Q2 2021 Hershey Co Earnings Call
Vice President of Investor Relations for the Hershey Company. Thank you you may begin.
Thank you and good morning, everyone. Thank you for joining us today for the Hershey Company's second 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 call. Please note that during today's Q&A session. We may make forward looking statements that are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the company's future operations and financial performance, including expectations and assumptions related to.
As 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 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 and isolation or as a substitute for the financial information presented in accordance with GAAP reconciliations to the GAAP results are included in this morning's press release, joining me today are hershey's, chairman and CEO, Michele Buck and Hershey Senior Vice President and CFO debacle with that I will turn it over to the operator.
Later for the first question.
Thank you.
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And Mr Keith and.
And the interest of time, we ask that you each keep to 1 question and 1 follow up thank you.
Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.
Morning, everybody.
Hi, first off I guess I wanted to dig in and a little bit more on the call.
And to serve dynamic that you talk about and the prepared remarks, I guess it should not come as a surprise that 15% organic sales growth and again, a given quarter, what kind of stress any supply chain and no matter how efficient from.
My question is I guess are there any structural and investments needed and the supply chain going forward or any capabilities that were.
Posed by the volume Spike or is it simply you're sort of suck up the higher costs as they are transitory and particularly the labor part and not need to necessarily make any changes is this sort of volume growth is it really not likely sustainable at these extreme elevated levels.
So and let me start and then let me have Steve dig and with similar detail I would say at the highest level there.
Exploit key parts of our portfolio that have had just extraordinary growth and we cited some of the numbers for example on racer. So 1 thing that we are very focused on is investing in capacity behind the brands and businesses that we know have demonstrated track records of strong growth over time, and particularly where we've seen strong spikes that we think will.
Certainly seeing strength going forward, let me have Steve talk a little bit more about.
And some of the other elements of cost and cost to serve.
And to you on the structural side and you wanted the benefits is we've been working on our supply chain to Guangzhou program and the Anvil fulfillment Center comes online later this year that will provide some additional.
We'll have flexibility and agility. So so that will certainly be helpful and as Michele said, continuing to invest and where we need to on capacity, especially on those fast growing core brands like right now.
And from a cost standpoint, and getting it from the pieces you know clearly like you said, Andrew putting downward pressure on the supply chain at 1 time pushed us and a number of sponsor pushes from and overtime standby.
And point of pushed us from.
Getting to contract manufacturers and expanding some of their work often outside of contract rate and the same on the freight and warehousing side. So I look at those as pressure points in particular on top of that or as a result of the higher volume and then in addition.
St Labor rates and general.
And all for availability in general are a pressure point beyond just the volume on the market for labor is challenging and so just like everyone. We want to make sure. We are staying ahead of the curve on hiring and making sure our value proposition and our plants and attractive.
And packaging inflation and similar packaging in place and we touched on a little bit on the last call.
It's still a pressure point I think we're still optimistic we're going to see that moderate as we go forward but.
But we haven't seen it yet and so it is a combination of those transitory costs on the back of the higher volume and a few things that are a little bit more sticky here and we look across the balance of the year.
Thanks for that and then just using our back on the envelope math it seems like the operating profit.
For the upside in the quarter, maybe is roughly offset and equal parts.
By higher full year tax rate and some other higher cost that you've talked about just now sort of leaving the full year EPS guidance intact. Just wanted to see if I had the magnitude of each of those impacts for the full year more or less right. It seems like they're kind of equal of equal magnitude essentially.
And I wouldn't look at it and the tax piece was by far the biggest impact on us not picking up our earnings guidance alongside the top line I think but for the tax piece, we were able to raise guidance.
Cost to serve as a component, but think of that and you know that's for 10 or 15 per cent of the impact where the majority really what the tax impact and the quarter.
Really helpful. Thank you.
Okay.
Thank you. Our next question comes from the line of Ken Goldman with Jpmorgan. Please proceed with your question.
Alright, Thanks, Steve you mentioned and that Theres 130 basis point tailwind from inventory loading this quarter and you said there'll be a day load in the back half 2 questions on this first what's your.
