Q2 2022 Hershey Co Earnings Call - Live Question And Answer Session
Yes.
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Greetings and welcome to the Hershey Company second quarter 2022 question and answer session. At this time all participants are in a listen only mode.
As a reminder, this conference is being recorded I would now like to turn the call over to your host Ms. Melissa Poole Vice President of Investor Relations for the Hershey Company.
You may begin.
Good morning, everyone. Thank you for joining us today for the Hershey Company's second quarter 2022 earnings Q&A session. I Hope everyone has had the chance to read our press release and listen to our prerecorded management remarks, 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 Q&A session. We will also post the transcript and audio replay of this.
Carl Please note that during today's Q&A session. We may make forward looking statements that are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the company's future operations and financial performance actual results could differ materially from those projected the company undertakes no obligation to update these statements based on subsequent events. It detailed listing of such risks and uncertainties can be.
And 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 morning's press release, joining me today are hershey's chairman and CEO Mrs.
Hershey Senior Vice President and CFO , Steve Voskuil with that I will turn it over to the operator for the first question.
Thank you well now be conducting a question and answer questions 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.
Thank you. Our first question is from Andrew Lazar with Barclays. Please proceed with your question.
Great. Thanks, so much good morning, everybody.
Good morning.
As you discussed in the prepared remarks inventory refill has certainly been nicely additive to volume growth through the first half of the year.
Where do you think retailers are at this stage and how much more of a benefit I guess can this be in the second half from the prepared remarks from reading it right. It seems to suggest maybe the the bulk of that inventory refill.
Is sort of behind you at this point and maybe no longer enough to necessarily offset what volume elasticity you are seeing so just some clarity there would be helpful.
Yes, that's exactly right, Andrew we saw pretty strong inventory replenishment in the second quarter as we commented.
A portion of that was pull forward from the second half so really a timing move so as we look at the back half, we're really not seeing any additional meaningful inventory replenishment in the second half guidance.
Alright, and then I guess.
Sort of following on that I guess as you and others.
Slowly start to get back to a sort of a better inventory position than some of the supply constraints slowly you use I guess not surprisingly we're starting to hear from you think from Hershey and others there'll be in a better position maybe for the first time in a while right to begin to kind of ramp back up merchandising activity to sort of drive volume and traffic.
I can understand why in this environment, some might simply see that as sort of retailer concessions given all the pricing that's come through in the industry and with commodity starting to rollover I assume you see this as more getting back to a maybe a more normal cadence of spending and really looking to drive volumes and traffic and protect elasticities.
Got it that I still think it can be in many cases incremental to the business, but I was hoping Michel you could kind of comment a little bit on that and if you could thank you so much.
Yes, absolutely.
We have always talked about our investment model of our model and running the businesses, we strongly believe and investing to drive the top line and with our strong margins that enables us on the bottom line. So we always want to be spending to the consumer advertising our brands, having the right levels of promotion and the right levels of innovation and as we.
Mentioned earlier, given some of the supply constraints, we didn't have to pull off on that a bit just because it didn't make sense to make those investments given some of those constraints, but we very much look forward to re upping the investment as we look at the second half.
We have always planned an increase both in <unk> as well as incremental merchandising coming back online.
Thank you.
Okay.
Thank you. Our next question is from Alexia Howard with Bernstein. Please proceed with your question.
Good morning, everyone.
Hi, Alexia.
Hi, there.
So can I ask about the you talked.
Talks about.
But the general supply chain disruption that youll still experiencing can you talk about exactly where the pain points are and I am thinking.
Our cost of raw materials packaging labor.
Where are the things that you're really wrestling with at the moment and all you're seeing light at the end of the tunnel at this point it sounds as though things are getting a little easier and then I have a follow up.
I mean, I think generally we continue to see struggled across the supply chain how I'd characterize it is what those are have evolved.
So where we are now I would say.
Early on it was some of the basic.
Logistics issues.
Largely driven by labor and as we've evolved I would say, we're now starting to see bigger concerns relative to scarcity of ingredients.
Needing to leverage different suppliers at higher cost and price points in order to secure production.
