Q4 2022 Hershey Co Earnings Call - Live Q&A Session

Greetings and welcome to the Hershey Company fourth 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.

Now I'd 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 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 live Q&A session. We will also post the transcript and audio replay.

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 as a substitute for the financial information presented in accordance with GAAP reconciliations to the GAAP results are <unk>.

In this morning's press release, joining me today are hershey's, chairman and CEO , Michele Buck and Hershey's Senior Vice President and CFO , Steve Voskuil with that I will turn it over to the operator for the first question.

Thank you at this time, we'll be conducting the 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. Kim 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.

Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Thanks, so much good morning, everybody.

Good morning, Andrew.

I guess, just one for me I'm trying to get a better sense of how youre thinking about elasticity for 'twenty three versus what you saw in 'twenty, two which was very little and what percentage increase in capacity Youre expecting for this year and I guess I ask because if elasticity where to stay as benign as it has been.

And you ramped some capacity I'm trying to get a sense of whether it could render your flat to slightly down volume outlook for the year.

Somewhat conservative or continued capacity constraints limit the potential for topline upside from here.

Yeah. Thanks, Andrew as we look at price elasticity, we are assuming that they will be closer to last year than they were to historic but not quite as good as last year and as we look at our capacity, we will have low single digit increases in capacity, which.

Do give us some ability to flex with demand as we see it.

Steve anything I no that's fine.

Excellent that's it thank you so much.

Thanks, Andrew.

Thank you. Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Hi, Thanks, and congrats everyone for such a great year.

I wanted to note that the guidance for 'twenty. Three is is more aggressive than normal like you normally start the year, rather conservative, but this year, you're guiding above your normal algorithm and I wanted to know if you could kind of isolate what the key drivers are and why.

You've raised it compare to three months ago.

Maybe drilling down it looks like gross margin is coming in better than you thought maybe you could explain why and then also on market share are you expecting market share gains in confectionery and 'twenty three.

Sure let me start.

Yes, so just on the big movers on the top line, absolutely price driven and good visibility to that we saw that effect be part of the driver for the fourth quarter performance, but we see that carrying forward, especially through the first three quarters of next year.

And we do have elasticity Packer and as Michelle said in the last question.

Our planning isn't quite a down to the levels of historic last history, but something that looks more like last year.

Sort of dropped further through the P&L, we do see some benefit from the gross margin side as we see more stabilization in the pricing coming down and some cost efficiencies.

And a return to more historic levels of productivity that will still have <unk> for more productivity, but at least this year, we're starting to see something that we haven't seen in the last two years. So those are some drivers through the P&L of that bar on the on the market share side, Yes, we do expect to have positive market share next year I think that's one that we're disappointed.

This year and we want to see turn the other direction next year, yeah, and some of that market share will be helped by the incremental marketing investment as we've taken that up as we have additional capacity online and certainly the additional capacity as well as we think about the pacing of the market share you should think about it relative to the beginning part of the year.

<unk> will be slower and we won't see those declines probably till we get into the spring, but once we hit this spring that will really kick into gear. We know that we had some lost opportunity this year around season that we weren't able to.

We'll still totally all of the orders and then also a little bit of a mix impact from refreshment being.

Being a rebounder.

Given social behaviors, but.

We think that will neutralize going forward.

Okay. It makes sense and just wanted to follow up.

On the gross margin side or your cost inflation costs coming in better than you thought or is this really just productivity has accelerated more than you thought.

Yes, it's probably more on the productivity side, we have pretty good visibility into the Cogs costs with the <unk>.

Hedging program at software, particularly on commodities and we're still expecting high single digit year over year inflation through commodities and 11 material items in mid single digits on things like labor and logistics and other supply chain costs I don't think that those assumptions have changed much from our outlook, probably a little bit more productivity.

Great. Thank you.

Thanks.

Thank you. Our next question comes from the line of Ken Goldman with Jpmorgan. Please proceed with your question.

Hi, Thanks.

You are guiding to a gross margin of 44, 5% next year I'm just curious for this coming year, what do you see as a I guess quote unquote normal level. If there is such a thing in this kind of environment and I guess more specifically if you can.

<unk> gross margin by a healthy amount in an inflationary environment is there any reason it can't ultimately get back to 45% or above.

Sure, Yes, I mean, our model is it is.

