Q1 2023 The Hershey Company Earnings Call
Speaker 1: And what.
Speaker 2: Greetings and welcome to the Hershey Company first quarter, 2023. Question and answer session. At this time, all participants are now listening only mode. As a reminder, this conference is being recorded. I'd now like to turn the call over to your host, Mr. Lip-Millisapoul, Vice President of the rest of relations for the Hershey Company.
Speaker 3: Thank you. You may begin. Good morning, everyone. Thank you for joining us today for the Hershey Company's first quarter 2023 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 a transcript and audio replay of this call.
Speaker 3: 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.
Speaker 3: 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 , Michelle Buck, and Hershey's Senior Vice President and CFO , Steve Bosco. With that, I will turn it over to the operator for the first question.
Speaker 2: And if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone would indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing D start.
Speaker 2: Our first question comes from the line of Angela Zarr with Barclays. Please proceed with your question.
Speaker 4: Great, thanks so much. Good morning, everybody. Good morning. Good morning. Yes, first off, I wanted to ask a little bit about the guidance update on the top line. The company beat by a few points on the top line in the quarter, but when we take out the earlier summer shipments, which is really just timing, I guess results on organic were only slightly ahead of the street view.
Speaker 4: but Hershey raised its sales growth guidance to the high end of the previous range for the full year. So I guess my question is, what are you seeing at this stage that gave you the confidence to shift the top line guidance the way you did?
Speaker 3: Yeah, thank you Andrew. Yeah, you're exactly right. For the first quarter, the timing impact was about half of the, half the beat on the sales line and also strong performance in international. So those were the two big drivers. We looked at the balance of year. Obviously the timing is going to wash out in the second quarter, but we do expect to see a little bit better elapticities in the year to go period. We still see a moderating.
Speaker 3: improved the elasticity a little bit in the year to go period that's what gives the confidence in the race.
Speaker 4: Thanks for that. With the pull forward of some shipments from 2Q into 1Q, along with the tougher, I guess, year ago, organic sales and EPS growth comparisons in 2Q, what are some of the key puts and takes to keep in mind when we're modeling for 2Q? Thanks so much.
Speaker 3: Yeah, Q2 will be probably our most challenging quarters I look to the balance of the year. You know, we're going to have the timing piece shift back out, but then also recall last year with the big inventory till quarter as well. And so when you look at the lap, it's pretty tough lap. That's combined with that point and half coming out.
Speaker 3: We'll put more to the mid-single-digit range probably from a sales standpoint and we'll put more pressure on the EPS side than the rest of the quarters.
Speaker 5: Great, thanks so much.
Speaker 2: Our next question comes from the line of Ken Goldman with JP Morgan. Please proceed with your question.
Speaker 4: Good morning. Two questions on capacity if I could. First, I think your prior guidance, if I had it down right, was for five new lines to come on this year. I think you're calling for.
Speaker 4: for now. So am I reading that wrong or was one delayed? And then I'm also curious to learn a little bit more about the weaver acquisitions just in terms of how they may help you down the road in terms of added capacity or efficiency obviously bringing plants in houses is.
Speaker 3: Generally, a good thing for efficiency, but just in light of the fact that they already did make product for you, just trying to get a little bit of a better sense of, you know, some of the benefits down the road for you. Thank you. Sure. So there is no change to the number of lines. There are five lines. And I think there's one that we just didn't specifically call out in our remarks. Thank you.
Speaker 3: So no difference there. Relative to Weaver, we feel very good about the acquisition. Weaver Manufacturing is currently a co-man of Skinny Pop.
Speaker 3: We acquired two plants and really what it gives us are three things. It gives us sufficient capacity to be able to support growth for several years to come. And as you know, we're seeing very strong growth on Skinny Pop. It provides us with resiliency and also flexibility just so that we can continue to support the strong growth that we are seeing.
Speaker 3: that we made, we believe, given the quality of the assets, the fact that facilities are on the newer side, that it is faster and cheaper than if we needed to build this on our own.
Speaker 5: Thank you.
Speaker 2: All right, next question comes from the line of Cody Ross with UBS. Please proceed with your question.
Speaker 6: Good morning. Thank you for taking our question.
