively benign things like cocoa costs in theory at least so far but if you were to look for more pricing and sales packaging didn't come in the way you're expecting how nimble can you be in you know what sort of timing does it take to flow. Some of this through how you know how much upside to the one to one and a half could we.
End up seeing.
Yeah, it depends on which parts of the portfolio that we would price obviously the seasonal part takes a pretty long lead time, and so really that's not something that would be in the card for this year on an everyday basis, we probably need at least three to four months of lead time, and so you could see there's still some optionality. There if we were to see some worst case scenarios from.
From a cost standpoint, right now thats not in the plan you know I think we're we feel good about the plan that we have for pricing, but as I said, we'll monitor what's happening from a cost standpoint.
Okay. That's great. Thanks, and just a follow up on the E. Commerce side I believe you've said that those margins might be somewhere around 100 to 150 basis points are lower but the other skills that should improve how have you seen that change over this past year with with the benefit of the surge in an obviously a bigger.
Our scale the pace now.
Yeah from a dilution standpoint, I mean, you're in the right ZIP code. It it's a bit dilutive to the overall margin obviously that piece of the business as we've talked about in prior calls have gotten bigger but.
But at the same time, we continue to look for ways to drive efficiency there.
Optimize inside that business to bring those margins closer in line with the rest of the portfolio.
Do you have a sense of just the timing for what that might take as a multi year process or with some of this surge that's kind of still sticking now would be a big help towards narrowing that gap.
Sure. It's a multiyear process for sure I think the scale does help me when we get more scale across some of the investments and capabilities that we put there. So there is some benefit there in the present, but really to address the full dilution, it's gonna be a multiyear process.
Okay, great. Thanks, so much.
Okay.
The next question is from the coming from Atlanta of Nik Modi with RBC. Please proceed with your questions.
Well. Thank you and good morning, everyone also had two questions first is on <unk>.
Shelf space for quarterly Hershey has done a phenomenal job on execution gains in 2028 games in early 'twenty 'twenty. One I'm just curious given how your momentum continues if you would expect to see or have discussions with retailers regarding more space. You know later this year, but also in 2022. That's the first question and then the second question is just on.
Given the online momentum that you've been seeing in clear clear stickiness that we'd see how are you thinking about the supply chain and kind of reorienting the supply chain to make sure that you can continue to effectively execute and the online business continues to grow. Thank you.
Yeah.
So good morning next so let me first go to the space question you know as we started out for the year. You know we always have a focused plan focused on balanced growth across all levers, yeah, driving base velocity I'm using <unk> to accelerate growth growth in season.
The distribution gain so that's always a focus for us and we are fortunate that we have been able given the strength of our performance of our supply chain, particularly overall, but also during COVID-19.
And some of the needs of our customers to be able to provide some incremental west skus that were very viable that our customers were looking for and you know we gained about five incremental skus for the year.
Certainly with that comes some shelf space gains.
So that's something we've been focused on as we get that distribution that we get shelf space now that certainly Hudson staying power as long as that that skews perform which we anticipate that they will so we are continuing to be focused on that and as we look throughout the year.
Your beliefs, we feel pretty good about our ability to continue to drive our distribution as well as the shelf space gain and certainly that kind of coincides with some of the share gains that we have seen on the business have been driven by that.
And as we look at them online momentum as it relates to our supply chain. You know we've talked before about supply chain 2.0, a big initiative that we have to really prepare our business and enable our manufacturing and supply chain for the future and certainly as we built that program and that initiative one of the key legs.
We were focused on was the agility to enable us to adapt to the changing retail environment I, specifically e-commerce being one of those areas because a lot of the Pac sold in E. Commerce are slightly different than those sold across the business. So some of those investments that we're making there.
Enable us to more efficiently.
Better margin and develop the right packs that enable us to win in E. Commerce. So a big focus in supply chain 2.0 against that and in all of our new capacity builds.
Great. Thank you Michele.
Sure.
Yeah.
Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your questions.
Hey, good morning folks. Thank you for slide again.
I wanted to come back to the question on pricing, but from a slightly different angle.
Michele if we look back in history.
Usually you move Mark follows Mars moves you follow in your fall in similar order of magnitude on similar products and that consistency has.
It helps investors still confidence in the pricing architecture of that pricing discipline in the pricing power of the category.
Where it needs a bit of a unique circumstance right now where margins moving one direction where to start with with a higher magnitude and you're moving to a different direction with much lower magnitude.
