Q4 2021 Hershey Co Earnings Call - Live Question And Answer Session
[music].
Greetings and welcome to the Hershey Company fourth 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 begin.
Good morning, everyone. Thank you for joining us today for the Hershey company's fourth 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 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 accordance with GAAP reconciliations to the GAAP results are included in this mornings.
Press release, joining me today are 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.
Yeah.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two 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, one moment. Please while we poll for question.
Yes.
Our first question is from Andrew Lazard with Barclays. Please proceed with your question.
Good morning, everybody.
Good morning, Andrew Hi, there I.
I guess my question is.
It seems like the plan for for this year is Hershey is going to look to certainly leverage greater SG&A to more than offset some of the expected gross margin pressure during the year.
Yes. My question is how does the company balance.
Leaning more heavily on SG&A this year to hit certain targets, including less aggressive marketing spend, albeit in light of capacity constraints and how do you balance that with continuing to lean in on reinvestment to protect as much of the sort of the current momentum and the market share. That's been gained in the past two years really to benefit the out years right of 'twenty three 'twenty four.
And sort of beyond.
Yeah. So as you know we take a pretty balanced approach in terms of focus on delivering the short term as well as making sure that we are building all the capabilities.
And continued investment to build the long term so as it relates to let me start with some.
Some of our SG&A you know, we think it's important to continue to build capabilities. Some of the places that we have been very focused in.
In the areas of ERP, obviously, so that we can really get a solid foundation of technology that we think will bring us tremendous benefit going forward in the future. We we incur a lot of the expense now and frankly more of the benefit in the future also in terms of digital is a big investment area, specifically, we've had a big focus.
Advancing our capabilities to deliver more sophisticated targeting and get more efficiency in media. So we believe some of those lands are really important to to help us build those capabilities for the future as we look at brand investment as you know, we're big believers in our business model the brand investment.
Is key.
We have always been very solid spenders and we continue to believe that we have moderated some of that spending as we've had a supply challenges and constraints to make sure that we keep our very strong returns on that investment. So it's a it's a balancing act some of the investments in media have enabled us to.
Get efficiency. So that we are still delivering a pretty strong number of consumer impressions out there we feel good about where our share of voice is so we're really trying to balance that and say, okay, well not moderate a bit now in brand investment, but certainly keep our eye on it as we go forward to make sure that we continue to protect that for the long term.
Thank you.
No I think you hit the highlights we have a compensation reset that happens as we set new targets and so you know that can be a little bit on the benefit side to deploy against the things that Michelle said right and then just briefly Steve I guess, where would you where would you say Hershey is right now with respect to sort of retail inventory levels and I guess finished goods inventory as well relative to where the <unk>.
You might typically see itself sort of at this time of the year I'm, just trying to get a sense of what sort of inventory.
Inventory refill opportunity there might be moving forward, obviously as capacity allows thanks so much.
Sure. So as we formed our guidance for next year, we have an assumption inside there that there is an opportunity for some inventory build back into the network.
Of course, we've also got some inventory building to do on our side.
But from a retail distributors standpoint, as well and that's part of our guidance. Okay. Thank you.
Okay.
Our next question is from Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, Thank you for the question I wanted to get a sense of.
What you're seeing from competition.
Is your competition facing the same supply chain constraints that you're facing and therefore should we assume that you're expecting a year of market share gains or do you expect to hold share this year.
You know that.
Do you expect them to reduce media as well.
So relative to the competition, yes, we would say everyone in the category seems to be having similar challenges just as I would say pretty broadly in the industry. That's the case.
We anticipate the situation relative to delivering on demand to be about comparable across the competitors relative to market share. We believe that we will hold share. This year as you know we've had some really significant gains over the past two year period of time.
We will we will have a more tepid share performance in the first half of the year building to a bit more strength in the second half due to lapse alone.
And relative to our share of voice on advertising, we do track that and we feel really good about where we are from an advertising share of voice perspective.
Okay great.
Maybe a follow up.
Gross profit dollars for the core business not including the acquisitions should we still assume that your gross profit dollars are growing I'm, just kind of a backhanded way to figure out what kind of gross margin I should expect for 2022.
Yes, gross margin dollars are going to grow as well.
<unk> talked about in the prepared remarks from a margin standpoint, we expect to see some dilution by comparable to what we saw in 'twenty, one but from a dollar standpoint, yes up year over year.
Okay alright, thank you.
Our next question is from Nik Modi with RBC capital markets. Please proceed with your question.