Speaker 6: You're implementing a high single-digit price increase on 50% of your confection portfolio effective at the end of May. I believe that's correct. That's what you announced at the analyst day. How much do you believe will benefit fiscal 23 versus fiscal 24? And can you explain the mechanics of the benefit by the year?
Speaker 3: Yeah, at a high level, it's gonna have, as we talked about in the investor conference, more impact in 24 than it is in 23. That's based on partly the implementation date and then also the fact that we have protection in place for big promotions and programming for a good part of the year.
Speaker 3: And we're still working with retailers on the implementation. And so all of that will continue. I think by the time we get to the mid-year mark, we'll probably have more visibility, both on balance of 23 and 24 impacts, and we'll be able to talk more about it at that time.
Our next question comes from the line of Michael Lavery with Piper Sandler.
What's your question.
Thank you good morning.
In the press release, you had mentioned just.
The ability to sustain momentum into 2024 and beyond.
It's early but just.
It kind of caught my eye that you would call that out. So what are you seeing that would drive a reference that's come up that far ahead and how much color can you give on how you're thinking about 'twenty 'twenty four right now.
I mean, we're not going to give a lot of we're not really going to talk about 2020 for I mean at the very high level I'll talk a little bit about the consumer piece. If you can talk about the P&L component, but we feel good about the momentum that we're seeing on the business certainly in terms of consumers' engagement with the category.
A lot of the underlying consumer behaviors that we're seeing sustained.
Which continue to support performance, we're continuing to see good response to the investments that we're making in media behind the business across all parts really I mean, CMG as well as our Sophie brands, where we're just getting started on some of the investments insulting.
And certainly as we saw in the first quarter strong momentum in international So right now we don't see any big signals that.
Suggests to us.
Hum.
Any big hurdles on the top line, yes, I would agree I would just point to that as Michelle said capacity, having capacity available as we exit the year to be a little bit more on the gas from that standpoint versus some of the limits that we've had here. The last couple of years of the salt the aspirations that we have talked a lot about that at the conference coming off the back of the ERP and rolling into next year, we're excited about that.
And then the commercial capabilities that we talked more about at the conference as well so being able to help drive sustainable growth in the U S. U S business in particular, so those are just some of the reasons I think we feel pretty good about the momentum.
No. That's helpful color. Thank you and just a follow up on top but we got to do the.
I had an investor day, obviously and.
Just curious.
You have a sense of how big a lift do you think that can drive and maybe specifically at least whats factored into your thinking and guidance around that and just sort of it we've already seen obviously all of us very strong momentum there.
How much further can it go and then you know what.
Some of how you think about your expectations.
You know I would say it's too early we've just started to support an error we.
We feel very good about all the work that we've done in terms of understanding the dots consumer and the consumer's relationship with docs and so we feel good about the messaging direction, the creative execution and certainly it's scored incredibly well and the responsiveness that we tend to see across our snack and cat.
<unk> with advertising investments, so more to come and we'll share more as we have actual in market results on that but we think that will clearly only help us given that we haven't been investing in that brand in the past.
Okay, great. Thanks, so much.
Our next question comes from the line of Rob Rob Dickerson with Jefferies. Please proceed with your question.
Alright, great. Thanks, so much and just to kind of your question.
The first is just an international obviously impressive on the volume side.
But really don't see anything incremental pricing.
Year over year, so I'm just curious.
But I mean, clearly it's intentional I'm just kind of curious as to why that's essentially why we're not seeing much pricing international just kind of given the cost complex.
Kind of what you've been able to push through in the U S. And then I have a quick follow up.
Sure we are pursuing a price strategy in international it's just.
More modest of what we're seeing so far and that's offset by some of the other.
Less than we had in the quarter, having some impact on how much of that prices coming through but we should see more price.
Come through in the next three quarters.
Okay Fair enough and then just quickly back to Houston to a you know.
Buying incremental popcorn facilities.
Which I get.
But clearly not that much cash out life cash outlay for those facilities and if we can kind of think about where the topline probably is headed.
'twenty four capex gets a little bit better next year. Martin do you said you know there should be a step up in free cash flow, while the balance sheet strong so.
And are you kind of always reiterated kind of your service through capital deployment.
Priorities, but.
What did you say part of it at this point given all the Capex.
Right.
On the on the new facility, the new line and then restart.
