Q1 2021 Hershey Co Earnings Call - Pre-Recorded Management Discussion
And as Melissa Poole and I'm, the Vice President of Investor Relations at Hershey, Joining me today are Hershey, Chairman and CEO, Michele Buck Hershey Senior Vice President and CFO, Steve all of them and in addition to these remarks, we will host an analyst Q&A on recession at 830, a M. Eastern on the morning, and people 29th and replay of this webcast and our subsequent Q&A session will be available on the Investor Relations section of our website along with a corresponding transcripts during the <unk>.
Today's discussion management will make forward looking statements that are subject to various risks and uncertainties. These savings 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 and detailed listing of such risk and uncertainties can be found in today's press release and the company that the SEC filings.
Finally, please note that during today's discussion we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors and presentation of information and not intended to be considered and isolation, whereas these other due for the financial information presented in accordance with GAAP reconciliation to the GAAP results are included in this morning's press release, and and now my pleasure to introduce our chairman and CEO and Michele Buck.
Thank you Melissa and good morning, everyone. Our first quarter results were outstanding with broad based growth across the portfolio, leading to double digit sales and earnings growth. We entered the year with strong plans to deliver accelerated top and bottom line growth with balanced activation of our brands through advertising innovation distribution and pricing we are delivering against these plans and at the same time.
External conditions have been more favorable than we anticipated and.
Our strategy capabilities and agility have enabled us to respond to these rapidly changing trends and capture incremental growth for the year.
And as COVID-19 vaccines rollout across the globe consumers are more optimistic about the future and looking forward to spending more time with their family friends and community and we have seen over and over 127 year history. Our brands play an important rule and the special moments of connection comfort and happiness.
Over the past few months families continue to embrace the at home lifestyle, and our brands and what part of many game and moving seasonal celebration and baking creation.
At the same time consumer mobility is improving and the U S and our away from home businesses performed better than expected.
Great Challenge and COVID-19 conditions across the globe sales and our international markets exceeded expectations.
Our teams have done a fantastic job responding to these trends and a volatile operating environment without their passion agility and dedication to making more moments of goodness from our consumers and none of this would be possible.
And so our employees across the globe for their countless contributions to these results.
And the first quarter, we delivered net sales growth of $12 seven per cent and adjusted earnings per share growth of 17, 8%. We expected a strong start to the year behind continued elevated take on chocolate and seasonal sales category share gains and inventory replenishment.
And we were able to exceed these high expectations by converting more shoppers as trips increased during the quarter and capitalizing on the competitive environment to capture incremental merchandising and distribution opportunities.
It resulted in year to date total U S retail takeaway of plus seven 1% through April 18th and U S. Confectionary share gains of nearly 80 basis points.
And some of these trials are planned to moderate as the year progresses, we expect to deliver sales and earnings growth above our long term algorithm for the full year and.
Accordingly, we are taking strategic actions and investing and the business to drive long term value from the opportunities and you're capturing today.
We believe balanced growth and business reinvestment and our brands and capabilities are critical for delivering sustainable advantaged financial results, our strategies and investments over the past several years positions us well to capitalize on COVID-19 headwinds and execute with agility and a volatile operating environment.
And the first quarter all key pillars of our strategy contributed to our performance we delivered growth in both our everyday and seasonal products and measured channels and non measured channels confection, and snacking products and North America and international markets, We grew volume and price across both our core products and innovation and through baseball.
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And we enter the recovery phase of COVID-19, we know the journey will not be linear we are closely monitoring consumer trends and pivoting quickly to adjust as the environment changes.
We expect certain free pandemic behaviors to rebound, including in person and schooling restaurant dining and in store shopping and those levels rebound, we will focus on our construction and better fees and FX foodservice business and single serve products and non traditional channel distribution opportunities.
And we saw a significant improvement in our sales in these channels and the first quarter, our foodservice and specialty retail business grew high single digits and the first quarter of 2020 one after declining high single digits in the fourth quarter of 2020.
Sales and our retail store and world travel retail locations also improved and notably with low single digit growth and Q1 versus 50 per cent decline and the fourth quarter of 'twenty 'twenty.
Importantly, while these businesses rebounded we saw continued strength and our core portfolio in traditional channels, while we don't expect trends to permanently stay this elevated and both at home and away from home channel. Our teams are capitalizing on this unique window of dual strength as consumer behaviors change during the COVID-19 recovery.