Is growing gross margin every year that would be the goal thats really part of the growth algorithm and so we've had two years, where that's been a challenge we see that now turning for 2023 and really getting back on the algorithm and so I would like to say price and inflation agnostic in terms of the strategy. How we get there we will change based on the external environment.

Yes, we do see restoring to gross margins that we have an app.

Frankly, continuing to drive that forward.

And then how do we think about the breakdown of sales growth and operating margins by segment in 2023, and you gave a little bit there, but are there any unusual items, we should be aware of for either of these segments. Just as we consider our models maybe drivers that aren't necessarily apparent at first glance.

Yes, the only things that are unusual or different if I kind of go to solve and we mentioned some of this in the remarks, south he's going to have strong topline.

<unk> that we're also expecting to see gross margin improvement year over year, we saw some of that in the fourth quarter finally, seeing pricing catch up in that business a little bit to inflation.

Still some room to grow, but we will see some reinvestment below that and so we're going to activate more against the brands next year, we're going to do some capability investments between lines to really scale up the infrastructure and part of that infrastructure is the ERP transition that we talked about in the prepared remarks, and so so that's probably the one area where I see.

Strong sales growth gross margin improvement less drop through to op margin that we might see in a normal year on the back of those capability investments.

Other than that I think the other segments are probably pretty traditional in terms of the growth characteristics.

Thank you.

Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question.

Thanks, operator, good morning, everyone.

My question. My question is just around the.

But the advertising and consumer spend investments and I guess I had two questions. One in the prepared remarks, one of the things you've talked about investing in is workforce.

So I wanted to just understand is that.

Like more merchandisers and people in the field or something else and then maybe I'll start with.

One other follow up.

Yes, I mean, as we look at some of the investments that we're making in our employee base clearly one of our key strategic goals. This year is really to integrate scale, our <unk> business and so we are adding some incremental talent there to really make sure that we have the right skill sets and that we have all the.

The employee base and talent needed to do that heavy lifting and the work some of that wholesale around improving our planning system. Some of the things that when you buy a smaller company we need some more sophisticated capabilities. Then obviously given a lot of the work across the business on supply chain, where we are continuing to invest to build capacity in Brazil.

You can see in the network, we have made investments in supply chain talent as well.

Okay, but its not specifically, adding merchandisers are like more people frontline salespeople.

Oh no no okay. Okay, and then the second just with related to the kind of the thinking behind the double digit increase in advertising and consumer spend is that partly.

Sort of.

A function of just.

<unk> has been.

So persistent obviously, you've got price increases on your own product lines, but consumers are just seeing.

I've seen a lot of inflation across a lot of consumables.

Is it.

If you're going to have that level of pricing you really need to advertise in order to sort of make sure consumers stay engaged because they will have to start making some choices or was there something else that.

Kind of drove the decision or the need to increase advertising at that rate.

Yeah, absolutely. So you know our long term model, we believe in advertising we've seen the impact in the returns that we get on advertising in terms of having very strong rois. So we take it very databased approach to media spending and we invest where we see that incremental profitable growth overtime, we do know that that.

Advertising builds consumer connectivity and we know that that consumer connectivity is what part of what helps us to have the elasticity that we do.

People are connected to our brands and during the tough times, we know that that connectivity leads to them continuing to buy so yes. It is important during an inflationary time and we've done statistics over that analysis to validate that and then as you know we've reduced spend last year really due to capacity constraints and we did see an impact in demand on <unk>.

All of our brands and so those are really the priorities, where we are reinvesting this year.

We're also investing in some of our white space opportunities like gummies and better for you to strengthen the business as well as our Sophie brands, where we're really not a major growth mode, gaining household penetration gaining market share and we want to continue that momentum.

Alright, Thanks Michelle.

Sure.

Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Thank you and good morning.

Good morning.

I just wanted to start by following up on the spending.

Could you give us a sense.

I recognise last year, adjusted spending to match or better align with the capacity limitations, but.

Would this year be restored levels to sort of the optimal targets or do you still see that.

<unk> into next year as well.

I'm trying to understand the sense of if youll be back on your sort of steady run rate or kind of ideal level or if we're not even quite going to be there yet until maybe 2024.

Yes, I mean, we are always looking at the returns that we're getting on our spending and making decisions.

A decision.

As we go forward based on that so we think that we're we're in a reasonable ZIP code I think we've said before that we don't think we have to go back up to the very highest levels that we were at historically, we've done a great job over time.

Getting a lot of efficiency getting very tight and are targeting so that we're getting even greater returns, but I wouldnt also commit that this is the high mark.