Strikes me is quite a unique moment in time, where you guys are diverging from.
I guess I love, a little more clarity on to try to understand the motivation for you to go in a different direction and what if any implications that may have in terms of the pricing discipline that we've historically seen in the category.
Yeah. So I continue to feel really good about this being a very rational category from a pricing perspective, and they're being strong disciplined from that perspective, you know our recent announcements regarding increasing price on seasons and also non chocolate and grocery are very consistent with the straw.
<unk>, we've been executing over the past couple of years of realizing price through different levers.
And on different parts of the portfolio and we think that that's proven effective for us to drive profitable growth and also be able to reinvest in the business both for us and also for our retailers.
But yeah, we we do know that across competitors in the category. We each do have unique portfolios with different skus to our business across pack types and across brands. We have some different capabilities in terms of what we are good at executing and perhaps even different business needs at different points in.
Time, and so while all of the pricing isn't exactly.
How exactly you know pack the pack exactly the same what we think is important is while those tactics in products might differ OS.
Overall category price realization is pretty consistent and so if you look at US and you look at you know the largest player in the <unk>.
The second largest player in the category the magnitude from difference in terms of what we each you know are getting from price.
Is probably a point or you know in that range. So it's not a significant it's not a significant difference between.
Got it. Thank you that's helpful I'll pass it up.
The next question comes from the line of Ken Goldman with Jpmorgan. Please proceed with your questions.
Alright, thank you.
I know you highlighted some recurring headwinds to your gross margin I think there were some incentive payments some co man and warehousing costs.
Is there any color Steve that you can provide on how much. These may have added to your Cogs or just took away from your margin and so any of those incentive payments bleed into two Q.
Yeah. So maybe just taking the incentive piece. So yeah, we will see some additional incentives might go versus prior in second quarter as well, if we get to the back half of the year, but it's going to get a little bit narrower year on year, and so, but we'll definitely see some impact in the second quarter.
We also have some year over year investments and capabilities I think we touched on these a little bit in our last call you know still some costs going through opex to support our supply chain to point out that Michele mentioned and also the ERP program.
So those would be if I kind of look between the lines some of the pieces year over year that'll that'll be different.
Okay and then.
As my follow up and maybe maybe pushing it a little harder hit and what you're willing to talk about but it's hard to not to notice the cocoa.
The only commodities that hasn't retire lately, it's come down it actually sequentially in the last couple of months. So I know you don't talk about your specific commodity buys but can you just walk us through a little bit about you know how youre looking to lock in maybe some of your favorable inputs a bit longer than you otherwise might have just just given how everything else is has risen so much higher.
Could help you in terms of protecting your 2022 numbers at this point.
Sure Yeah, I mean, you're right, Tim we're not going to get too specific or hedging horizon very we've kind of said in the past three months up to two years, depending on what's available and market liquidity pricing and I will say our commodity team is very good at interpreting the signal and trying to make smart smart moves with respect to that hedging program.
Beyond that we're probably not going to comment on that.
Cocos moved round it down a little bit all else equal you might interpret that as some opportunity. If you were to be a little bit longer from a hedging standpoint, but really don't want to say anymore than that you've got about 22.
Understood. Thank you.
Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your questions.
Good morning, everyone Hope you can hear me okay.
Yeah, we can perfect. Okay. So I guess my first question is I Wonder if you can give us a little bit more detail and granularity around the away from home recovery, particularly in North America are which regions, which channels what exactly is playing out that that youre seeing that so encouraging and then my second.
Follow up question, I know, you're not giving quarterly guidance, but obviously 2020 was such an unusual year I, we're gonna be lapping some interesting developments in the year ago period. As we go into Q2, I think you mentioned the AD spend was going to be up materially in the second quarter I'm. Just wondering whether you can give us any other point too.
Is on how you know the top and the bottom line might be expected to develop a lots of pluses and minuses all as we think about that next quarter. Thank you and I'll pass it on.
Sure.
So relative to the away from home strength, you know I would say it is across the board. So first of all you know, we did see stronger foot traffic and consumer mobility in North America and that was really I believe from the accelerated vaccine distribution as well.
As from the stimulus funds that were allocated.
And that not only drove strength and what we would call our core channels because of the more traditional channel food drug mass.
And even some pickup inconvenience in Q1.
It also had a you know there was also a very strong positive impact on our non measured channel as well so foodservice.
Our own retail stores, you know world travel retail some of those businesses that were really big decliners for us last year.