Your best estimate for how large the inventory reduction will be at retail and the back half and number 2 I know, it's not always easy to forecast this but how should we think about the cadence of that is the majority and the third quarter or the fourth quarter just for modeling purposes.
Yes, I think in terms of total magnitude for the back half 1.5 to 2 points.
For the impact and I would you know I don't think were club.
Clever enough to give you the precise quarter I would say and look at it across both quarters, maybe a little bit and skewed to the fourth quarter.
Okay. That's helpful. Thank you and then you know I think it's fair to say.
There's some frustration among investors this morning, but you didn't raise.
And the EPS guidance I recognize you.
<unk> wasn't huge and the second quarter Theres, some uncertainty around the world and the back half for the year, but your business is doing great. So I'm just curious internally was there any consideration of raising the bottomline guidance or did you just feel it's a little early given some of the inflation and the macro risks.
Yes, I think again, but for the tax piece, we would have risen are taken up our guidance.
Certainly there is caution in the back half relative to inflation and cost to serve.
I think we have our hands around what that looks like and have a pretty good beat on that but.
And if that were the only piece, we would have taken up our guidance for tax was really that.
Piece that we had to have to take into account and we want to make sure we're not sacrificing investment and the back half of the year debt for perspective tax was 17.
And on EPS, so very meaningful.
Got it thanks, so much.
Thank you. Our next question comes from the line of Robert Moskow with.
And with credit Suisse. Please proceed with your question.
Hi, Thanks for the question.
What do you think about the tax rate going.
Going forward for 2022, Steve this looks like a 1 time.
Impact.
Do you think you'll have an easy comp and.
In 2022.
Secondly, you talked about some of the cost elements and some are structural maybe summer or for short term.
And does any of this impact how you're thinking about pricing going forward.
For this year and for 2022.
Sure on the tax side, and we look at it as a as a 1 off sales.
And then reset next year and again, we'll talk a lot more later in the year about 2022.
But as a starting point, we wouldn't factor that into the starting point for 2022, So I hope that's helpful.
And then from a pricing standpoint, and Michele can add on here.
Pricing is a key part of our strategy and maintaining and growing our gross.
And as a key part of our strategy and so we are.
Let's say, we execute against that trend and but we are very aware of the dynamics at play from an inflation standpoint, and so on and what competitors are doing on what retailer for doing so we are evaluating net environment, all the time and as always we're not going to.
Tip, our hand, as we think through it but pricing is and will remain a key.
We would have our strategy going forward.
And as you recall, we did take a 2 different price increases earlier this year on our confection portfolio that will really just began flowing through in the second half for the year and we'll also have some upside from that in the first half of next year.
Okay.
Alright, well thank you.
Okay.
Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.
Good morning, everyone.
Good morning.
Hi that and so I guess the first question is whether you can give us any.
And thoughts on the gross margin outlook from here, obviously, you know a lot of other companies are saying and awful lot of pressure.
And I remember back in 2018, when there was freight cost inflation I think you also saw some pressure.
Cost of going out and packaging costs are going up.
And yet you held it.
Yeah, and flat and this time around so just some thoughts on that and then I have a follow up.
Sure. Yeah, we were pleased with the Q2 gross margin we were it was a little.
But ahead of our plan and I think we managed it well and of course implied inside our guidance for the balance balance and here's a little softening of the gross margin outlook from being up slightly to be in line with last year.
And I think you know that performance and pace of the inflation that we've seen with would be good but our goal again looking to next year building on and the last question a little bit as we want to continue to grow gross margin overtime, and we want to do that through a pricing strategy and we wanted to do that from productivity and we want to do that for all of the levers to manage inflation and commodity costs and so dry.
Pretty net forward remains an important goal we will get more color on next year's gross margin as we get closer to the end of the year, but that goal remains.
Firmly in our mind.
Okay great.
And and then just a question on the Lilly's acquisition.
You recently sold shelf and bugger.
And to go back you know the company has been trying to make premium work for quite some time, what's different about Lilly and that makes that makes you confident that you can actually make that work this time.
Some of the problems that you've had and the path. Thank you and I'll pass it on.