Acquisition of the new popcorn facilities.
Broadly speaking do you feel like you'll probably get a pretty good spot in terms of kind of what you need to grow and therefore.
Is there a possibility for you.
Let's say other cash deployment, whether there'll be it around the dividend or buybacks or what have you. Okay. Sure yeah. Great question. So the.
Short answer is yes, we do feel good with that additional capacity in place or coming in place for the Weaver acquisition will be very helpful to support the growth of that business for a time to come and I also like the fact that we're buying.
Well maintained a state of the art manufacturing facilities, where we're what we're not doing that there's still much more capital efficient than building from whole cloth and so it is capital efficient to pick up assets. This way as well so as we look to the future I feel good about the capacity that we're gonna have installed on both the confection business and a healthy business and that will.
Have an impact on free cash flow as we look to the future.
Alright fair enough. Thank you.
Thank you.
Our next question comes from the line of Jonathan Feeney with consumer edge. Please proceed with your question.
Thanks, very much could you comment on the role of.
Not just recent distribution growth.
Distribution growth over the last 12 to 18 months in the salty snack business driving that really outsized volume growth because I.
I guess I'm trying to understand how when you take these products whether it stops most recently or others into new markets is very necessary decay curve. Like you know you have all this new innovation of new Hershey capabilities, and then that kind of season, then it slows down.
What data or insight can you offer too.
Help us understand that and maybe if you think about what a sustainable organic volume growth looks like for salty snack going forward. Thanks.
Yes, absolutely. So clearly distribution is job one when we buy a business like this I mean, that's one of our key strengths and we want to fully utilize it so and dots in particular.
There were really opportunities to kind of fill in on distribution.
Previously they really didn't have a very large walmart business and they were underdeveloped in the north east. So that's been a big area of focus and that certainly has driven has been a key driver of the business, but we've also seen increases in velocity at the same time, given the very strong repeat potential.
That we see from consumers behind this product.
Then as you think about the growth trajectory over time, I would kind of describe it as it it basically will evolve in terms of what the drivers are so as we fill out the distribution you know we start to really employ our category management capability relative to optimizing the shelf.
As you saw in March we then start to apply our media capability with advertising behind the brand to really increase awareness and household penetration.
And then beyond that the other kind of key focus is relative to price pack architecture.
And other drivers. So I think we will see the revenue coming from it will continue but we will apply the other capabilities, we have to really generate that and as we mentioned at Investor day, We do anticipate seeing growth in that 15% kind of range for the next.
A few years and then.
But you know a deceleration from the 20 plus percent that we've seen more recently.
Thank you very much.
Thank you.
Our next question comes from the line of John Baumgartner with Mizuho Securities USA. Please proceed with your question.
Good morning, Thanks for the question.
Good morning.
Maybe just building on John's question Michel sticking with the the salty snacks distribution another focus of ours building availability in mass and grocery, but the ACB opportunity seems pretty significant C stores as well.
Are there any considerations, whether it's dislodging competitors or do you have the route to market.
The model given the velocities that maybe makes the path to building ECB in C stores a bit slower for these categories. Just how are you thinking about you know of course that distribution gap and C stores over time. Thank you.
Well she story is really a core capability for the company for our base core CMG business is certainly we realize it's important in reaching certain specific consumers and really certain specific occasions, when consumers are out and about so it is a priority for us.
We have been focused on that I think can skinny skinny pop we are.
Certainly, making progress, but there's more opportunity to go and so it will remain a focus for us going forward.
If I'd say that there is any key barrier.
Certainly there are folks who have DSD capability more broadly.
But we've done a good job with our CMG business, where we don't have it building distribution in convenience stores. So we feel very good about that and then across our salty snack network. We do have both warehouse and DSD capability and we're really working right now to optimize how we best utilize each to maximize the potential of the business.
Okay, and then in terms of the popcorn assets that you're acquiring in addition to just the pure growth in volume capacity is there anything augment your capabilities or pack size or anything else in terms of opportunities there.
Yeah beyond just the capacity of one of the things that gives us the opportunity to optimize the supply chain network more broadly. So if you think to the future other assets potentially coming in you can think about some of the strategies, we talked about around price pack architecture, and being able to make sure. We've got the right packs. It mixes are to support the business.