Consumers tell us they value some of the new traditions that they've created this past year and we intend to continue them and the future even when the pandemic and this is particularly true for occasion spent connecting with loved ones and this represents a wonderful opportunity for our brands.
To share some examples <unk> 43 per cent of parents are having more moving items. This year compared to last and 36 per cent claim that they will increase moving nights and the coming months.
While we had a record so more season last year 14 per cent of household who did not make some orders last year planned to do so this year and those who did make some words last year are excited to make more this year as they reconnect with close friends families and neighbors and.
Other area, where we've seen increased participation and new traditions isn't seasons consumer participation and valentines and seasons with strong and ahead of expectations consumers have settled into their pandemic holiday routines and they are finding ways to create special moments for their families at home.
And Easter this included candy dishes filled with chocolate eggs Easter baskets filled with bunnies and treats to fill eggs per month, while backyard egg hunts became a COVID-19 necessity as community Huntsville canceled many consumers indicate that they plan to continue backyard pumps in the years to come and their kids seem to enjoy them more.
A significant amount of candy continues to be purchased in store. However, a sizeable number of consumers did purchase their seasonal and everyday candy online and first quarter.
E Commerce represented approximately 15% of confection trips and the first quarter and increase of approximately 60% versus the same period last year. Our team was prepared with strong omni channel activation and cross category promotions to inspire consumers as they got ready for the season.
Well this year with a shorter season, the category grew nine 5% versus 2020 Hershey grew nine 7%, resulting in a share gain of 11 basis points.
And in 2020 was impacted by the onset of COVID-19, the two year trend is perhaps more time on this.
And <unk> 2021 being a two week shorter season, and the 2019 category sales were down approximately three five per cent versus 2019.
This is above historical decline of approximately 10% during the two week shorter season, and it's a testament to the importance of seasons and confections rule and consumers tradition. During these holidays.
Hershey results for that two year period, we're slightly up resulting in a category share gain of almost 170 basis points.
Our sell through was stronger than anticipated this year, partially driven by elevated foot traffic and robust retail spending and vaccine and vaccinations paced ahead of expectations and stimulus checks were issued these great results will set us up for a fast start on our summer activations and position us well for a strong selling for 2020 two.
And we head into summer we were excited about the plans we have in place we will continue to support our brands with strong media and we have great merchandising lined up to support some or some more twizzlers and our Olympics sponsorship.
And our innovation is on track and many of our take home items, including kit Kat and and our zero sugar items are hitting shelves now.
In addition, our category management teams have been able to capitalize on our strong performance and the competitive environment to secure incremental distribution during plant and Gram changes.
In Q1 alone our teams gained approximately five new everyday items through front and strategies like queuing and take home aisle space optimization and.
We expect this strength to continue as we progress through the year.
Finally, let me share and update on our confection pricing strategy.
Earlier this year, we announced changes to our seasonal pricing that go into effect with our holiday products. This year two weeks ago, we communicated additional pricing changes to our retailers. This most recent change primarily affects our non chocolate and grocery products, which had not been price since 2014.
These actions are consistent with our previously stated pricing strategy. One that we believe plays an important role and enabling business investment and driving profitable category growth and he will share. Some additional details as it relates to the impact on our financial outlook.
Now, let me shift gears and provide an update on our snacking and grocery products.
Our amplify business is off to a great start with retail sales growth of 9% for the year to day period, ending April 18th this strength was driven by Skinny pop, which grew 14, 6% and gains of 180 basis points of share and the ready to eat popcorn category.
While we expect growth to moderate as lots become more difficult, we do expect to grow and gain share in the coming quarters behind strong media support distribution gains and incremental merchandising.
Hi, Rich boutique declined in Q1, and multi pack sales were pressured by virtual school and key promotional activity was shifted to Q2.
We expect trends to improve and more students return to in person and schooling and promotional activity increases and the second quarter.
The one business continued to be impacted by reduced consumer mobility, and the first quarter, but trends subsequently improved and have turned positive over the past several weeks, we expect to category and one trends to continue to improve as the year progresses.
Finally, let me spend a few minutes on our international and other segment before turning it over to Steve.
Net sales grew 11, 2% with strong results across markets.
And Mexico Chocolate category sales remained pressured, but we did see improvement and the traditional trade and Q1 as consumer mobility increased we were able to take advantage of incremental capacity to capitalize on this improvement and delivered net sales relatively in line with the prior year. Despite continued COVID-19 challenges a big thank you to the teams and we're able to bring this capacity online.
A plan to be able to capture this demand.