Yeah, what we really like about Lilly is it is.
Is a scale business. So it is close to that $100 million and size, whereas sharper and sharper Burger and to go but were much smaller.
And the $30 million range and.
And we found over time and I think we've shared this before that you know for us a good acquisition being around close to that $100 million Mark.
And been built.
That we can really best apply our capabilities around distribution and manufacturing.
Synergies additional marketing and kind of more broad based marketing et cetera to really help to make.
The acquisition of success.
Other thing I would say is literally the single mindedly focused on better for you. So while it is premium.
And now it has a very distinct understandable benefit that those consumers understand which is about being the lack of sugar. So you know that.
And that also gives us a lot of confidence that it fits very neatly into our operating model and as you.
And we.
We have already launched a broader portfolio of better for you on our core brands and so that's what's better for you area is a big point of focus for us and there's some nice synergy in terms of our focus there.
Great. Thank you very much I'll pass it on.
Thank.
Thank you, ladies and gentlemen, and I as a reminder, if you'd like to join the question queue. Please press star 1 on your telephone keypad. Our next question comes from the line of Michael elaborate with Piper Sandler. Please proceed with your question.
Thank you and good morning.
Good morning, and just.
Curious, how you think about elasticity and I.
And I know it can be hard to measure the ways. We've tried to come at it you tend to score quite well.
Does that is that your sense as well and how do you think about that in terms of your.
And your pricing.
And how aggressive you may try to be or not be and and just how you anticipate the consumer response to that.
Yes, we have seen we have a very complex and sophisticated price elasticity models, where we look not only at price points within our own category price gaps price thresholds also with around other snack items as well and I think over time I think we've consistently seen that.
Our business, our brands and our categories tend to be on the less elastic side versus perhaps some other categories, which is what gives us confidence and pricing power and the ability to take price when we feel it is the right time.
Okay, that's helpful and just on.
Follow up on <unk> can you give a sense for the organic.
<unk> launched just how that might be tracking versus your expectations and maybe a little bit of how it compares from a margin perspective, it looks like with its price point, its probably pretty nicely accretive.
And Directionally correct.
So it is performing in line with our expectations. It is early days, but it's absolutely in line with what we expected it.
Is really in kind of a test and learn phase as we move forward and it's not I would say a big material piece of our better for you launched at this point in time and organic.
Gannett is a little bit more of a targeted offerings than say a zero sugar sugar free.
Okay, great. Thanks, so much.
And to your second part of your question from a margin perspective, we do charge a higher price point for it.
But it also does cost more obviously, so the margins.
Comparable to the core.
Okay. Thank you.
Yeah.
Thank you. Our next question comes from the line of Ed Zaslow with Bank of Montreal and please proceed with your question.
Hey, good morning, everyone.
I have just 2 quick questions 1 is the.
And is it a cash item or a noncash item and then the second thing on that is implicitly youre actually raising the EBITDA, which is more cash oriented and my.
Not understanding that correctly.
So the first question is for <unk> for the second quarter.
It's noncash, but a portion will become or could become cash and the balance of the year and a portion will probably be noncash for the balance of the year. So it is a mix of both for the balance of the year on your second question. Yes, you are thinking about it the right way from an EBITDA standpoint.
Okay, and then just to follow up on this day.
And <unk>.
Instead of the increase on the EBITDA.
Exceed the amount of cash that will be needed to pay the taxes is that a fair way and then I'll leave it there I just wanted to make sure I understand the tax because it just seems like it's more cash.
Cash flow was actually coming up not not going down based on what you're saying just want to make sure I'm on.
The magazine and yes, it's true by say the caveat is time, alright, so if youre looking at a longer period of time. It is more possible that a portion of that reserve could be come cash and so if youre looking at next quarter or for the balance of the year that might lead you to want to answer if youre looking at the next 2 years it could be a different answer.
Great I appreciate it thank you.
Okay.
Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question.
Hey, good morning, everyone.
Good morning on money, Hi, So I guess I wanted to maybe follow up a little bit on Andrew's question.
And getting and and Michele you know, maybe just stepping back a little bit you know this.