Thank you good morning, everyone.
So just a couple of just a housekeeping item then a broader question.
I was hoping you could maybe disaggregate the shipping days and the elasticity impact.
That you expect in the.
Prepared remarks, if theres any perspective, you can give on kind of what the magnitude of each and then.
In the prepared remarks, you also indicated you're looking at historical elasticity is when you think about this year, but as we've seen across the broader CPG landscape. You know you'll have to see it have been better than expected. So I'm just trying to get clarification are you assuming kind of what you've seen historically like you know pre COVID-19 or if you could just.
To provide some context there.
Let me start and answer your elasticity question I'll give it to Steve to do the disaggregation.
Nick.
What we are assuming for this year is historical elasticity to date on our pricing we have seen a little bit better performance versus historical as we go into this year, we Wanna carefully keep our eye on the potential impact of it brought inflation on the consumer we know that theres been no.
Reduction obviously in government stimulus.
And snap and with the inflation across the board. It's just a top of mind, a watch out area for us and that's why we really chose to say historical price Elasticities is what we think is a smart and prudent planning move for us.
Steve do you want to talk about disaggregation, yeah, just to break that out a little bit the shipping days, we would estimate to be about a two point impact on the quarter.
And elasticity standpoint, if you sort of took back to the side because the shipping days to the side.
Pounds were about flat in the quarter. So that helps give you some idea.
That's very helpful. And then Michelle just one more question I mean, you know obviously that the issue with honest boxes, it's been a pervasive problem for everyone and you know labor, obviously is a big part of that.
Is this one of those scenarios, where you just kind of have to manage through it and don't really have a good handle on when things are going to start getting better I mean, I get because it's so so labor dependent.
Well I guess, what I would say is we have a lot of actions in place to drive continuous improvement relative to our own supply. So certainly yeah. There's no certain end state where I can tell you. This is this is where the the the the.
The switch flips, but what I can tell you is we have had numerous programs underway. So first of all we focused a lot on optimizing demand how do we get the most efficiency out of the capacity, we have by reducing complexity and changeovers prioritizing skus part of that included working with retailers to double and triple face our core items.
Which is always a great move because they are very high velocity. So that makes a lot of sense as it comes to supply we are continuing to invest in incremental capacity are there incremental capacity that will gradually come online as we go through this year and also into 2023 and 2024.
We've also made some significant investments in manufacturing labor.
You know frankly last year was a real challenge our people where did real yeoman's work to just do whatever was needed to produce as much volume as possible, but it really was you know in terms of having a reasonable employee value proposition for those folks and so we have invested in labor, we won't get the benefit benefit of that immediately because it takes.
Time to train people to get them up to speed to be as efficient as our current workforce.
But we do think it's important and a lot of that really just helps us to manage some of the over time as well. So we do have a lot of activities underway. We think that we will make continuous improvement, but under no circumstances would we really be out of the woods totally we will continue to have pressure throughout the year. Our goal is to just continue to.
Make improvement.
Great. Thanks, so much I'll pass it all.
Thank you.
Our next question is from Jason English with Goldman Sachs. Please proceed with your question.
Hey, good morning folks thanks for calling in.
Congrats on strong results in some sustained momentum.
But give you a volume growth in North America over the past two years.
Calculation of roughly 7%, it's obviously a real standout here, especially given that a contrast to what was very little growth before before COVID-19 .
So my question is kind of on that focus you know how.
How much of the volume that you picked up during Covid do you think it's Derek.
And how much is at risk of we came back out.
As we kind of come out the other side of this and what's embedded in your planning assumptions I know, there's a lot. There. It's it's it's a bit tricky to to suited to unravel, but I'd love your view on it.
Yeah. So you know we've really tried to do a good dissection and deep dive to understand that as best possible and I would tell you I think there are a number of things going on first of all we do know that there are some COVID-19 related impacts.
The change in consumer behaviors with consumer spending more time at home has clearly benefited some of our brands and categories because their around their homes more to consume our products and their products are more eating and those types of environment, then out and about and you know restaurants environment etcetera.
I think that based on what we're seeing in consumer behavior. Like you know I think that while more people and people have become more mobile. There also is a change of behavior that I think is is is here to stay to some degree right people enjoy state spending time with their families. They appreciate some more given the COVID-19 situation they've gotten comfortable some of them.