Going forward, so by having all of that in our hands that are control just gives us more flexibility and agility to deliver that growth plan, yeah, and as I mentioned earlier, we do have that gives us capacity ahead of demand. So it gives us that trajectory.
For the next few years.
Thanks, Michelle Thank you.
Thank you.
Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.
Hey, good morning folks.
Yeah.
A couple of a couple of quick questions.
Colgate just recently did something similar in pet food in terms of going out and buying some capacity.
That came in before there was a lot of other products that they would make and it created some margin distortion on near term is there anything to be aware of but similar.
People are on that front with the Weaver acquisition.
No I mean, the bulk of the capacity is ready to eat popcorn. So it didn't really come with a big.
Negative overhang, that's right other than that there will be excess.
Unused capacity for a while so that you know there's some fixed overhead there, yes, some fixed overhead and some transition costs that would be normal, but not a portfolio overhang like youre referencing Jason.
Okay. Thanks for that and then.
Bigger picture question.
You got it you mentioned a lot since he's been very low that's that's not on our Hershey comment or even a confection Thomas the industry comment because we havent had a lot cross breitbach wherever we're moving the same direction.
It sounds like in 'twenty, four you kind of kind of a break from the pack and pushed through part of it quite a bit of pricing at a time, where we're not expecting a lot from the industry at large.
So how are you managing across price elasticities, which category should we be watching where you where you tend to see switching between confection.
And I'll leave it there.
Yes, I would say first of all it's a little early yet to be starting to think about the cross elasticity for for 'twenty four but you're right. We're trying to think ahead in terms of the pricing strategy. We're also watching the commodity space like we talked about earlier in some of the upward movements on cocoa and sugar and so I think that's getting us in a good start.
Position, but then what happens to the other categories and peers, that's all yet to be seen and we'll be able to communicate more on that obviously as you can probably turn the corner and get to the back half but yeah.
Yeah, that's the one piece I might add its just you know or is it kind of come through a little bit slower and more elongated because of the timing. It takes for us to implement particularly with seasons. So kind of as we think about 'twenty four pricing, we won't have an outsized price gap versus kind of pre pandemic levels versus a lot of our competition as you've seen many of them are posting high teens or 20% pricing versus up at 10.
So some of it is just hours, there's a little bit more spread out, but we will certainly be watching it very closely and particularly within snacking to look at where the share of stomach is going and how those cross the elasticities.
Progressed.
Yeah, that's a good point.
How about that.
Our next question comes from the line of Chris Carey with Wells Fargo Securities. Please proceed with your question.
Hi, good morning, Thanks for the question.
Just kind of.
A question on confection margins very strong in the quarter.
Even despite a.
Tough year ago compare pricing is clearly building.
How should we be thinking about you know confection margins not just this year, but certainly over time as it seems like it's coming through very strongly with pricing and cost perhaps are easing.
So again, just just a trajectory of confection margins would be helpful. And I think you had mentioned some inflation in there.
Cocoa and sugar just remind us of your.
Your duration on those hedges.
When we might be seeing that inflation coming through and just so we can kind of of Susquehanna.
He might be needed to offset it thanks, so much.
Sure I'll take the last piece first just on cocoa and sugar, we don't get specific on the duration of our hedging programs. Obviously for those two commodities, we do some hedging.
But we don't share the duration, we do expect to see potentially more impacted 24th in 'twenty three but we'll see how the markets play out on pricing and just more generally as we talked about the Investor Conference. Our goal is to always have a mix of volume and price price. That's part of the balance in our growth formula and as part of that we also.
I want to see margin accretion over time from both sources and so confection margins have been strong, but even in the future across all levers of pricing, including price pack architecture and in mix and other things we want to continue to put upward pressure on our margins because that's part of our growth formula So and we continue to see some of our input.
It's rice cocoa and sugar recently, which is one of the reasons that we decided to lean into that more recent pricing action right.
Okay. That's it for me thanks, so much.
Thank you.
We have reached the end of the question and answer session I'll now turn the call back over to Melissa Poole for closing remarks.
Yeah. Thanks, so much for joining us this morning, and all the great questions and the continued interest and investment in our company. So I'll be available today and in the coming weeks to answer any additional follow ups. You may have thanks, so much have a great day.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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