And then also the geopolitical environment has put certain strains on the business certainly the Ukraine, Russia issue created some scarcity in issue with ingredients and more recently there have been additional restrictions from Russia on the EU relative to natural gas, Germany will be impacted that's an area, where we source a lot of equipment.
<unk>.
As do many of our suppliers. So I would say that that's kind of evolved Steve would you add anything on the only thing I would add is that where we're also starting to see more cost flow through from third party co Packers coal met coal manufacturers and.
Those are under contract and so it sort of happens as those contracts renew but they're facing the same cost pressures and disruptions that we're facing and so we're starting to see more of that impact the P&L as well I guess I'd also just add we have made significant progress in investments in capacity significant investments and so part of our short term pain was once you make.
Those investments that take some time to get them up and running to get the.
The lines actually in place and so part of some of the relief. We're seeing is the gradual coming online all of those capabilities as well.
Which is helpful.
That's super helpful. Thank you so much for all the color there and just as a follow up how big is India. These days you called it out in the prepared remarks Kevin.
News on India for a while and I'm just wondering.
How do you avoid the same.
Coming off that you had in China several years ago, I know, you've made backed off from China and doing it more arms length. These days.
No.
Why is why is in the euro different market why cannot walk over the longer term. Thank you and I'll pass along.
India is still.
Relatively very small for us growing high double digits.
Back when we really made our decisions on China and India for me. The key difference in India is the cost of doing business in that market is very different.
Immediate cost labor costs and so in both markets. We felt we had the potential to drive topline, but as we really did the assessment and looked at the NPV of our investment India is a market that we feel good about our prospects of getting to profitable growth.
Frankly, we're already in a place that we like relative to where gross margins are on that business very different than where we ever were in China.
Great. Thank you very much I'll pass it on appreciate the color. Thank you.
Thank you. Our next question is from Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, Michelle Hi, Steve Hi.
Hi, good morning.
Good morning.
I thought the comments about 2023 were pretty encouraging, albeit at a pretty early stage.
You said that you expect your pricing actions.
Did the partially offset by high single digit inflation.
And then you also have productivity so.
Is that do you expect the pricing lap two to offset inflation and Cogs inflation in 2023.
Because you've had lagged in 2022, so I guess, that's a positive and then maybe you could talk about the advertising increase that you're you're thinking you need to do.
How much of that is just restoring what whats kind of lag so far and.
How do you think about how much investments needed.
Sure, Yes, I mean for 2023, we're still talking at a pretty high level will get a lot more fine tuned as we get through the third quarter and get more picture for next year, but we are seeing high single digit price is the expectation that come through volume wise, we'll watch and see how consumers being able to know more about elasticity as we come out of this year and as you said overall.
Inflation, we're still seeing high single digits. When you Peel into that we will have some I expect some commodity impact steel as we will be rolling off the more favorable hedges into hedges that were struck at prices that look more like recent times, we still see logistics and third party third party cost impacts in there and I think it's too soon yet to.
Say, whether the price is going to fully offset all of those inflationary impacts won't know more again as we get through the third quarter towards the end of the year, but we do want to increase advertising and we called that out in the remarks, we see that growing faster than the rate of sales and as you said, it's really as Michelle said, just a few minutes ago, making sure that we continue to reinvest.
Best in brands reinvest in consumers and have a healthy level of investment once we have the portability.
Okay did you say that Steve that you expect your your pricing to be up high single digit next year because of the flow through.
That's correct.
Okay alright, thank you.
You bet.
Yeah.
Thank you. Our next question is from Ken Goldman with Jpmorgan. Please proceed with your question.
Hi, Thank you.
One quick one and then a longer one on Halloween I just wanted to get a sense if possible for the North America salty snacks business the margin going forward.
Seen some volatility there I just wanted to kind of get a sense for.
How do you sort of model that in the next couple of couple of quarters, given some of the <unk>.
As we have in our model at least our model on that one.
Sure be happy to take that one so as you saw in Q2 looked a lot like Q1, we continue to see higher raw material costs and logistics costs that for these two quarters are more than offsetting the price that we've taken so far.