The portion who are flexibly working and want to continue some of that so I believe that some of that is here to stay at the same time. We also did implement a number of new strategies in our business over the years that we think have also helped US you know, we really tried to do a better job of balancing innovation and the core to get.
More sustainable growth and we haven't seen that that's had an impact on the business. I think we also think we've gotten smarter about pricing, where we have multiple levers on list.
List price and price pack architecture that we can utilize so I guess I can tell you. We believe that you know there's there's part of both of that so we do think that there is a a sustainability and underlying sustainability may not be all of it but you know in addition to US in particular I think the categories Relevancy has just you know.
Increased during COVID-19 . So those are some of our thoughts Rob I hope that's helpful.
No that's it that's helpful.
Sticking on the topic of volume it looks like your guidance for next year is predicated on fairly firm volume, but you say you are you assuming historical loss densities, which should be a net negative drag and maybe some of the school and stuff comes back out what are the offsets it looks like the inventory reload later in the year of ketchup or or or where where are you seeing the offsets of that elasticity.
Right.
Sure Yeah, a couple of things one we touched on it earlier was the inventory. So we are assuming some inventory rebuild with retailers and distributors that's the component fees.
Seasons as a component of season were fantastic. This past year, yet another 90% sell through for holiday and you know that will help from an ordering for this year. So we're leaning into seasons and then continuing to activate against our brands and go to market strategy a portion of that innovation and a portion of that is just working with our retail team to make sure.
We're bringing a new programming that we can support from a capacity standpoint. So those are the biggest factors offsetting the elasticity.
Understood. Thanks, a lot I'll pass it on.
Thanks, Jason.
Our next question is from Michael Library with Piper Sandler. Please proceed with your question.
Good morning, Thank you.
Good morning, Hugh you mentioned, the stimulus benefits and snap in particular and clearly there's some risk there, but can you give a sense of what if anything you're hearing from consumers directly in terms of how they may have reacted with elevated benefits and just how much of your performance could have been.
By that because when we survey consumers. It looks like confections is the category that may have had the least benefit of ball is that consistent with what you're seeing or can you just give a sense of how you think about some of the risk around that.
Yeah, we do think that.
There could have been less benefit that's what we're seeing as well for us than for others.
So I do think that's correct at the same time, we do know that Theres significant pressure out there and we just want to really keep our fingers on the pulse of it to make sure that we you know we arent missing something I mean, certainly we're not in a category, where there's a big private label component and people can easily just say I'm gonna still participate but switch to.
You know lower brand, that's always been a benefit for us during times like this but we do understand that the pressure consumers are under.
No that's great color. Thank you.
And then just on some of your your your outlook where you.
Yeah from a planning perspective can you give a sense of some of the timing you expect for any of the inventory restocking and you touched on the SKU rationalizations.
How significant are those I know, you're swapping them out for higher velocity items is that a net positive. It is their timing for that or anything we should keep in mind from how we think about modeling the year.
Sure I'll take the first part of that if we looked at the inventory Bill we're kind of planning it just spread evenly over the year.
It gave it a little bit by our capacity coming online and so that's one factor.
I look more broadly at the sales profile for the year. You know, we will have more M&A benefit on the topline in the first half of the year, but more pricing benefit in the top line for the first half of the year, but the inventory build will be spread more evenly.
On the SKU rat side we.
We see a minimal impact from that for the reasons Michelle talked about you know, where we where we've had to make choices for things we can supply with middle gained more facings in and sell more core product. So net net that hasn't been a big factor and you know we always we have done SKU rat before we got into Covid just to make sure. We're always thoughtful when we did it.
New innovation Skus and make sure we had good velocity on those products. So we don't see a big impact.
That's very helpful. Thank you.
Our next question is from Ken Zaslow Zaslow with Bank of America. Please proceed with your question.
Hey, good morning, guys.
Good morning again.
Just two questions. One is you know you're hitting your 9% to 11% EPS growth in a capacity constrained environment with higher labor costs, even lower.
AD spending.
We were in a normalized environment.
How much incremental EPS growth or how would you kind of frame.
The pent up.
P S that may not be in the 9% to 11% as you emerge from.
Just capacity constraint issues.
Yeah, that's a tough one to.
Kind of think about because there are so many interconnected variables inside that equation, we've got robust volume, which is driving very high utilization on assets too high to be honest, which is why we're adding capacity. So you pick up some benefits there, but a lot hangs on that we're also with the pricing drop through in response.
To commodity costs.
So that's a that's a tough one to say there are too many interconnected components inside the P&L Kinder really probably give you a clear answer for that.