Which we're not going to move above we're still probably not quite back to exactly the point, we want to be.

Okay, that's really helpful.

Just wanted to unpack a little bit more if we can comp.

Comment you made in the prepared remarks about seasons being a growth driver.

So it is off to a great start obviously last year went really well as well and so just would love to understand a little bit better how that unfolds and how to be thinking about that.

Yes, we continue to anticipate very strong growth in the seasons, we've continued to see that in the category.

Consumers.

During the past several years.

Have you been dialed up their interest in season. So it is a.

A strong part of our portfolio, it's a place where we do very well, it's a place where there's a lot of emotional connectivity.

As an anchor events people want to participate in those anchor events with the brands that they love and so we think that there is opportunity. We had some mixed demand that we werent able to fully fulfill because of capacity and we're going to be in a much better position this year to be able to more fully capture that opportunity and now the first part of the year.

I mentioned earlier from a share perspective, we won't be.

As strong as we anticipate that we will be for the seasons towards the back part of the year.

Okay, great. Thanks, so much.

Thank you. Our next question comes from the line of Cody Ross with UBS. Please proceed with your question.

Good morning, Thank you for taking our questions I just wanted to go back to the last question on volume and perhaps on pack cadence throughout the year, we have increased capacity for seasons coming on quite you're also lapping the over shipment in the first half.

Sure can you just unpack a little bit how you expect volume to progress throughout the year understanding that you expect for the full year to be flat to slightly down. That's my first question. Thank you.

Keith can you talk about them going into the first part of the year.

Seasons, we've got already identified the volume and shipments there. So as Michelle said, we still were dealing with some capacity constraints leading into the seats in the front part of the year. When you look at the year overall, we're not expecting any big material differences by quarter for volume.

Okay. That's helpful. And then just one last question on capital allocation here Youre at the low end of your leverage targets are over the long term are you beginning to look at making additional acquisitions or perhaps returned more cash to shareholders in the upcoming years.

Well I'd, just say job one right now for US is integrating the amazing acquisition that we bought.

Pirates and dot and we're <unk>.

That's going to leverage their full potential.

However, we do always continue to be in the market looking at assets that can continue to advance our strategies and expand our portfolio appropriately into high growth.

Consumer demand segments, and we certainly do have a lot of balance sheet flexibility to be able to do the right M&A. If it becomes available that's right and I would say more broadly from a capital allocation standpoint, you are no major changes, we definitely want to be giving back cash in repurchasing shares as part of our strategy that puts good tension on the internal investments.

And M&A to make sure we're getting the best return and so that's an area. We'll continue to monitor we've got a lot of Capex. This year and so that's one thing that we are.

Taking into consideration as we look at the overall balance of capital allocation.

Yeah.

Thank you. Our next question comes from the line of Chris Growe with Stifel. Please proceed with your question.

Hi, good morning.

Good morning, Hi, I just had a question first if I could.

A follow on to an earlier question, but in particular in the salty snacks division with the margin being so strong in the fourth quarter and reaching over 20%.

Was there anything unique to the quarter and then I certainly heard about investments you want to make both.

Both internally and advertising throughout 2023.

So just want to understand how you expect the margin to fair throughout the earnings margin expand but just not to the level at which it did here in the fourth quarter.

Yes, we're really pleased with the fourth quarter finished at probably two things drove that one we did have easier lap in the fourth quarter and then second.

But as we said earlier, we are seeing pricing catching up a little bit more to some of the inflation that we saw over the course of the years, you've got a little bit of a benefit of that as well as we look to our margins for that business going forward into next year, we want to again on the gross margin might expect to see some continued advancement. We've got a lot of plan still to optimize that business.

And we've talked before about streamlining the back office streamlining the supply chain network better integrating all of that with our existing Hershey systems, and so forth and so in fact, we'll talk more about that when we get to our March Investor Conference.

First in time on that.

But have aspirations to continue to see that profile up over the course of the year, but as Michelle said, we are going to reinvest some of that back between the lines to accelerate topline to invest behind the brands and then on the capability investments like ERP.

I'd say the key takeaway is we have still high margin aspirations for that business as we look forward over the next couple of years and most of those will occur over the longer term. We don't expect significant margin expansion on margin expansion in 'twenty three yes. Okay. That's helpful. Thank you and then just a quick follow up if I could on to understand how inventory.

