Q3 2024 Hershey Co Earnings Call - Q&A
If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host annuity.
Speaker Change: Senior director of Investor Relations. Thank you you may begin.
Speaker Change: Good morning, everyone. Thank you for joining us today for the Hershey Company's third quarter 2024 earnings Q&A session.
Speaker Change: Hope everyone has had the chance to read our press release and listen to the prerecorded management remarks, both of which are available on our website. In addition, we have posted a transcript of the prerecorded remarks.
Speaker Change: At the conclusion of today's live Q&A session. We will also post the transcript and audio replay of this call.
Speaker Change: 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, including expectations and assumptions regarding the company's future operations and financial performance.
Speaker Change: Actual results could differ materially from those projected the company undertakes no obligation to update these statements based on subsequent events a detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. Finally, please note that we may refer to certain non-GAAP financial measures that we believe provide useful information.
Speaker Change: 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.
Speaker Change: Reconciliations for the GAAP results are included in today's press release, joining me today are Hershey, Chairman and CEO, Michele Buck and Hersheys Senior Vice President and CFO, Steve thoughtful with that I will turn it over to the operator for the first question.
Speaker Change: Thank you.
Speaker Change: We will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Confirmation tone will indicate your line is in the question queue. You May press star two to remove yourself from the queue for participants using speaker equipment. It may be necessary to pick up your handset before Christian Stark.
Speaker Change: 2024 Earnings Results. I'm Anuri Naughton, Senior Director of Industrial Relations.
Speaker Change: Our first question comes from the line of Ken Goldman with Jpmorgan. Please proceed with your question.
Annuity: Joining me today are Hershey's Chairman and CEO, Michelle Buck, and Hershey's Senior Vice President and CFO, Steve Bosco.
Ken Goldman: Hi, good morning, and thank you.
Ken Goldman: I wanted to ask a couple of questions around the comment.
In addition to these remarks, we will host an analyst Q&A only session at 830 a.m. Eastern on the morning of November 7th. A replay of this webcast and our subsequent Q&A session will be available on the investor relations section of our website along with their corresponding transcripts.
Ken Goldman: Regarding.
Ken Goldman: Top line being roughly on Algo for next year. The first question is the street is looking for a pretty decent step up.
Speaker Change: And your realized price.
During the course of today's discussion, management will 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.
Speaker Change: For next year I wanted to make sure that's kind of the right way to think of it.
Speaker Change: And then the second question is is it reasonable for us to assume that your guidance will factor.
Speaker Change: The typical kind of our historical one for one elasticity on certain products that you've mentioned in the past. Thank you.
Actual results could differ materially from those projected. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risk and uncertainties can be found in today's press release on the company's SEC filings.
Speaker Change: Sure if you want to take the.
Speaker Change: Sure on the reference to the algorithm.
Speaker Change: We're talking about our long term algorithm. So that's two to four on the top that's the reference point that we're looking to in terms of realized all in we'd expect pricing next year to look a lot like this year.
Finally, please note that during today's discussion, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors.
Speaker Change: As the price increases we took this year flow through obviously, we will work to make sure we're competitive and.
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. It is now my pleasure to introduce our Chairman and CEO, Michelle Buck.
Speaker Change: Yeah.
Speaker Change: Work with retailers to make sure we get good execution of that and then from an elasticity standpoint, we expect historical elasticities, which is what we've seen as we've progressed further through this year.
Speaker Change: Thank you, Inori. Good morning, everyone, and thank you for joining us today.
Speaker Change: Got it I'll pass it on thank you.
Speaker Change: You bet. Thanks, Thanks, Ken.
The operating environment year-to-date has been challenging, with historically high cocoa prices and a stretched consumer continuing to impact our results.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.
Andrew Lazar: Great. Thanks, Good morning, Michelle and Steve.
Speaker Change: Before I address those items further, I want to first emphasize that regardless of the external environment, the foundation of our business remains intact, as do the fundamental reasons for Hershey's success.
Speaker Change: Good morning.