What did you think it would be higher or lower.
Leave that question and then I have another question.
Sure.
Even that is kind of hard Ken because if I start at the very top we would probably not be taking any price increases as we've taken but for the need to cover the cost that we have coming through both commodities and the rest of the P&L and so even at that very top line level of it's hard to say, how the construction and then below the rest of the P&L.
Through.
Okay.
My second question is.
Yeah with Pirates booty and Skinny pop you guys, obviously crushing it on the cell line, what one of the key learning that has changed your acquisition strategy with that and what are you going to apply to docs that continues to keep the you know the snacking business at these levels right. So.
Your acquisition strategy has clearly.
Evolved into something that has been quite successful can you talk about the evolution of dawn and how you apply it to our jobs.
Absolutely.
You know, we know that at the beginning of our journey into snacks, we had some challenges in some of our first acquisitions and you know I guess it goes to you know maybe you kiss a few towards on the way to the print but.
But we learned a lot about what we're good at and what we're not good at and we established some principles and one of those principles was there was a certain size threshold. That's critical for us in order to absorb a business and be able to really build it from there. We're not good creators of very small businesses and making them Big we also.
So understand that our business model is all about a high gross margin a strong gross margin then enables us to invest to grow capabilities and invest in our brands.
And we got very very stringent about those guidelines and those criteria for success.
We focused a lot on building capability frankly, we didn't have a lot of M&A capability and so we got a lot smarter about how to do the right due diligence what were really the key questions. We needed to understand are we started to see what we have to know going in and I think as we did each acquisition, we got better at that so with pirates booty and skinny pop.
We've got amazing brands and that's what we're good at is really getting a brand that has a strong consumer following we'd like to see brands that have tremendous repeat but low household penetration because that's as consumers loved them and we can apply our capabilities to expanding distribution and investing to create awareness of the brand.
The other thing we learned was the importance of supply chain.
And you know early on we had some struggles absorbing a lot of these smaller companies didn't have their own supply chain and so thus you saw when we went for it and but we decided to buy the car manufacturer pretzels ink as well. So I think we've consistently applied those lessons I as I said, we built a lot of capability and muscle along the way.
Got better at those key criteria of Yep.
The importance of brands margins and the right supply chain.
Great I appreciate it thank you guys.
Yeah.
Our next question is from Kenneth Goldman with Jpmorgan. Please proceed with your question Hi.
Hi, good morning. Thanks, so much I just wanted to follow up on one thing I know you talked about investing in digital capabilities and I hear the goal and part of it is advancing targeting inefficiency and media I guess I'm not quite sure what the mechanics are there and why those efforts would cost a good deal of <unk>.
Capital and maybe I'm digging a little bit too deeply here are just those things historically seem to be more about.
Learning education hiring consultants to help you then capital I'm, just trying to get a sense of connecting the dots there if I can.
Sure.
So you know one of the things that we have seen has been really critical is whats the dataset.
In the past, we relied on our own internal dataset that we would analyze and do in a traditional marketing mix modeling kind of Ah yeah activities, but we've really created what we think is a proprietary approach to what we're doing investing in other data sources and.
Then integrating them into ours building the tools that allow us to do that you know utilizing the cloud across what we're doing and so a lot of that has been in investing in those different areas to truly kind of break out.
In this space.
Okay. That's helpful. Thank you and then.
I may just be missing it but.
I hear that I see in the press release and in the prepared remarks commentary on strong innovation.
I'm not sure I see.
A list of products that you would consider strong innovation I can't recall Hershey ever not listing.
The new products as the year starts and I realized this year is a little bit you know.
Unusual just as last year was but I'm just trying to get a sense of what those new items are that you're most excited of our foreign and and you know how you might qualify them.
Absolutely I mean, I I'd start by saying first hey, given where we are in a capacity constrained world. Our first focus is the core of the core of the core [laughter].
And if we are maxing out capacity with the core you know, we're really balancing what's the right innovation to continue to drive news, but we also want to be very efficient and we just want to maximize throughput, but that said we do have several items that we are excited about reese's potato chip kitkat dark chocolate with strawberry.
Kit Kat Hazel nut. We also have importantly, so really a great new pack types. So we've talked to you about price pack architecture, and we've put a lot of focus on understanding different consumer occasions, and we're there there was a need or an opportunity for a pack type that best meets that occasion and drives incremental consumption.