Well first of the year, you talked about depleting inventory late in the years, you've convert their move to the new ERP system should inventory growth through the year and then you depleted or does it hold this level and then it goes just goes lower as you.

Kind of move that inventory out of you built it already I guess is the question or do you expect to go more.

Yes, we haven't built it all already I think there will probably be some.

Build not that material I mean, theres a limit to how much salt inventory, we can bill, but as you said when we get to the fourth quarter, we expect a pretty significant depletion and thats really just to allow the cutover between systems and so on a net net basis that will look like a negative for the year for that business, we would expect to see that come back.

Next year, probably with a strong start to the year.

Okay.

Thanks, so much for your time.

Sure.

Thank you. Our next question comes from the line of Nik Modi with RBC capital markets. Please proceed with your question.

Yeah. Thank you good morning, everyone.

Hi, Michelle Hi, I was hoping you could just comment on fill rates kind of where you guys are now versus kind of where you'd like to be and I know things are below where they have been historically just curious is that just a function of capacity. That's also a labor component to that and then I had a bigger picture.

Questions.

Yeah, So I would say our fill rates are much better than where they were there's been some significant improvement versus last year as we've been able to invest in capital and get additional.

Capacity on the ground so.

And really there is minimal impact from labor. It was really largely very much tied to capacity now we did staff up in labor to enable us to be able to obviously execute against the capacity and the incremental line.

But.

We are seeing.

Less network disruption that we've seen in the past not all the way back to.

The perfect situation it was before the pandemic, but it has certainly improved.

Great. Thanks for that color and then just the bigger picture question as you know look this these categories, especially on the on the chocolate and confectionery.

Confectionery side.

I think clearly we can see a renaissance and maybe we can attribute some of it to COVID-19.

But I'm just curious like what does your research internal research say about what's actually going on with the consumer and these categories. Because I think we can all agree that underlying trend rate has been much better than I think anyone would've expected a couple of years ago.

Well certainly we know that snacking has been on the rise has continued to be on the rise as the consumer behavior pre pandemic and also post pandemic.

No that there still is a bit more at home behavior versus.

So cutting back on going to restaurants, and certainly that's a benefit across packaged goods snacking.

We also know based on our insight that consumers are interested in snacking and particularly in confection and chocolate.

On two diametrically opposed parts of their emotional state one is when they are incredibly happy and it's a shrink time and they want to treat themselves and the other is when there are down times and they want.

Right spot, but they do view these categories, and especially chocolate as a part of kind of emotional wellness.

What it does and how it makes them feel and then of course I think the more the the more that we interact with consumers in this really hasnt changed overtime consumers.

Consumers' emotional connectivity to our brands our brands are more about the.

More than just about the products. They are about the moments of connection many of them are used in special times and we get letters all the time with people talking about the special role. That's some product played in their life. They remember when the April with a friend experiencing either with their kids at this season and I think that continues to be timely and perhaps is even.

Filled up a bit since the pandemic.

Great Thanks for that color.

Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

Hey, good morning, folks, which was taught me.

My apologies I didn't get a chance to go through all the prepared remarks, we've got a lot going on in Florida.

I apologize for various labs can we go to questions.

Two quick things.

First the capacity expansion you gave us some quantification for the year, what's the cadence when should we expect to see that capacity coming online.

Yes, it's going to be coming online throughout the year.

Again, thats sort of fits into a broader discussion we had on capacity expansion I think we've talked in the past if you look at the 2020 to 2024 periods.

We're looking for a 15% ish increasing capacity across the network and so what we're going to see in 2023 is going to be a low single digit contribution towards that goal and I would kind of think about it coming in ratably over the course of the year.

Okay.

Oliver to Capex it sounds like it is a long slog should we expect this elevated level to continue into next year and the year beyond as well.

Yes, not at this level, but I would say at least for the next for 2024, we will have some amount of elevated capital it will still be finishing off the ERP program and still probably having some tail investments from a capacity standpoint. So those are the two things I would point to on the Capex.

As we talked about all the timing of the majority of that Capex is targeted on capacity expansion you click into that a large portion is driven by recent fantastic growth we've had there.

Reached capacity and network capacity has improved significantly although we still have opportunities somewhat recent some other brands to unlock more efficiency and capacity and so that capacity expansion plus the ERP investments that will eventually drop out.

Are the two biggest components of the Capex right now.

Understood and last question for me I've always considered your European venture to be a bit opportunistic small tactical export.