That said, we've announced more price increase in the second quarter second quarter and so as we roll forward through the next two quarters, we do expect to see some stability and release. There. We're also going to begin to lap in the back half some of the higher logistics costs.
That we've been talking about and so that will provide a little bit of relief there as well and then longer term as we've talked about on <unk>.
Last quarter's call we continue to advance the structural changes that we need to do for that division, so things like setting up.
Or formalizing the supply chain some of the back office efficiencies that we need to put in place and longer term that will drive more structural improvement that right now.
Fighting the balance between pricing and inflation in commodities cost.
Thank you for that and then I wanted to ask about Halloween, it's early to be precise, but you guided to high single digit sales growth.
And you said that part of the reason is you're still capacity constrained.
A little curious why the guidance wasn't higher.
Maybe it's just there was a very difficult comp.
Or you're facing a difficult comp from last year.
Maybe just a little bit of conservatism, because it's still early but I would.
I would have expected maybe capacity to be less of an issue just given how important the holiday is.
And maybe you could sort of be rather than an all hands on deck mode, right and producing as much seasonal candy as possible, but maybe that's just an overly simplistic view of your supply chain, but I'm, just curious why that guidance wasn't a little bit higher.
So Ken as we look at the business, we had a strategy of prioritizing everyday on shelf availability. It was a tough decision to balance that with the seasons, but we thought that was really important and so that was a choice that we needed to make.
We had the opportunity to deliver more Halloween, but we werent able to to supply that.
And we were really producing we begin producing Halloween back in the spring and Thats really when we needed to make these key decisions on what we are going to produce so.
Laid out to make we feel really good about having high single digit growth, but we also feel good about as we get into the future.
Being able to have more capacity to really fulfill more of the demand that we see during the season.
All hands on deck.
Make no mistake.
Understood. Thank you so much.
Thank you. Our next question is from Jason English with Goldman Sachs. Please proceed with your question.
Hey, good morning folks thanks for Slotting me Jason.
I guess I wanted to start on capacity.
There's a little bit of conflicting messages here. Thank you.
On one side, you've got enough capacity to be refilling retailer inventory levels, but on the other side you don't have enough capacity to meet demand for some products.
Can you help me help me.
Two conflicting things and also give me a little bit better understanding of where the bottlenecks are and what the what the pathway and timeline as to relieve those bottlenecks.
Yes, so so capacity is.
This constrained, but obviously in certain parts of the portfolio more than others. So there are certain places we have no constraints and there are other places that we are more constrained.
We've shared previously that that <unk> is one of the areas, where we have seen high double digit growth for extended periods of time, it's our very largest brand. So that's certainly been a pressure point and then there are a few other places that have been pressure points and where we've needed to make tradeoffs.
In order to prioritize some parts of the portfolio. So we continue to work through a capacity investment plan to address where the soft areas are and bring capacity online so that might be part of the mixed messaging is there are certain places we're not constrained others that that we are.
On.
Refreshment, specifically ice breakers Mint is one area, where we had some production difficulties as we ramped production back up after the Covid softness.
And so that's one place as well and that we're continuing to work to get more supply available does that help.
It does it doesn't show a lot of light on when do you think the issues will be behind you, but it certainly helps in understanding where the issues are.
So as we get through the issues I would say, we're making I would characterize it as gradual improvement.
Certainly we are I would say quite constrained this year, we see that gradually improving as we get through 'twenty three.
And as we get to 'twenty four we feel much better about our ability to be able to fully meet demand. So that's how I would characterize it Steve any color around here in the last three years, we've invested on the order of $800 million on capacity, mostly in the core and so we've got.
13, new lines in place coming online we refurbished 11.
So as Michel said over the next year.
Year or two we're going to start to see more significant capacity available. If it helps the investments that we've made will result in about a 15% increase in our internal volume production capability that should allow us to catch up but also to deliver some of that future growth for sure that's helpful.
I wanted to come back to Rob Moskow question real quick.
I was surprised that you were offering color on 2023. This early it's arent characteristic of you and it begs the question of why.
I guess, Rob Rob showed one interpretation of Hey, you have inflation, but your price above it don't worry gross margins are weak now, but they'll come back to growth next year I guess, that's one way to interpret it. The other is your emphasis on we're going to lean into spending next year. So don't get out over your tips in terms of how much margin flow through is going to drop to the bottom line.