So we're really excited about two of those one is called the pantry packs and think about that as I don't know I'm going to describe it as almost a case of your product or a case pack of your product. That's designed to sit easily either in your refrigerator or in your pantry that you can easily get out multiple units of you know.
A single serve product.
And then we also have an item that's called the Super King you know we have a standard our standard bar, which is a smaller instant consumable item. We've a king size bar, which is a bigger instant consumable item and consumers identify the interest in a super King, which is an instant consumable pack that has more product more individuals.
Units for sharing.
And those those pack types have tended to be really great innovation for us overtime highly sustainable.
Thanks, so much.
Our next question is from Bryan Spillane with Bank of America. Please proceed with your question.
Hey, good morning, everyone.
Just a couple of quick ones for me first just as we're looking at the gross margin guidance that you've given for 'twenty. Two just what does the acquisition or the acquisition accretive.
Dilutive or neutral to gross margins.
Yeah on the gross margin line, they're dilutive and you could get a little sense of that with the new segmentation detail that we provided but particularly dropping those in versus where we were before it does create some dilution okay.
And then I know theres been a few few comments, Steve that you've you've or questions around just phasing could could you just help us a little bit if.
With regards to how we should think about the phasing I guess of margins through the year or so.
This pricing help a little bit more later in terms of gross margins.
Just any any any guidance or any any color you can provide in terms of how we should be thinking about the phasing of costs over the course of the year.
Sure Yeah, we have it and if I go back to kind of first half second half I won't get down to the quarters, but we expect to see tougher lap and you don't want more pricing in the first half of the year, but we expect to see probably tougher gross margin in the first half and probably Q2 in particular will be a tough just looking at the lap that we had last year.
And we would expect to see growth margins, you know, Greg again, everything else equal and the plan gradually improving as we get to the fourth quarter next year.
And then Michelle in the in the prepared remarks there.
There was a comment around salty snacks are talking about being in a position I think to integrate more efficiently integrate future acquisitions.
Can you just touch on that a little bit just what that means.
Yeah, absolutely. So you know we're at a point now we are where we are continuing to build scale and salty snacks, we started with skinny pop than pirates booty and now with the data business, we have sizable brands and so we are really looking at what is the opt.
I'm a way to build the operating model around that entire piece of business and that includes everything from you know obviously right now we're very focused on integrating datsun pretzel thing, but you know what's our in state of from an operating model. How we operate from a supply chain network. How we operate you know these these.
Array of products do not require a condition distribution. So they are very different than our core portfolio. So that's really the work that we're talking about there.
Okay, Great and then last one for me explain household is very activated right now around the Cadbury Bunny trials.
Right.
[laughter] alright ill leave it there thanks guys.
Yeah.
Our next question is from Christopher Growe growing with Stifel. Please proceed with your question.
Hi, good morning.
Good morning.
Just to add an editorial remark finally, Brian there, we've really enjoyed super King Theyre very dangerous by the way, but we do enjoy that as well.
[laughter] I just had two quick ones I just wasn't sure.
There's a common and preferred remarks.
You're a person coming through but that won't fully offset cost inflation are you also through window. So manufacturing investments that kind of thing. So I just want to get a sense of how much inflation do you have and then we'll price to offset inflation, but there's other factors that may weigh on the gross margin is that the way to think about it or give any more color on that.
Yeah, Yeah, a couple of things so yeah in general pricing will offset the majority of our inflation. So if I look at our commodity basket.
You know we've got the biggest increases year over year in places like sugar, and dairy and packaging materials and specialty ingredients.
We have pretty good visibility into that we've talked in the past about our hedging program and that gives us a pretty good picture.
We've also got inflation from a labor standpoint.
One of the things Michelle said labor and manufacturing value proposition is one area that we're leading in pretty strongly this year and that's a differential investment other than what we've done in the past and so to answer your question, yes pricing.
Offsets the majority of the inflationary piece pieces, but it doesn't fully offset the additional investment that we're also making to improve the value proposition for our employees.
Okay.
Given the.
Level or range of inflation for the year just to get it.
A level set on where you are right now.
Yeah. So as we look across I'll say, the commodity basket, but also other sources of inflation, you're talking mid to high single digits.
Okay. Thank you and then.
Just to be clear your capacity as it stands today can you produce enough to meet demand or are you still using third parties more heavily things like that that they were kind of waiting on the gross margin. In addition to other inflation given the fact that you're trying to catch up on production here.
Yeah today, we don't have enough capacity to meet consumer demand.