And this this environment right, where we're seeing not just higher cost inflation, but in addition to that you know what's effectively labor shortages right. When we've seen this across.
Lot of other companies on our coverage.
And so I can.
I had 2 questions related to that 1 is.
And if supply chains are.
And kind of running all out just how you think about stimulating demand. When there is some challenges and just in terms of just getting getting product on the shelf and I guess.
The second is just.
As you step back and you look at all these different dynamics and the economy and and the environment in general it's definitely situation that is and <unk>.
Some ways unique so just.
For perspective have you seen some of this before and you know.
Maybe just how you're thinking about approaching planning for the business over the next.
And I don't know 12 to.
24 months, if we continue to be and this type of environment.
Yeah, It's certainly something that we spend a lot of time thinking about and working on and I guess, what I would say is yeah. We do realize that it is somewhat of a volatile times still certainly with all the talk of the Delta variant and recent.
And CEC Guy.
<unk> recently and it's all too.
Too much of a reminder, that we clearly aren't fully out of the pandemic and I personally believe.
September we know that a lot of companies are implementing kind of a return to office. It seems like a lot of companies are doing that then kids going back to school and so there will be north for all of us to.
To learn about consumer behaviors and what some of those changes mean for that you know the wave and we think about the supply chain and managing where we are right now is I guess and a couple of ways. So how do we maximize it.
Yeah, how do we efficiently maximize and properly maximize revenue.
And so 1 other key things we do focus on is really looking across the portfolio and focusing on.
Really maxing out where we have available capacity and leaning into some of those brands and businesses with greater investment you know reallocating investment for those businesses. So that we can really take full advantage.
For that if there are areas of the portfolio, where we you know like a REIT for example on keep pointing out as an example, because it's such a big piece of our business and growing it such as Pepsi right.
We have total confidence, making big capacity investments on that 1 just because of the track record and the dynamics around that.
And then so we'll invest and capacity as a piece of that and then there are parts of the portfolio, where we're not going to lean in and right away and invest and capacity because we want things to play out a bit here more so we really leverage the breadth and 1 of the strength. We have is the breadth of our portfolio. We've got on seasonal portfolio. It's the consumable take them with a range of different.
Brands, and so we really try and and leverage that as best possible to manage through so it's kind of a balance of investing.
To build supply chain, even stronger, which we're always doing but we're doing even more of that right now and doing what we need now kind of no regret moves and then planning for the future from a contingency perspective.
Depending on what the potential outcomes are.
Okay. Thanks, and thanks, Thanks for that and if I could just follow up with 1 quick 1 just as you said.
Have you said, you've sold and merchandising for for holidays, and the back half of the year and and maybe just more in general.
Have service levels come up more.
As a sort of a factor that that retailers are focusing on.
You can sell a program or they can take a program, but are they more sensitive to actually wanted to be and stock is that becoming more of a sort of a factor and that that decision, making right. I mean, I would say absolutely I mean retailers we're.
We are under tremendous pressure this past year with all of the huge shifts that COVID-19.
Caused on many manufacturers businesses and.
They had as we all know tremendous issues with out of stocks and so their goal is to make sure. They remain in stock in fact, right now we've seen retailers really leaned in a bit to inventory.
And carry a bit more inventory than they have and the past because I think theres, a little bit of a scarcity mentality and they want to make sure. They have product. They also know that manufacturers are taking price and so in some cases, it may allow them to hedge a little bit there.
No.
Yeah, I think it is it is definitely a focal area and.
Of course, something that we always focus on and are proud of how we've been able to deliver for retailers because they've continued to come to us given how we were able to deliver during the worst for the pandemic last year and have continued to rely on us this year.
Okay. Thanks Michele.
Absolutely.
Okay.
Thank you, ladies and gentlemen, and that's a final reminder, it is star 1 to ask a question little pause a moment to allow for any others to come in.
Okay.
Yeah.
Thank you it seems there are no other.
Other questions at this time I'll turn the floor back to MS. Poole for any final comments.
Thank you for joining us this morning I'll be available throughout the day for any other follow up questions you may have.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.