Which where those two interpretations do you think we should be leaning towards.
Yeah.
I would just say, it's still pretty early we're trying to just give some broad movements on the topline and inflation and thats really the part that we can share as it we're learning more every month and quarter that goes by it will have a lot more to share as we get to the end of the year.
So really not trying to get ahead of our Skus just extending some of the color we see right now.
Jason if I could just add a little bit was just related to some of the pricing that's in the marketplace and expecting the comp trying to put that in perspective.
Round how.
How much 23 factored into that choice and just trying to make sure that everybody was understanding some of the inflation that we see coming in in 'twenty three to help put some of that pricing in perspective as well.
Sure for sure Alright, Thank you.
Yeah.
Thank you. Our next question is from Bryan Spillane with Bank of America. Please proceed with your question.
Thanks, operator, good morning, everyone.
Good morning.
Just wanted to.
Follow up on.
I guess, the just the commentary around inflation.
I guess two things Steve one.
You mentioned you had mentioned in the call that there is some of the pressure is like scarcity of ingredients and it's more than just like market based type things right. So.
I'm just trying to understand is just how much of the sort of increase in Cogs that you are experiencing now.
Maybe a more permanent shift and how much of it is still.
Sort of a function of just.
The current environment and maybe there will be some.
We will beef disinflation at some point in time, so just trying to understand how much do you think is really just hey look this is narrower.
Permanently rebased higher cost.
Or is there or do you think some of this could be more variable when you get some disinflation in the future.
Yes, it's a really good question and it's hard to answer that one with precision as to look at all the moving pieces. There are clearly some that we would see as temporary scarcity issues.
Hopefully some of the commodities pressures that are being influenced by events in eastern Europe things like that on the other side, we've seen more labor inflation and other things that could prove to be more structural and so again, if we get to the end of the year, we give some guidance for next year I'll, probably give some more color on that but it is a mix some are temporary and some at least have the potential.
To be longer lasting that said, we also focus on productivity and continuous improvement every year and extend the goal of that program is to be able to more than offset over time some of those structural costs.
And so that also has to continue to advance.
Right right right. Okay, Alright, that's all I had thank you.
Thank you.
Thank you. Our next question is from Michael Library with Piper Sandler. Please proceed with your question.
Thank you and good morning.
Good morning.
I just wanted to come back to dots, which obviously is up very strongly I would love to understand a little bit more some of the dynamics there how much is distribution driven.
Maybe more importantly, how much distribution upside runway do you still have left.
Sure. So we are absolutely very pleased with <unk> performance in the marketplace and the momentum that we see.
I think what we're really happy about is we continue to gain distribution, but we are maintaining our velocities as we continue to broaden reach and that can be a challenge to do as you continue to broaden reach into sometimes some of the smaller.
Accounts so all.
All the trends are in line with our expectation that retail sales growing about 50% over the past 12 weeks share up about 370 basis points. We are right now lapping some large distribution increases from prior year. So we do expect to see a little bit of softening in trend as we overlap that but we do have.
<unk> distribution upside as we took over the business. The distribution was really concentrated primarily in the center of the country and the west and we're really still filling out the east and importantly, just making sure that we have the right.
Placement in stores, and then of course, beginning to actually market and.
Drive consumer messaging to the brand, which we think will further drive upside and velocities.
Okay. That's helpful. Thank you.
Just a quick follow up on the pricing I know you've said you've got at least most of maybe not all of it Thats announced is there.
Any of that.
TBD or to be negotiated or is it all locked and loaded and just a question though.
On the clock ready to go out the door.
Our recent announced pricing action is being executed is going as planned and we're starting to see some of the new retails in the market already.
We feel good that we really took a consumer focused approach for the right retail price points and we're also beginning to reset some of the promotional point so overall.
The prices are moving in line with our recommendations and our expected ranges.
And we are pleased about that is we want to really move ahead with further investments in the business and capacity in consumer spending.
New capabilities and the right programming and all of this will allow us to do that to drive profitable category growth.