Add some four manufacturing lines come online in 'twenty, one we have more in the Reese's and payday and jelly Rancho Gummies that will come online in 'twenty two.
But even with that we feel like we're behind our consumer demand and so there is inflation through co Mans and partners in the network inflation flows through those lines just like it does from an internal standpoint, and so that is a factor, but even as we rotate that outside support into internal production and we're still going to have inflation on the.
Jim you know labor lines and some of the materials line.
Okay.
Oh I'm sorry go ahead.
Just cause it and theres not a lot of material change in our use of co man.
Some of the items that are in highest demand are items that we uniquely produce them at.
Do you think about the uniqueness of some of the forms of some of our big confection items. So what we are trying to use any external come in in network. As we can there are some that it's just not available because of the proprietary nature of our products.
Thank you.
On the phone Brian's question, a I think he asked about dots and I think you mentioned that was dilutive to margin is that the EPS as well and perhaps you can answer that but I mean, Minnesota.
No. The dots deal is accretive to earnings in the first year and it's about a two point benefit.
Okay.
To be sure on that thanks, so much.
Our next question is from David Palmer with Evercore ISI. Please proceed with your question.
Oh, Thanks, good morning.
I noticed that you're calling the two segments confectionery and salty snacks and you know those are two different parts of that snacking Mega segment that you might've shown in AR and.
In that short years ago, and a path to analyst day you.
You don't take suites versus salt tea for example, capturing even more of that.
Does that mean that for the foreseeable future. Those are the two segments that they're going to be the company's focus and if you just kind of roll back the clock just how did we get here that that salt is the best adjacent category for Hershey.
So certainly if you look at our business. These are the largest two areas of our business today and that's from a reporting perspective.
It's exactly where we went to how we segment the business.
You know and as you look at some of the best we've placed I think some of the you know some of the larger assets at least on the scale of the acquisitions. We're doing do tend to be available. There. We've we've tended to like many of the assets we've seen in the growth. There. So so that has always been in our you know in our eyes early on was.
That the two incremental areas of Incrementals for us beyond confection that we're most excited about where salty snacking and better for you overall.
I remember years ago, there was some.
Yeah.
It didn't always go great with some of the adjacent category acquisitions and there was some talk.
Was that you didn't have it.
Into another aisle wasn't always easy could you talk about the capability building that you've done in parallel to these growths.
Growth brands that you've acquired that.
It looked like they had fantastic momentum, but what.
In terms of your own internal workings.
Have you done to really make sure that you're going to give us the best.
Growth possible in terms of the salty snack area and I'll pass it on thanks.
Yeah. So certainly I think if we think about winning in the store I think we've built some scale in the warehouse delivered snack general space. So from a from an in store perspective, that's been a key area of focus, but I guess I'd go back to really some of my earlier comments around the M&A and where we've really been.
The best capabilities I think I think we got very tight about wasn't asked that needs to look like in order for us to for it to be attractive for us and be a good fit for us and that's about it has to start to be obviously after identifying the two areas of incremental opportunity and it has to be significant scale or at $100 million.
Love and have strong gross margins because that lets us build the brand.
For brands that have very strong repeat which signifies that they have got a loyal consumer base lenders out there there that we can build from that we can build our awareness with consumers through advertising and we can either increase distribution and availability.
Make sure that we've got a good solid supply chain plan, because our whole goal is going to be about growth and we have to be lined up to do that and then really given it was a focus and building our talent and our capabilities and our into workings and our process and we spent a lot of time on that and getting much more robust in terms of the Tam.
That we're applying in these spaces.
Accountability and ownership across the enterprise, both with our M&A team with the commercial units that are picking this up.
And building a lot of muscle and due diligence and I think you know in every piece of that whether it's legal whether it is analyzing the business.
All of those things have been key.
Great. Thank you very much.
Our next question is from Steve powers with Deutsche Bank. Please proceed with your question.
Yes, thanks, and good morning.
Just going back and just to round out the conversation you were having with what Jason and others earlier around volume.
Is what you're saying that you expect volume in terms of consumption and consumer takeaway to perhaps trend negative year over year, given elasticities, but that you think your own shipments can remain flat to up given the dynamics that you talked about with respect to the seasonal activity and the inventory rebuild it does that is that the read or did I Miss.
Misinterpreting.
No you've got it that's exactly right.
Okay great.
Great.
And then.
If we could just because it's we're kind of getting a first look at the.
