Q3 2022 Hershey Co Earnings Call - Live Q&A Session
Greetings and welcome to the Hershey Company's third quarter 2022 question and answer session.
At this time, all participants are in 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.
Thank you you may now begin.
Good morning, everyone and thank you for joining us today for the Hershey Company's third 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 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 actual results could differ materially from those projected the company undertakes no obligation to update these statements based on subsequent events.
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 substitute for the financial information presented in accordance with GAAP reconciliations to the GAAP results are include.
In this morning's press release, joining me today are hershey's, chairman and CEO , Michele Buck and Hershey Senior Vice President and CFO , Steve Voskuil with that I will turn it over to the operator for the first question.
Thank you. Our first question is coming from the line of Andrew Lazar with Barclays. Please proceed with your questions.
Thanks, so much good morning, everybody.
Andrew Good morning, maybe first off on <unk>.
In the prepared remarks that you expect a strong top and bottom line performance in 'twenty, three I guess, given where the markets are it seems like items like pension and interest expense will be sort of incremental headwinds obviously for the group as a whole next year I was wondering if you'd be able to help level set us a little bit on sort of where some of these items. It looks like you do have visibility.
To might sit for next year and I guess, if they were material enough to kind of derail the earnings performance in the year.
Sure Andrew let me start with a little bit of an overview and then I'll, let Steve dive into a few more of the specifics. So overall, we believe we can deliver and an algorithm year next year. We believe our sales will be slightly ahead of algorithm pricing will be about comparable to 2021.
We anticipate that our gross margins will be stable, we will have a step up in investment as we reinvest reinstate some of the <unk> spend.
Now that we have more capacity available to grow we'd be able to take advantage of that and also to invest in capabilities to secure profitable sustainable future and we think all of that will net down to strong earnings performance that will likely be at the high end of our algorithm. So that's a little bit of an overview, but Steve.
And I'll, let you kind of go a little bit deeper yes, just on the discrete items kind of answer your question. A summary, first we don't see any derail or in terms of those discrete areas. We will have more pension expense. Our estimate today would probably be 5 million more year over year for next year on the pension side. This year, we picked up.
About 10 million of incremental pension expense next year I would again markets can change, but today I would probably estimate that applied twice that number for next year, but neither of those are material enough to shift the needle, yes, sorry, just to clarify that first $5 million was interest.
And then the pension probably about a $20 million.
Really helpful.
Yes.
Helpful. And then just lastly, I mean, as you mentioned, you've got incremental pricing on tap for 23.
I appreciate youre planning for greater elasticity than you've seen thus far which is prudent obviously you've delivered strong volume this year in the face of high single digit pricing you've got more capacity coming online I think AMC is expected to grow faster than sales next year.
<unk> entering I think the organic calculation to start the year and obviously strong underlying momentum. So I guess at a minimum shouldnt. These help at least mitigate.
The potential for building elasticities in 'twenty three I'm, just trying to make sure I'm not missing anything else on either side of the ledger. Thanks, so much.
Yes, I mean, I think that's the right way to think about it.
Michelle said at the top you know I think we've got a lot of positives in the story for next year.
Some of the things you mentioned roll through and I'm sure. We will have challenges, but we don't see anything yet.
Ailing sort of factor.
Thank you very much.
Thanks.
Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your questions Hey, Thanks, operator, good morning, everyone.
Hey, Michelle in the prepared remarks, you referenced consumer behavior, and maybe seeing some some changes.
And where people shop, I guess channels and pack types could you just elaborate a little bit more on that and maybe how how hershey's adjusting to that.
Yeah, absolutely. So we are seeing some of those changes and how they're spending you know Fortunately we are seeing them continue to spend but there is some re prioritization so specifically.
<unk> channels and value packs are selling well. We are also seeing some improvements in private label performance and really we're seeing this across the board.
Slightly more noticeable with lower income consumers, but really across.
All different income levels.
Within our categories. The trends have really remained very strong as the consumer continues to prioritize snacking and particularly sweet treats and obviously, we have minimal private label presence. So we continue to see that our products remain affordable for families and for consumers and we know that part of that is they want to reward themselves one.
Times are tough they also use these products to relieve stress and we think that those trends will continue I think on the class of trade basis, just to augment relative to the channel piece.
We have seen particular strength in mass and club and in dollar so certainly in channels that represent strong value.