Okay, great. Thanks, so much.
Okay.
Thank you. Our next question is from Chris Growe with Stifel. Please proceed with your question.
Thank you and good morning.
Good morning, I just had a question first on your the recent price increases you've put into place.
In particular cross confectionery.
I guess to understand I guess, you see very little of that coming through this year. It would seem like some would come through at very little and then just to what degree that's caused you to build a higher degree of elasticity into your second half assumption I just want to get a better feel for that.
Sure, Yes, I mean, it's right most of it will impact next year, we will get a benefit in the fourth quarter, but even a portion of that benefit we're reinvesting in with the trade and to drive merchandising and so forth, but most of that will impact next year in terms of elasticity assumptions.
We do have in the back half.
<unk> that is.
A little bit better than what we've seen historically, but a little bit worse than what we saw in the first half it actually looks a lot like the second quarter. If you adjusted for the volume replenishment of that level of Alaska.
The assumption for the back half and then of course the range on guidance chemical was up and down from there.
Okay, and then one related question to that would be do you expect pricing to sequentially accelerate in the second quarter.
Sorry in the third quarter from the second quarter or maybe more Q4 with the confectionary, partially coming through.
And then do you believe you can grow volume in the second half of the year you had some really strong volume trends to date.
Yes, so we don't see sequential improvement in the third quarter, we do in the fourth quarter and that's when we'll see the beginning effects of the price increase and we don't expect to see volume growth again with that last two city impact combined with some of the pull forward of the value of the inventory replenishment from the second half into the second quarter.
Okay.
All I had thanks so much.
Thank you.
Thank you. Our next question is from Cody role with UBS. Please proceed with your question.
Good morning, This is Simon Megan filling in for Ross.
Could you give some additional detail.
Ladies and capacity coming online next year does this only impacting lease and how much of an impact than we expected.
Yeah.
So most of the capacity that will be coming online is focused on the core Reese's won a significant component of that I don't think were going to be specific about exactly how much is coming on when.
That is the focus of the capacity.
Gotcha, Alright, and just one smaller question, obviously, dorset, demonstrating incredible growth largely by distribution gains.
Moving forward you expect to change your consumers Trialing, new brands and products when budgets are squeezed more in this environment, perhaps sticking to what they're comfortable with.
It's a good question I think.
Ross Snacking, we tend to see is consumers.
Very much let their brands. So if you look across total food.
As budgets are tighter certainly.
Private label brands have grown share versus across snacking private label has not and consumers tend to select their brands. So I think that.
I think that consumers will continue to try new brands given that they have a real focus on brands within snacking. So we will closely monitor that but at this point, we haven't seen any concerns around the slowdown.
In trial as a result of that.
Great. Thanks, so much.
Okay.
Thank you. Our next question is from Jonathan Feeney with consumer edge. Please proceed with your question.
Hey, good morning, and thanks for taking the question and great quarter.
As far as pricing over the next six to 12 months.
We have if we did have a moderating cost environment.
Worked through a lot of ups and downs in cost in this business how does the Congress.
So much conversation so much acceleration in pricing much of that headline cost driven how does it work.
If what changes about the conversation if costs move sharply in the other direction like they did in grains. For example at least so far I'm off their peak cost moderate how do you handle that to people does it typically play out that it's increased promotion do you see decrease list prices or do you see no impact in just a significant increase in gross margin.
Thanks.
Yes, I mean, our focus is always on driving profitable category growth and looking at how we can invest to do so we have a deep list of investment priorities and growth driving opportunities and so we believe that this enables us to really invest.
To unlock whether that is in capacity whether that is in the right consumer marketing support whether that is in more impactful promotions investments in innovation technology et cetera.
So we like to invest back in the business and I would say that the overall approach and strategy that we take.
Okay. Thank you.
Thank you.
Thank you there are no further questions at this time I would like to pass the floor back over to Michele Buck for any closing comments.
Thank you very much for your time today, we appreciate all the questions and I know that many of you will have follow ups with Melissa throughout the day. So thanks.
This concludes today's conference.
You may disconnect your lines at this time, thank you for your participation.
Yeah.
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Yes.