Business recently.

Recently, you've kind of carved it out as a standalone business with it doesn't it has it does this signal anything.

In terms of your strategic intent on expansion in Europe .

Okay.

No not at all.

If that's in reference to any of the talent changes that we made they were really in the course of just normal development and expansion for people to get new opportunities.

Europe continues to be small we continue to feel that we are making great strides and seeing a lot of growth there, but there is no strategic change in our approach to that market at all.

Understood. Thank you.

Thank you. Our next question comes from the line of Panama Kaufman with Morgan Stanley . Please proceed with your question.

Hi, good morning.

Good morning, good morning.

Can you talk about you are a key innovation is planned for 2003 and how are you thinking about the drivers of top line growth between innovation versus existing brands, where you've been capacity constrained.

Sure.

So innovation continues to be an important part across our portfolio.

And we have several items that are launching this year that we think will generate a lot of consumer excitement and merchandising and if we look at our core confection business. The highlights there would be a.

Reese's stuffed with Reese's puffs.

We have a limited edition, which is a reese's creamy and then our reese's crunchy product. So a line of limited edition that let consumers pick their favorite which texture. They like and then we have an exciting new cases flavor that is called <unk>, which is a kiss filled with a milk chocolate filling.

<unk>.

On our <unk> business, we launched as a limited time addition, this year it got extended.

And sugar flavor, and so folks will see that in the market as it has been very successful.

So those are probably the highlights of some of the biggest innovation.

We continue with our strategy that we employed several years ago, that's really helped to accelerate our topline growth, which is while innovation is important and we will support innovation across the board for news and excitement, we really don't want to stray away from a primary focus on our core our core our brands that are.

Sustainable they have been out there for a long time consumers love them.

Lots of these on them will always be stronger than innovation across our entire portfolio driving our core is job one and then using innovation for news and excitement.

Great. Thank you.

Just.

In terms of your organic growth outlook for 2023, how are you thinking about the growth between North America confectionery and salty snacks and maybe if you could just touch on some of the key growth drivers behind the salty snacks business for 23.

So I can talk about some of the growth drivers and then let me have Steve talk a little bit about the other part of your question. So as we look at silky snacks.

We will be as Steve mentioned investing in marketing to really to continue to expand.

Those brands and businesses and continue our growth in household penetration. So that is clearly an investment that will drive growth. We continue to have some level of distribution upside, especially on <unk> on <unk>, we saw distribution upside as well as increased item counts.

In 2022, and we will see some of that growth continue as we go through 'twenty three once we get beyond that we think we will then start to be going more to velocity increases and price pack architecture opportunities. So those are some of the biggest one investments in skinny pop in advertising as well will continue.

To unlock growth potential.

I think those are some of the biggest.

Growth drivers across the Salt business, yes, just at a very high level from a protection standpoint were expecting high single digit top line price being the primary driver there and as we talked about earlier seasons underneath that feeds into the media investment behind the brands are going to be big importing components of that on the <unk> side double digit growth.

Which is what we should expect from that business and more of a price there as well, but also volume and again as we said there are two we're investing behind the brands that we have some distribution opportunities as Michel mentioned on the international side solid mid single digit performance on the back of distribution volume some pricing as well and some <unk>.

Innovation, so at a high level those are sort of a big target.

Okay. Thank you.

Thank you. Our next question comes from the line of Chris Carey with Wells Fargo Securities. Please proceed with your question.

Hi, Good morning, Thank you for the question.

Good morning, Matt.

Steve You gave good information on gross margin ranges for the year, a little bit on cadence with the Q1 and the impact of inflation.

It's.

It's just striking to see high single digit commodities labor, which.

This dynamic.

<unk> sticky inflation that we're seeing across staples landscape.

But clearly you have good visibility into that outlook I guess, what I'm, what I'm wondering is.

This is going to be probably a volatile environment for.

Inflationary drivers, namely commodities over the next year and I'm just trying to frame. If there is a change in the commodity outlook is that something that changes your own outlook or are you. So locked on costs at this point guidance no. We have good visibility on the year.

Year end were fairly locked in and Thats really more of a consideration for them from a year ago, something like that I have a quick follow up.

Sure on the.

In general we have pretty good visibility I would say across constant commodities I would say that hedging program gives us some of that visibility.

The caveat is that if you look at the last two years, where we've been bitten in some cases have been the things that we don't hedge and have been volatile things like packaging.