Okay. Thank you.
Sure. Thank you.
Okay.
Our next question is from the line of Michael elaborate with Piper Sandler. Please proceed with your question.
Thank you and good morning.
Morning.
You you've got strong momentum on Reese's, obviously up I think it was 16% in the quarter.
Certainly, adding capacity is paying off even even pay day, which we don't hear too much about typically.
It was up very strongly behind some new capacity can you just maybe give us a little bit more specifics looking ahead in terms of how some of the capacity unfolds.
Given maybe like a five year outlook, but.
Or say next year would it be is it about a fifth comes over the next five years is there a.
Do we have to wait longer is there a bigger bump from near term.
Help us maybe think about some of the pacing because the capacity certainly is working when you come at it.
So we certainly have a I would say it's continuous.
Effort again, broadening our capacity certainly focused only on where we see those really strong returns.
Next year for example, we are planning for five new manufacturing lines to start up throughout the year and that includes three new Reese's line. So we do expect a pretty nice increase in capacity.
However, some of the investment that we have in 2023 will also be for production that doesn't come online until 2024. So so not all of the incremental spend directly relates to 'twenty, three but but we do have continuous capacity coming on line into the future years with a b.
Focus on 'twenty, three and 'twenty four.
Hello.
That's helpful. Yeah, its a little bit more near term skewed it sounds like.
And just on thoughts if I could follow up there.
Very strong momentum it looks like it came in about 40% ahead of what we had thought that the run rate was when you bought that business can you just point to what some of the drivers are and how to think about the sustainability of that kind of momentum.
Yeah, absolutely so on drops a big piece of our gains have been continuing to grow distribution as.
As we purchased the business there was significant opportunity, particularly on the east coast and with certain customers. We were somewhat underdeveloped with Walmart to Walmart was a big gainer on distribution, obviously, that's a huge customer at the same time. We're also focused on optimizing the can.
See my model and all of the spend to maximize impact and starting to drive the incremental investment in brand building, which.
Which is our model across our entire portfolio, which we think will give us further upside.
Beyond the distribution going forward.
The other thing I wanted to just clarify on the capacity piece is while we have significant effort in 'twenty three and 'twenty. Four there will be continued if you look across our entire portfolio continued capacity coming online into the future years beyond that as well.
If you look at confection snacks et cetera across the board.
Really helpful color. Thank you.
Thank you. Our next question is from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, Thanks, two very different questions.
Are there any.
Our initial efforts being made to try to consolidate your snack brands together in either route to market for or any other operating.
Operating functions my understanding is that they get to market in very different ways.
And then also for Steve I, just wanted to know if you can help us with seasonality.
In 2023 first half looks like a tough comparison.
But maybe that's just topics.
Okay.
Yeah, so relative to our snack brands.
To date, we have been running those businesses separately as we have had a dedicated focus on continuing to drive ahead, the amplify business and also to really integrate the <unk> business as we just took it over in December going forward. We are now starting to take a much more holistic look.
Look across all of <unk> with a focus as we go into 2023 on really how we integrate those businesses together across the board to really capture and leverage scale and synergy across everything.
Hi chain.
Marketing go to market etcetera. So that's really the phase that we are entering now and I think we believe that's how we will also begin to unlock some of the gross margin expansion that we need to go after on that business.
Yes, nothing to add that on the seasonality I don't think there's a big store. We've got we've got a big year last full stop firsthand second happened. So I don't think it's we're not thinking about big nuance right now first half versus second half.
I don't know if that's helpful.
It's simple thank you I'll take it.
Thank you.
Next question comes from the line of Ken Goldman with Jpmorgan. Please proceed with your questions.
Hi, just a very quick clarification first.
Michelle I think in response to Andrew's question, if I heard correctly, you said that pricing.
23 will be similar to 2001, I assume you, but similar to 22, unless I am not sure I heard you wrong, yes.
Yes, sorry about that.
That's okay I've lost time lost all meaning to me.
I understand.
And then really just a quick.
A quick summary of next year to make sure I heard you correctly. There. So you were talking about sales growth being very strong and you don't have an EBIT algorithm I think.
But is it fair to assume just to summarize that you're expecting very strong sales growth, maybe a little bit higher than EBIT growth, which in turn is a little bit higher than EPS growth with EPS growth still closer to maybe that maybe that 8% organic range with I guess, a small haircut from FX kind of summarizing that correctly.