Similarly in India, we saw mobility improve ahead of expectations and the first quarter driving better than anticipated results across our portfolio. Our chocolate distribution expansion initiatives resumed late last year and they remain on track.
And Brazil, our performance accelerated and the first quarter as the chocolate category gained incremental merchandising opportunities due to the cancellation of carnival this year.
And in China, our transition to the new distributor go to market model is going well and remains on track.
And many of you know the state of the COVID-19 across the globe is different from what we're seeing and the U S and the environment remains uncertain and volatile recently, we have seen new lockdowns implemented across the globe and variance spread and cases rise during the past year. We have seen these strategies to limit mobility had a negative impact on confectionery category sales. However, despite these challenges we believe we can grow.
Both sales and profitability and our international markets. This year now.
Now, let me turn it over to Steve to provide more details on our Q1 financial results and our full year outlook.
Thank you Michele and good morning, everyone.
I'll share our first quarter results were exceptional while exceeding our expectations by delivering double digit sales and adjusted earnings growth strengthen our core confection and seasonal products complemented by the accelerated recovery of our COVID-19 impacted businesses drove significant net sales and operating income growth despite higher input cost and capability investments. These results showcase our focus on balance and profitable.
Growth, providing the financial flexibility to meet current business needs invest for the future and return cash to our shareholders. While the environment remains highly volatile due to the pandemic, we see incremental opportunities based on our first quarter performance and growth momentum that is reflected in our increased outlook.
And the North America segment continued to show momentum with reported net sales growth of 12, 8% as expected we saw strength and our take home chocolate portfolio. In addition to solid seasonal performance for Valentine's day, and Easter, which drove category share gains and the quarter.
We also benefited from inventory replenishment, which was relatively in line with expectations and two additional selling days in the quarter.
Accelerated orders for some of our key summer programs drove incremental shipments for the quarter, given our strong Easter sell through Additionally, the teams capture incremental distribution and merchandising opportunities that further contributed to our outperformance in Q1, we do see additional distribution and merchandising opportunity on the coming quarters, particularly the second quarter, which is reflected in our raised full year outlook.
Elevated COVID-19 case count throughout much of the quarter mobility increased ahead of our expectations as consumers anticipated the distribution of the vaccine and discretionary income increase with the receipt of two rounds of stimulus checks and January and March and Michele share has created a unique window of dual strength as both are at home and away from home businesses benefited in the quarter our away from home businesses include.
Foodservice and specialty had a strong quarter growing high single digits versus the prior year period, while away from home businesses improved and we also saw continued strength and chocolate take home and seasonal products growing nine 9% year to date.
The year progresses, we expect our away from home business to continue to rebound and our at home business day moderate as we start to lap higher growth and share gains in the second half of the year.
This benefit was compounded as base volume gains and channel mix generated trade favorability on net price realization of approximately 130 basis points and the first quarter and.
Additionally, we generated approximately 40 basis points of price realization from list price increases in line with expectations on a full year basis. We now expect net price realization of one to one five points, reflecting modest trade favorability largely realized and the first quarter along with the pricing on our seasonal non chocolate and grocery products benefiting the back half of the year.
Within our international and other segment reported net sales increased 11, 2% in the first quarter FX was a 370 basis point headwind.
First quarter results were ahead of expectations due to stronger than expected consumer mobility that benefited confectionary category sales Michele shared a detailed update on each of our key international markets and we're pleased with the strength, we saw in Q1 and the team's ability to react to the significant demand changes.
Given that our original outlook anticipated improving mobility over the course of the year, we do not expect this plan over delivery to sustain and future quarters. Furthermore, the international environment remains volatile and rising case counts and new Lockdowns implemented in April and bring additional uncertainty to the continued recovery of the confectionery category and these markets.
Our strong top line delivery generated over $1 billion of gross profit for the quarter, reflecting a dollar increase of 10, 8% versus the prior year period, while gross profit increased double digits, we did see a slight contraction and gross margin in the quarter driven by the North America segment.
In North America, adjusted gross margin decreased by 110 basis points to 46, 4% and the first quarter driven by raw material and packaging cost inflation as well as increased supply chain costs related to higher than anticipated demand, which were partially offset by higher volume and net price realization and.
Net sales exceeded expectations and the quarter, we incurred higher co manufacturing and co packaging costs to service this demand.
And to warehousing and transportation costs, we expect these cost pressures to subside as volume begins to moderate throughout the year and as new capacity comes on line. Early next year. We also provided additional onetime incentives to our manufacturing employees and the first quarter to recognize and reward them for their tremendous efforts keeping our plants running safely at high capacity to service this strong demand growth.