Resins, and specialty ingredients and Soviet dairy even itself so.

Those are ones that I'd say, we keep an eye on and movements at some of those material movements can can move the needle and we saw some of those material movements in the last few years I think our expectation is some of that will settle down and with that settling down and our visibility into the rest of costs I.

I agree with you, it's still potential for volatility, but we feel the sort of pick the guidance range to try to accommodate most of that volatility.

Okay that makes sense, one quick follow up and perhaps something thats.

Even better suited to the Investor day coming up but.

This sounds confidence time long term margin improvement and then clearly we saw an inflection in the snacks business today with positive commentary on the medium term at that business. So.

When you think about that long term margin between the confection and in fact side do you have any sense of what would be driving that between those segments or is this just more of a holistic.

<unk>.

Target for the organization over time, thanks, so much.

Yes that is a great one for the Investor Conference and what I will say our expectation is we want to see margin improvement across all parts of the business all segments.

And so we've seen a lot of improvement in international in recent years, but we have the same expectation that that's going to continue also.

And that we're going to optimize and grow but grow in a sustainably profitable way their.

Salty probably expectations given the capital that we've deployed in those acquisitions and the opportunity we touched on things like private label and the impact that still has on the business as we look to the future.

Opportunities to extract more margin out of that business and always on the confection side, we want to have a model that drives margin accretion.

Okay. Thanks for your efforts.

Mhm.

Thank you. Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.

Thanks.

Question on gross margin in this latest quarter, especially versus the third quarter.

The reason I'm asking for color.

About what might've been your biggest unlocks that.

Fourth quarter is because.

One in a multi year basis, it looks like pricing was rather similar to.

The third quarter, yet the year over year margin trend improved in that fourth quarter was actually higher than than it was in the <unk> in the fourth quarter of 2019, so any color about unlocks on gross margin would be helpful.

Yes, I think the biggest drivers that we touched on we did have some better productivity dropping through supply chain efficiencies that had ramped up and as Michelle said, we're not all the way back in terms of that supply chain efficiency, but it would be an uptick in the fourth quarter and then I'll say the volume growth on the elasticity side.

<unk> and dropping some fixed cost absorption through the P&L as well those are private.

Just a couple of things those are the ones I would point to.

And just a big picture question, one I've been thinking about is during this COVID-19 era clearly at home Snacking did well you guys have major own Thunder with.

Smores in your seasons, and you've seem to have pretty good visibility into what youre doing each year and seasons and so it looks like youre going to you are poised to have a pretty good 2023, but I'm wondering just as you just think about the overall energy for at home Snacking is an occasion.

Do you have a view about whether that can sustain in terms of its growth rate.

Wonder Wonder about this not just for Hershey, but for other companies as well any comments there would be helpful. Thanks.

Sure. So let me start by saying as much as we have benefited on our take home business.

At home Snacking, our instant consumable business has also been quite strong. So we've really seen growth across all what we say all three segments of our business season take home and instant consumable.

We don't expect that we're going to lose volume on those segments going forward. So we don't see a reversal in the trend.

But we would say that growth may moderate we would expect it to moderate a little bit versus where it's been as consumers just shake out into their normal ongoing behavior.

Thanks.

Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Yes, hi, good morning, I wanted to go back to the.

Two topics you talked about already.

A&P investments from the workforce investments just a little bit joined beyond into those just any on the A&P side any notable phasing of the incremental spending that you are you planning and if so just the drivers.

Phasing if you could comment on the workforce side.

You walked through.

A number of priorities, especially on the <unk> side I think it makes sense there but.

Frankly intriguing I guess the question is where are you with those with those hires is that something that we should anticipate.

You kind of have in the near term pipeline.

The investments show up early in the year and carry forward or is it something that they build and there's more.

The spending progressively layers out of the Euro goes on just where you are in making those hires that you talked about earlier. Thank you.

Yeah. So as we looked at the investments in marketing spending you should think about the confection investments being fairly stable throughout the year until our investments will be more front loaded during the year because of the.

Towards the end of the year is when we're doing the S. Four conversion. So we're really going to drive the volume harder at the beginning and those investments harder at the beginning of the year.

SG&A spend.

We will see that across the quarters.

And especially beginning in Q1.

Okay. Okay. Thank you very much.

Yeah.

Thank you. Our next question comes from the line of Max <unk> with BNP Paribas. Please proceed with your question.