The salty snacks business kind of stand alone can we just drill down there maybe.
Talk a little bit about how you expect that business to shake out price versus volume.
Maybe margin progression was in the $3 22, just yeah, I don't I don't know anything to call out there as we think about that business standalone.
Yeah like the other part parts of our business, we look at both price and volume.
But volume is very strong right now on skinny Pirates and dock and so in some ways. We're facing the same challenges that we have on the convention business as we need capacity and trying to solve for capacity to continue to unlock the volume momentum that we're seeing.
That's probably I'd say one of the biggest issues just like it is for the confection business right now, but probably it's also plays a role.
Okay. Okay. Thanks.
Okay.
Our next question is from Rob Dickerson with Jefferies. Please proceed with your question.
Oh, great. Thanks, so much.
Just have another question Oh, the salty snack side, maybe it's a bit longer term strategic.
So obviously I realize you know our business doing very well our growth is excellent demand for suggesting some of your top brands in the segment.
It's very strong, but still obviously very small piece of your total company total portfolio and the margins are still up there obviously was a much higher scale.
Confection business. So you know what you think forward a few years.
You know it is.
There's an argument to be made that maybe there can be some kind of overall margin progression.
But for her so you know, but that would likely be driven by that falls into that area just.
We have an increased scale attention and you spend what have you and I also kind of just in the context of kind.
Kind of where your total company operating margin it's been over the prior call it seven years.
Yeah, I mean, we.
We see a lot of opportunity in front of us as you mentioned.
We are you know we have been building scale. So you could say that we are subscale, but we see tremendous opportunity for efficiencies and synergies as we integrate and gain scale as we've taken on these businesses for US job. One you know these are growth businesses, we bought them to accelerate our growth and to participate.
It's paid in high growth segments that were very appealing to consumers and first and foremost we wanted to go after that and then as you know it takes some time to get to the right ultimate structure.
The right phase of integration and really build towards that efficiency and so where we are in the middle of that right now it'll take us a few more years, but you know you you see the growth rates from a top line perspective, and a lot of the work that we do like we're doing on the operating model and on the supply chain network are intended for us to drive up.
The margins to you know to take advantage of the synergy that we think exists.
Okay Fair enough and then just quickly.
You know obviously you know we're close to Valentine's day, a smaller holiday for Easter is forthcoming and usually large.
If we're just thinking year over year.
I guess, just any perspective color in terms of demand you kind of feel so far with conversations with retailers relative to last year, which was obviously strong.
And then like are there you know material differentiating factor.
And how you would actually provide supply for that season versus last year, where demand was already high and you did well and had decent supply and that's it. Thanks.
So we're feeling good about both seasons, we see both of them being up versus prior year, we know that for US we had record sell throughs throughout the seasons and that always leads to a strong season for the next season and also it's a bit of a longer Easter.
Season, and that bodes well for us as well so we're focused on working really closely with our.
Our retailers to get them the product that they're looking for but we are anticipating that we will be able to see growth on both the season.
Alright Super Thanks, so much.
Yeah.
Our next question is from Jonathan Feeney with consumer edge. Please proceed with your question.
Yeah.
Thanks, So much for taking my question. So with so many companies are really struggling to take pricing and I measure that in terms of not so much the level of pricing, but the adjusted gross margin compared with the apparent elasticity, which in your case Youre outgrowth margin trend year over year at negative 40 basis points as all world and the law.
These limited what specifically do you see.
Do you think about your categories and your company execution your corporate mindset.
That has allowed you to you'll communicate.
Communicate and execute this pricing got better than peers and the rest of the industry I I just love to hear your perspective on that because I know you've invested a lot in the kind of capabilities not just now, but I mean, that's been a buzzword for Hershey for years.
Understanding you know what the data is telling you about your ability to price I mean is it that I mean is it the people what is it.
I mean, I'll take a crack at a few things first of all I think that we all believe that.
At the root of that is having great brands that that consumers see the value in right. It's about the consumer value proposition. It's one of the reasons that over the years, we've been such strong believers in investing in our brands because the more we invest the greater awareness of the greater connectivity consumers have and with that connectivity you know they're they're more.
<unk> to the brands they don't want to switch to another brand and so I think if you know what I would say fundamentally I think that's one key thing that's an advantage for us.
Secondly, I mean, we we have had great analytics over the years, we've always had a big focus on our elasticity models.