And in our international and other segment expanded by 180 basis points to $39 four per cent for the first quarter, driven primarily by strong volume growth and fixed cost absorption. Overall, we continue to expect modest gross margin expansion. This year driven by productivity volume gains the lapping of incremental COVID-19 incentive costs and 2020 and net price realization.
And this multi lever approach to gross margin expansion has been successful for us and the path and we are confident that we can deliver our profitability targets for the full year barring any significant changes to our internal assumptions or new external pressures.
In North America advertising and related consumer marketing spend increased three 4% consistent with our expectations. This increase was driven by investments and our core brands and innovation. In addition to the sponsorship of MPW March Madness that was canceled and the prior year due to COVID-19 for the full year, we expect advertising to grow roughly in line with sales. However, we do expect growth of <unk>.
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Typically we expect a significant increase in advertising and the second quarter as we lap with deep weighted basis in the prior year due to COVID-19, driven market price efficiencies and brand support reductions and.
And our international and other segment advertising and related consumer marketing expense decreased by two 9% in the first quarter. We continue to have and agile yet disciplined approach to deploying brand investment based on the sales trends and recovery of the confectionery category by market divisional and corporate expenses increased $4 four per cent for the first quarter, driven by salary and benefit inflation incentive comp.
And patients and capability and technology investments. These investments were partially offset by reduced travel and meeting expenses.
First quarter adjusted operating profit of $556 million resulted in an adjusted operating profit margin of 24, 2% and increase of 110 basis points versus the first quarter of 2020.
Strong volume gains and both in North America, and international and other segment more than offset product cost pressures and increased SG&A costs.
The adjusted tax rate for the first quarter was 22, 5% increase of almost 340 basis points versus the year ago period, driven by the timing of lower tax credits and lower benefits related to employee share based payments versus the year ago period.
First quarter other expense was $2 million, a decrease of $9 million versus the prior year period.
Our first quarter results are testament to our balanced top and bottom line approach, which provides our healthy cash flow and a strong balance sheet at the end of the first quarter, we had approximately $1 1 billion and cash and cash equivalents on the balance sheet and $610 million and operating cash flow in the quarter. This strong cash flow allowed us allowed us to simultaneously execute on nearly every lever in our capital allocation framework during.
The quarter, we funded investments to fuel growth returned a significant portion of cash to our shareholders through dividends and share buybacks and pay down debt.
And the first quarter total capital additions, including software were approximately $114 million and.
We shared in January and last year, we have several key capital projects over the next few years, including capacity expansion ERP and supply chain modernization initiatives, we expect capital expenditures to be around $550 million per the full year consistent with prior guidance.
And the first quarter, we paid $163 million and cash dividends and we resumed share buybacks by completing $240 million of repurchases related to stock option and replenishment. Finally, we repaid $85 million of bonds in February with an additional payment scheduled for me and we had a strong start to the year benefiting from the unique benefits in the first quarter and as a result expect of <unk>.
Stronger full year outlook and the year progresses, we expect our performance to moderate as we lap higher prior year growth and share gains and take on chocolate sales growth moderates and away from home sales rebound with that I'll turn it back to Michele for closing remarks.
Thanks, Steve.
And so proud of how our teams continue to respond with agility and execute well against many factors out of our control. During these extraordinary times, we're continuing to execute our strategies and make investments to not only deliver today, but secure our future as well last month, we announced and ambitious commitment to reduce our greenhouse gas emissions based on.
The latest climate science by partnering with the science based target initiative.
This includes goals to reduce our scope, one and two emissions by more than 50% and our absolute scope three emissions by 25% by 2030.
As part of these commitments, we signed two power purchase agreements that will enable the construction of two new utility scale solar farms Ah.
Additionally, we set a new goal to reduce packaging waste by 25 million pounds and target, 100% of our plastic packaging to be recyclable reusable or compostable by 2030.
Finally, we announced a new companywide deforestation policy to and before station across our supply chain by 2030.
This work is important it's ambitious and it's what the world needs from leading companies like Hershey.
It will take all of us working together to achieve our goals and we are excited by the journey, we're on and the impact that we can make we.
And we look forward to sharing more details with you in our 2020 sustainability report, which will be published on June 1st.
Thank you for your time this morning, and I invite you to listen to a live question and answer webcast, which will begin today at 830, a M. Eastern time and will be available at the Hershey company Dot com.
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