Came back faster than we had anticipated. So I would say you know it was it was pretty much across the board in terms of all of those then use you know improving.
More than we had anticipated so some of it was due to the consumer traffic and then of course, we were able to also capture incremental distribution and merchandising and our U S confection business and given the strong sell through that we saw driven by mobility and foot traffic.
Strong sell through with Easter then led to accelerated shipments of some of our summer program, which also helped us across the board and then even beyond North America, we actually saw increased mobility in the international markets as well.
I'm a bit more than we had expected.
So with that I think those were unplanned for us in Q1, we certainly had planned to see those mobility improvement later in the year and have that in our plan, but not in Q1 and with that I'll turn it over to Steve to talk a little bit about the quarters, yeah from a quarterly standpoint, as we look at Q2 building on what Michelle said, we've got a lot of momentum on the top line.
Coming into Q2, we're able to merchandise early some of the summer season, and that'll get us off to a strong start as we go forward from there on the top line, you're going to see sales growth moderating overlap get tougher you'll see pricing start to make a contribution more in the back half.
And as Michele said, you know our plan assumed mobility would begin to recover as we got to the back half. So that's less of a new piece of the story as we turned the corner on the mid year and then we will see some margin improvement as the year progresses, you mentioned.
<unk> spending for Q2 is going to be up pretty big year over year that was the quarter last year, where we made some adjustments some pricing advantage because it was cheaper to buy and some pricing or some adjustments.
Adjustments in how much we spent just in response to COVID-19.
Hopefully that gives you a little bit of color on the the balance of the quarter.
Helpful. Thank you so much I'll pass it on.
The next question is coming from the line of Andrew Lazar with Barclays. Please proceed with your question.
Good morning, everybody.
Good morning.
I'm sorry, I know this can be a little hard to parse out sometimes but you know as.
As you think about how much of.
The gains that you've made in the last couple of quarters, right and in distribution and shelf space merchandising gains you've talked about how do you think about like how much of those might be structural right based on a lot of the good stuff that you're doing around innovation and everything else versus.
Product of what's been you know clearly a more accommodative sort of competitive environment from you know from a perspective of some others, whether it be supply chain missteps and things of that nature. So I'm trying to get a sense. If it's a hard one to answer I know, but how sticky you think some of those gains in market right that you've seen can be over time.
Yeah. So I think you're right. It is it is a little bit tough to parse all of that out. So I would say we came into the year feeling really good about our strategies.
And many of those we had laid out pre COVID-19 relative to really focused on you know we got to win at the topline with balanced growth, which is you know driving against distribution the core innovation seasons pricing and volume growth and you know I think what we're seeing.
On the businesses that we are delivering on each of those elements and and so certainly that that is a piece that I think has staying power that you know some of the strategies, we put in place relative to you know pre COVID-19.
Optimizing our balanced focus on the core and non innovation not over you know rotating on innovation too much you know not over rotate on any one factor you know balancing price and volume one of those things. So I think that there's some underlying strength there as well as a lot of the investments that we've made in our core capabilities.
<unk> in our manufacturing and our supply chain over the years that have enabled us to you know to deliver perhaps at stronger levels than perhaps some others in the marketplace.
And so some of that strength that we're seeing in terms of impact of media those types of things you know, they're there you know without the COVID-19 impact.
You know we tend to always you know as you know strong category managers. So we do tend to do well when it comes to winning at retail we have a proprietary retail sales force to enable us to do that at.
At the same time, I say I guess, what I was kind of parse out you know some places where.
Some of the current dynamics, maybe a little bit more transitory certainly we have one more distribution then I would say, it's probably at the historic level in terms of number of new items because of our strength in being able to operate in this environment and our agility.
We have wanted to make momentum merch associated with the competitive situation as well.
For me I guess I kind of you know I never went into probably those two factors being probably the biggest ones that are you know that they're the most unique and of course. The other one is that right. Now in Q1, you asked more about a couple of quarters in Q1 in particular, we've got that got that unique duality, where were seeing that were benefit.
Both from away from home and from at home behaviors, both being strong and certainly I think that that you know that can't sustain at the level that it did in Q1. So we do think that that's going to moderate a bit.
Does that help the yeah, that's very helpful and it'll be really interesting to see how much of how much of the at home moderates as mobility does return for the industry as a whole obviously it'll be really interesting, but I hear your point about how strong both of those really were at the same time in Q1. So that's very helpful. Thanks, So much.
Thank you.
The next question is coming from the line of Rob Dickerson with Jefferies. Please proceed with your questions.