You know that over time, we've always focused on you know pricing pretty aggressively as one of the tools in our toolkit to deliver our P&L and to deliver our business and I think we just continue to try and take that capability to the next level. All the time as we've broadened it to okay. We can get the insights on pricing in our categories and then we started to look.
At cross category price elasticity. So we can understand any trade off that could occur between our category and other categories. Then we started to invest in price pack architecture and look at how can we generate price realization without a list price by <unk>, but by changing the game. So I guess I'd say it to me at the heart of it is the is are those things.
And I wouldn't underestimate as well the trusting relationships, we have with our retailers. We've always taken an approach of looking out for what's best for the category not being so self serving and so I think our retailers appreciate that and work really hard with us to get to the right outcomes because of that.
Helpful. Thank you.
Okay.
Our next question is from Pamela Kaufman with Morgan Stanley . Please proceed with your question.
Hi, good morning.
Morning.
I wanted to see if you can elaborate on what level of pricing gorilla is embedded into your guidance for 2022.
And in terms of demand elasticity. It seems you experienced some elasticity in confectionery, but this wasn't as evident in snacks, you have different expectations for demand elasticity within snacks versus confectionery salty snacks versus confectionery.
And how little pricing both vary across the North America segment.
So I'll take the first one you know overall pricing that we've assumed in the plan is five to six points.
In terms of the difference with the salty snacks business really not a big difference from an elasticity standpoint.
And that's the way, we look at that and plan for that so those two are pretty similar and the last question I might have missed it.
I think was that it.
That was it.
Thank you for that and on media spend can you elaborate on what your plans are for media investment in 2022 do you expect it to increase I know you mentioned that it'll be stronger in the back half of the year, but how should we think about it overall and what.
There are some of the key.
Initiatives there.
So our dollars will be up slightly for the year in media.
More of the increase will come towards the back part of the year as as we're in a better you know increasingly better supply position.
And there aren't really a lot of big changes fundamentally in terms of how we're advertising you know we do a significant portion of our spending that is in digital like like we have been for for many years and so there's not a big shift in how we're spending the dollars.
Great. Thank you that's helpful.
Our next question is from John Baumgartner with Mizuho. Please proceed with your question.
Good morning, Thanks for the question.
Good morning.
Just kind of building on and you'll come back to John's question in your areas of focus and you know sort of differentiation can you Michele can you speak to where you feel you are right now on the distribution side you had quite a bit of success. These last few years in terms of getting front end displays modernize the middle of the store and the packaging there.
The self checkouts. So I mean at this point you know where is your focus regarding those efforts for 2022 and beyond.
Where are the opportunities that remain for GDP distribution and quality placements from here. Thank you.
Sure. So I think some of the areas of focus for us going forward self checkout queuing lines are a big area of focus you know right now we're seeing a lot of retailers given the some of the pressure on labor focusing there and the other big area and push for US is in what I would call non tree.
Additional channels.
We have over the years, you know kind of started distribution in areas like home improvement stores and as our products have done well there. It then gives us the opportunity to expand from having some instant consumable items to putting our take home portfolio to even putting season during those specific times. So those are the biggest.
Opportunities for our focus in 'twenty two.
And then I guess related you know thinking about distribution internationally, whether it's Brazil, India, Mexico, you've been expanding distribution there as well how do you think about the opportunities whether it's traditional trade modern trade you know, what's sort of driving that and is there a way to think about either the E.
T V penetration or total outlet penetration how much opportunity. There is left or do you think about sort of where your framing of international growth going forward.
Well you know, we still have our businesses and most of the international markets. You know set aside Canada, where we're very developed yeah. We continue to have distribution opportunities. If I, if I looked at Mexico, I would say yeah traditional trade is an untapped and you know an area of opportunity going forward.
Look at the other markets in which we do business you know the bulk of the of the business in India is traditional trade and so there I would call. It more just getting broad distribution is the opportunity and building scale continuing to build scale in areas like Brazil.
Western Europe , we've had a lot of strength just in getting our.
Our brands in distribution across the board in modern trade you know in the regular trade there great.
Great success with race and we're seeing a growth in a lot of other countries through our export model, which is really just a distributor model, where we get our products on shelf.
A lot of that is in either western Europe or parts of EMEA.
Great. Thanks, Michel Thanks for your time.
Sure.
Yeah.
We have reached the end of the question and answer session and I will now turn the call over to Melissa Poole for closing remarks.
Thank you so much for joining us this morning I'll be available throughout the day for any additional questions. You may have have a great day.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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