Yes, I think you are in the right Zip code.
Perfect. That's all I have thank you.
Alright. Thanks.
The next question is from the line of Alexia Howard with Bernstein. Please proceed with your question.
Good morning, everyone.
Good morning.
I'm going to ask about the the high single digit increase in cost in 2023 I think.
Generally we've been expecting that things might get a little bit easier, obviously that is easier than what we've seen in 2022, but it's still a pretty big hurdle to get over specifically, where all where the pain points.
<unk> to go up.
How much of it is locked in.
Do you have good visibility into that and is it likely to moderate through the course of the year. So it might be higher in the first half versus the second half. Thank you and I'll pass it on sure.
Sure Yeah as I said, if it's high it's not as high as this year and to that extent like could be in a position when we give more guidance for next year to be to say, we are sort of stabilizing gross margins overall, but nonetheless still expecting high single digit inflation and where is that coming from you on the commodity side.
We still have some commodity pressure in some commodities, where we don't have a complete hedging coverage packaging costs logistics.
<unk> seeing inflation in people costs, some energy cost, but I would also say technology as <unk>.
Another one that's starting to be a bigger component and so across that basket, we're still seeing high single digit inflation.
I would hope by the time, we get to the back half of next year, Youre again, and starting to see more moderation as we start to lap more of those inflationary costs, but still expecting pretty significant lift next year.
Our visibility is pretty good.
With our hedging in longer term contracts I think we do have pretty good perspective on on that number today.
Great. Thank you very much I'll pass it on.
Our next question is from the line of Pamela Kaufman with Morgan Stanley . Please proceed with your questions.
Good morning.
Good morning.
Can you discuss the shipment timing dynamics that impacted Q3 results you pointed to earlier seasonal shipments and inventory replenishment benefiting top line in the quarter, So where our retailer inventory levels now and are there any additional timing shifts that we should.
Be aware of over the coming quarters.
And then just on the Q4 implied guidance which points to the.
The deceleration to low single digit growth is that largely.
Flexion of all of the inventory dynamics are or are there other factors contributing to the outlook.
Sure on the inventory timing for Q3.
The two big factors have been talked about were one.
<unk> some inventory build as he mentioned we didn't expect as much inventory build as we saw in Q3 again, what we and what we did see wasn't as big as we saw earlier in the year, but it was a factor of bottom point and then we also saw some seasonal pull forward and this continues a little bit of a trend of retailers pulling seasons and earlier and earlier until we talk about it too.
Point benefit in the third quarter from that as we look to the fourth quarter. We also expect we will see some seasonal pull forward with valentines and Easter So that will have some impact potentially on Q4, but the probably the biggest factor in the Q4 guidance really just the assumptions around elasticity.
And again being a little bit prudent as we think about whats happening with the consumer and not being quite as aggressive as maybe more recent elasticities we've seen.
Great and can you comment on current promotional levels you indicated that they are back to more normalized levels can you address what types of promotions you are implementing and how you're balancing higher promotions with the capacity constraints and then do you expect promotions to continue to step up next year.
Sure.
Yes, so our promotions are.
Pretty much in line with historical what we do promotion in this category. It's always our first objective to get display because these can drive this category can drive a lot of impulse. So a focus on feature and display display where possible.
And as usual, we always put a big focus on our core brands. So we may use news to create some excitement on a display but we know that our core brands are the strongest mover and that's really where the bulk of the focus will be.
So it's a bit where we are on promotion.
If we think about next year.
We think we'll be at about the same level as we've been there might be some shifts across across the quarters, but pretty much in line.
Yeah.
Great. Thanks, I'll pass it on.
Yes.
The next question is from the line of Nik Modi with RBC. Please proceed with your question.
Yes. Thank you good morning, everyone.
Hi, Joe.
I was just wondering in terms of growth drivers.
We've been getting a lot of good feedback on the pantry packs, especially in the online channel. So I was just hoping you could talk a little bit about that and what your insights are staying in and maybe how you where you can take that strategy going forward.
And then the second thing would be just on alternate channels.
Obviously F. D. M has been a very strong area for Hershey, but they seem to be a lot of pockets of opportunity and in other channels not measured and I just wanted to get your thoughts on that strategy as you move forward.