Alright, great. Thanks, so much.
I just wanted to touch on the international.
Segment for a minute you know I mean, obviously.
Our performance in Q1, it was extremely strong.
I think originally the expectation was especially for somewhat modest growth.
Guidance now is up from the four years the total company.
And then I know you have Bert.
The comments in your prepared remarks, just around basic.
Basically playing it safe right, there's some incremental walk downs occurring.
Visibility is that strong.
You know kind of overall question is you know you could it be actually a lot stronger right.
Alright.
Expect as we go through the year, because it would seem as if kind of relative to where what we're thinking about from North America.
International piece does continue to play out you know obviously given those compares are so much easier it would seem as if you know the volume driven year could actually be even more volume driven off of that international piece as we progress through the year. So kind of Simplistically I'm, just asking you know I realize you don't have the visibility but.
You know if things were to kind of self correct. In my bathroom ordered continue in international I mean could you just don't do much better on the top line and you're already currently got it that's all thanks.
So first of all I'd say, you know hey, we feel great that we are seeing strength across every piece of our business in North America, and every component of North America, including U S confection and amplify as well as in international So that's great to see and certainly we did have a strong first quarter in international that was significantly ahead of our.
And I think what was interesting for US was that despite the fact that COVID-19 cases were high in many of those markets co consumer mobility still increase and that drove demand for our category that was stronger than we anticipated I think the potential concern and certainly as you look at the news you see this everywhere is.
You know there there certainly are some pretty dire situations, especially in some of the markets that we're in but certainly India being one of those.
Where you know case counts are rising there are other markets, where the vaccination dissemination is going quite slowly and you know as new Lockdowns are implemented we expect that those could have for mobility and that these trends could moderate so we know in international things are always volatile.
But they certainly are even more volatile during this time and and those markets are not gonna have linear behavior.
We expect that we will see continued volatility.
What we're trying to do is is to drive what's within our control and our teams are responding with tremendous agility in adapting the plans based on the stages.
That is in each market. So we feel good that all of our key initiatives, whether it's our China transitioned to the new business model, you know a restart or upping again, our focus in India on our chocolate initiative all of those things are going well, but there's just a lot outside of our control and we'll have to see how the year plays out if things are positive certainly.
There could be upside and.
However, we also know that there could be downside as well.
Alright, great. Thanks, so much.
Our next question is from the line of Morgan Fletcher with Bank of America. Please proceed with your question.
Hi, Good morning. Thank you for the question free So I guess my question is on how COVID-19 may have changed your perspective on the portfolio maybe in an organic but also inorganic way, we touched on e-commerce and supply chain earlier, but maybe if we could just go through them more how you're looking at.
Categories differently like baking mix has had a very strong growth while refreshment has.
Seem decline so just how you're maybe thinking about your portfolio on a category basis going forward. Thank you.
Yeah, absolutely I mean, I think one of the things that you know that we feel good about that COVID-19. Just reinforced was the strength of the breadth of our portfolio to be able to participate in different occasions, and so I would start first within core confections and say you know we've as you know our business splits a third a third a third instant consumables, which are all about.
People being out and about on the go take call, which is all about people being at home and consuming the products. There and then seasons, which is all about celebration and so within confection. What we saw was Wow you know normally we might focus a bit more of our efforts on instant consumable and when COVID-19 hit.
We were able to immediately shift media in store merchandising et cetera, more to our take home portfolio and we also saw that during a time like COVID-19.
Consumers were just hungry for connection and so the role that our brands play during season to create that connectivity and traditions and rituals with something consumers. Just we're so hungry for so really leveraging the full breadth of that within confection was important.
You know you raised speaking and certainly you know consumers, we're making more and we were able to leverage that as part of our portfolio. So I think well what it really taught US was this ability to pivot to follow the consumer and to focus on the parts of our portfolio that were most relevant to them at that time.
I think if we think about organic and inorganic likewise, you know we were able to take advantage of a skinny pop which has done incredibly well during COVID-19 and certainly we know that our categories like nutrition bars, havent done quite as well. So it's really playing on the pieces of your portfolio with the right piece of time, but having.
The options and the breadth across the portfolio to be able to meet those needs.
Thank you.
Thank you.
Richard You ended the question and answer session I will now turn the call over to Michele Buck for closing remarks.
I'll turn it over to bill ever close out a mark. Thank you for joining US. This morning, I know, it's a busy day of earnings as always I will be available to answer any additional questions. You may have thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Okay.