Hey, Thanks for the question just just one for me and it's on gross margins. So you expect gross margins to be up 40 to 50 basis points year over year in 2023, given net price realization and higher levels of productivity, which are expected to offset inflation, but it sounds like <unk> 23 gross.

<unk> will be pressured due to lapping a timing benefit related to inventory valuation last year I'm, just trying to get a sense for it he could.

Close frame the magnitude of that <unk> 23 impact thanks.

Yes.

Youre exactly right on a per quarter, one that will be our most pressured gross margin quarter. In fact, I expect will be still down year over year for the first quarter because of those labs.

And I don't know if that all dimensions get as specific as the guidance for that.

But youre exactly right that will be our our most pressured gross margin quarter.

Great I'll leave it there thanks very much.

Thank you.

Thank you. Our next question comes from the line of John Baumgartner with Mizuho Securities. Please proceed with your question.

Good morning, Thanks for the question.

Good morning, good morning.

First off Michelle in confections, Youre, bringing more capacity online increase in brand spending as well, but how are you thinking about in store activation at this point I think going back pre Covid. There was an increased focus in the aisle with the king size and some different shelf sets. Then you move to the checkout lines. I think you had taken some shelf space for magazines and not consumer.

So if we think about 2023 and I guess, even beyond at this point what are the levers you see as most impactful from here, where do you can you still benefit from activation going forward.

So we are always looking to optimize across the entire mix of levers that we have to drive activation.

Managing the shelf distribution shelf space is always a priority there were some areas as we were later on capacity, where we were unable to fill some of those distribution needs. So we see some of that ahead of us as an opportunity as we have improved service.

We talked a little bit earlier about the marketing spending where we had pulled back again, because we were lighter on capacity. So reinstating that we know that theres a very strong.

Return on that.

Reinventing the front end retailers are always looking at how they optimum optimize front end space and so we partner with them and we continue to see opportunity there.

As we look at our in store promotional spending yes, we do believe.

That's getting visibility in display in store is important to our business that said our.

Our promotional spending is below corporate levels and we've seen that we've continued to be able to drive the business.

Are those promotional levels are today, so that's not a key.

A key priority to reinstate back to the past.

Okay. Thanks for that and then Steve on the.

The salty snacks margin there was a lot of noise. This year you mentioned the catch up on pricing you had the warehousing in Q4, you had some reduced promo and advertising spending if we think about the sequential increase in margin from Q3 to Q4 is it possible to bucket those tail wins across the different elements or maybe what do you think the underlying run rate is for segment margin exiting 'twenty two is mid teens high tech.

Just trying to think about the moving pieces versus the structural improvements there just far thank you.

Yes, it's a fair question there have been a lot of movements across the quarters I think think about a run rate in the mid teens, that's probably a good baseline to operate from an FSA there'll still be movement across the quarters, probably especially as we look to the back half of this year with that ERP transition that we talked about it as we get further into the year, we'll give more color to <unk>.

Some of that variability, but if you think about mid teens, that's probably a good starting spot.

Okay. Thank you very much.

Okay.

Thank you. Our next question comes from the line of Jonathan Feeney with consumer edge. Please proceed with your question.

Good morning, Thanks, very much so.

It's been about 15 points or so over the past two years with pricing and I was wondering if you could characterize.

I know that the data driven but I wonder if you could characterize how much of that was driven by this narrative about rising costs and if costs continue to moderate or even decline.

Should we expect some.

Is the expectation on the from the retailer that some of that pricing goes away.

Costs go down or is this just all been a change in the.

<unk> to what's worked together to grow the category just curious about how much risk you have it cost in fact start to moderate or decline. Thank you.

Sure, we always work together with retailers to try and maximize category growth that is our fundamental premise, especially being leaders in all of the categories that we are in the category is growing we feel really good that we will benefit from that growth.

Historically, there hasn't really been.

A move in the category to execute price declines or price rollbacks as prices have gone up they have tended to stick in the marketplace as a matter of principle of how the category dynamics have worked.

And then what we really try and do is to leverage some of that favorability in price and our holistic model to reinvest for growth, whether that's reinvesting in capabilities to get smarter about managing the shelf with the retailer helping them to find new points of interruption or whether that is incremental consumer.

Investment.

Makes sense. Thank you.

Thank you.

Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Ms. Poole for any final comments.

Thank you so much for joining us. This morning, we will be available for any follow up questions you have a great day.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.