Yeah, absolutely so as we approach innovation, we've really evolved our strategy over time to continue to provide product news, but also really to look at packaging as a big unlock because packaging enables us to provide consumers with our core brands, which they love, but in a different packaging format that tends to open.
A new occasion and that can be very powerful and very sustainable and that's really what the pantry packs did as consumers are spending more time at home.
Almost the ability to have their own <unk>.
Single serve dispenser.
In their pantry or in the refrigerator if they so desire. So we're really pleased with how it's doing to date.
We still have some distribution upside opportunity to further capture them.
But it's done what we were hoping to and we will continue to focus on packaging for new occasions relative to non measured in alternate channels. Yeah. This has always been a focus for us I would say as capacity got tight we pulled back a little bit deep prioritized a little bit.
During COVID-19, but we're.
We're really leaning back in now and the team is aggressively focused on really trying to get our products everywhere that they possibly can.
Thank you I'll pass it on.
Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your questions.
Hey, folks good morning, Thanks for fitting me in.
Couple of questions. So first in prepared remarks, I think you noted that youre expecting growth trends on everyday products to moderate.
Can you elaborate on what Youre seeing and also comment on how this influences your view of.
How much more capacity you have to push price on everyday and whether or not you should be looking to layer on it a bit more promotion to counter whatever trends youre seeing.
So it's been pretty.
Pretty happy with the strong trends that we have seen on retail takeaway and certainly throughout the year, we've been trying to balance the.
Seasonal.
Sell through with everyday business.
And really look at the two somewhat holistically.
I think we've been held back a little bit as you mentioned through capacity. We're excited that next year, we open up a bit more capacity, which then allows us to reinstate some of the spending that we had pulled back on which we think will also provide some momentum for us going forward.
Okay.
Switching gears M&A.
Your track record of late has been pretty successful.
Your balance sheet. Certainly suggests you have capacity for more do you have organizational bandwidth to do more anytime soon or is or is it attention focused on integrating dodson and also it sounds like not just in <unk>, but.
Addressing the whole structure of salty snacks as you look to combine those businesses and leverage the synergies you've discussed.
I mean, certainly I would say job one for US is the integration and continued growth and acceleration of the entire salt tea portfolio. So we do really have scale. There now and a lot of opportunity ahead of US great top line momentum and then opportunity to leverage that scale to improve the margin.
Structure. So that's clearly job one that said, we are always looking and evaluating the marketplace and given the health of our balance sheet. We certainly would consider something that made sense for us that we believe that well yeah.
Understood. Thank you I'll pass it on.
The next question comes from the line of Chris Growe with Stifel. Please proceed with your questions.
Hi, good morning, good morning.
Hi, I just wanted to ask.
A little more of a near term question around the fourth quarter you had it sounds like you're going to have some further pull forward of next year's season next year 'twenty three seasons, and then I also think given easy shipping.
Some of the previous year, we had less shipping days in the fourth quarter of 'twenty. One I just want to get a sense of what that means for volume in the fourth quarter.
That's true seasons, and then a little extra benefit from the shipping day sector.
Yeah on the season side, it's not a net benefit because we pulled some of the Q4 into Q3 season sort of got a little bit of a deficit that will be.
Partly made up by full pull forward of 23 seasons.
That's probably the biggest piece in terms of calendar days and really not a big factor for shipping days.
You had two less shipping days in the fourth quarter 'twenty, one does that not.
Compare beneficially to this year or no.
Not I think I think the calendar early shift by maybe one day. So should this year. So it shouldn't have a material impact.
Got you.
Just a quick question on the gross margin as I look at the gross margin decline year over year and look at the margins by Division I'm just curious.
Is there more of a gross margin kind of lag or shortfall, obviously of pricing versus cost inflation shortfall in salty snacks first confectionery I'm just trying to get a sense of the pricing coming through confectionery should that benefit the margin and without therefore benefit. The overall gross margin more so or is it salty snacks it needs more pricing here has offset the inflation.
So theres a lot in there I think I've been placed.
Pricing on inspection is great and the plan, we will see we will see the full effect of that in the fourth quarter and there'll be a big factor in the 'twenty three outlook on salty, we have taken price that probably hasn't come to the market quite as fast.
As Michelle said, you know as we look at strengthening that business and the gross margins in and at the same time, continuing the rapid growth on the top line pricing as a lever like it like it is for all of our businesses that will continue to look at.
And what I'm pleased with as we look at the progression of the salting margins. Even this year, we started out the first quarter order of magnitude I think 200 basis points down year over year, that's improved sequentially and we would expect that to improve again in the fourth quarter. So as we get to the as we get to next year continuing to drive margin improvement in that business.
All levers available is going to be a high priority.
Thank you.
The next question is from the line of Cody Ross with UBS. Please proceed with your questions.
Good morning, Thank you for taking our questions.
Based on the prepared remarks, it sounds like your underlying volume excluding the seasonal shipments then retailer inventory replenishment was down is that correct and how does that compare to your expectations.
Q3, Q3 is roughly flat overall.
In line with expectations likes the fact, we're a little more inventory than we expected, but where we landed on base volume was more or less in line with what we expected.
Thank you for that and then I think you mentioned your chocolate market share was up versus pre pandemic.
I assume that dollar share can you just comment on how that compares from a volume share perspective. Thank you.
Yes that was dollar share and it is similar from a volume share perspective.
Okay, Great I'll pass it on thank you.
The next question is from the line of Jonathan Feeney with consumer edge. Please proceed with your questions.
Good morning, Thank you.
Michelle you mentioned in your prepared remarks, but a lot of.
Industry leaders have mentioned, while reporting pretty good numbers in the past couple of weeks.
Yes.
A sense of I think it was concerned about.
Okay.
Concerned about the stress that inflation was bringing to consumers. So I think that's certainly true and it's certainly an impact on retailers, but if I just.
Dived into the two that you have like where are you seeing that if anywhere.
As trade down behavior happening is in.
How would you think about I don't know prior periods, where.
There's nothing quite like this period, let's say consumer distressed accompanied by rising inflation I think we had something like that dynamic. It 2010, how did consumers behave as you look forward.
Does this go round with the consumer reacting to.
Tougher environment, driven by crowding out factor some other costs how does the how does this compare.
Yeah. So we remain very focused on the consumer and certainly we are aware of the pressures that are on them. What I would say is overall it has not impacted our total performance and overall product performance to a large degree yes. There are some shifts.
In terms of seeing more consumers buying a value pack purchasing in value channels and then certainly in other categories, where private label has really dialed up but I would say overall, we need to continue to be always focused on the consumer and when they could hit it breaking point, but to date as we look at our labs.
Just Steve we really arent seeing signs of that impacting our business that said, we're going to be very focused on it going forward because we don't want to we don't want to Miss a trend I would say historically, our category has tended to fare pretty well during these times because it is an affordable indulgence when consumers can't afford a lot about.
Other things.
Very clear thank you.
Our next question is from the line of David Palmer with Evercore ISI. Please proceed with your questions.
Thanks. Good morning, you mentioned in the prepared remarks that capacity.
Was added for Reese's and gummies and <unk>, how much of a capacity increase was that and where are you in any way constrained.
These platforms before this or is this just simply anticipatory of ongoing growth.
Yeah, we're not going to get into a lot of the specifics.
Around specific brand capacity just for overall competitive reasons, but yes, we were constrained on both and this capacity did allow us to unlock whether it was broader distribution.
Stating a promotion upping, our marketing spend selectively etc.
Okay, Yeah understood on that.
I wanted to ask on on convenience channels and single serve packaging.
Heard certain retail.
<unk> foodservice like convenience store foodservice have gotten stronger lately, I wonder where where's your volume inconvenience and single serve packaging. If you look at checkout counters to how does that compare versus pre COVID-19 are you. All the way back is is that ramping more quickly than some of your other packaging.
I would say that overall.
For convenience stores in total not specific to our business.
Some of the trends have moderated, particularly with regard to a unit purchase, though I'd say snacking and confection products continued to outpace the overall store and they are growing double digit. So certainly we had seen a pretty significant decline when consumers were not mobile and now that consumers are much more mobile than they were.
Where previously.
We've seen that business really come back.
Is that gonna be a meaningful help too.
Profitability mix or is it.
Not a big deal no not really I mean overall, we sell single serve in other units.
Other channels as well so no.
Thank you.
Thank you at this time I'll turn the call back to Melissa Poole for closing remarks.
Thank you for joining us. This morning, we look forward to catching up with you throughout the day to answer any other questions. You may have have a great day.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Okay.