Speaker Change: I guess I want a quick sort of all things cocoa sort of aside for the moment and focus again on sort of core underlying trends.
Speaker Change: What would you expect core I guess chocolate market share trends to look like as you exit this year, Ken Ken market share get back to stable or do you think it takes maybe more into the first half of next year and what should we be looking for in the data I guess as we move through the fourth quarter.
Speaker Change: We have a diversified portfolio of resilient brands in growing categories.
The right strategy in place.
and winning commercial capabilities like ubiquitous distribution, a strong in-house retail sales force, category management leadership, and supply chain scale and agility.
Speaker Change: And I ask because obviously if we're.
Speaker Change: It's supposed to be looking through the anomalous cocoa cost inflation and twenty-five two potentially a year of maybe outsized growth in 'twenty six as costs normalized it's really these underlying share trends that obviously, our most important and in core chocolate, we're going on I think like two years of some share weakness. So that's really what I'm trying to get at thank you.
Consumers across the income spectrum are making budgetary trade-offs and shopping differently this year. However, our data shows consumers continue to want to participate in snacking occasions.
Speaker Change: Confection products are part of the most memorable moments in our consumers' lives, like birthdays, celebrations, and seasonal occasions.
Speaker Change: Absolutely. Thanks, Andrew Yeah, let me step back and talk a little bit about kind of your category and market share trends. So first of all we continue to feel really good about the category resiliency that we've seen you know consistently growing about around that 2% range, which is what it's been historically and continuing to outpace other snack.
Speaker Change: For more than a decade, chocolate has consistently ranked the number two most eaten snack, which means it is also an integral part of consumers' everyday lives.
Speaker Change: The chocolate category has grown at a four percent CAGR since 2009 with positive growth every year for more than two decades.
Speaker Change: So we think that's a really good starting point for us, we do see us ending the year with greater momentum.
Speaker Change: This is an incredibly resilient category that remains healthy in 24, with everyday candy, mint, and gum consumption up over 2% year-to-date and continuing to outpace broader snacking in Q3.
Speaker Change: Then we have had particularly if we look at some of the green shoots that we called out in the script relative to suite and the acceleration that that innovation that we launched in the marketplace is really taking hold and driving takeaway and also increasing share with each four week period that goes by.
While our categories remain relevant to consumers, our performance this quarter was impacted by both industry-wide and Hershey-specific challenges.
Speaker Change: We had a great Halloween.
Speaker Change: And expect that we will have one share in Halloween.
relative to sector-wide headwinds.
Speaker Change: Skinny pop certainly we called for a reversal in trend we've seen that in the past four weeks innovation remains strong and then we have a few labs that we are starting to get into that period that lessens the pressure that we're facing.
Total snacking consumption softened to plus 0.1% in the quarter, from plus 0.9% in Q2, as consumers continue to seek value, budget for meals, and prioritize satiety.
This has pressured trips to convenience and drugstores where we over indexed. Those trips dipped further year over year in Q3.
Speaker Change: We had spoken before about reductions in virtue that key retailer last 12 weeks, we've seen over 2% growth there.
Speaker Change: So as we look forward, we feel good about a lot of those things combined with as we get into next year a longer Easter.
Speaker Change: The broader evolution of shopping preferences is shifting trips into channels like club, dollar, and online, where our categories are less developed.
Speaker Change: Other headwinds that are a bit less relative to snap a mexico drinks and some of the retailer inventory issues.
Lastly, we saw a continuation of customers managing inventory more tightly, impacting our outlook for both North America Confectionery and North America Salty Snacks.
Speaker Change: So I would say, it's gonna be I would say a gradual improvement that we do think we'll build them. Both in terms of dollars and percent and probably the piece of the portfolio that will remain under pressure will be instant consumable because convenience stores, we really saw some of the pressure in that.
Speaker Change: Relative to Hershey specific challenges, in the third quarter we experienced increased pressure across all our segments.
Speaker Change: First, similar to other categories, we continue to see increased competition in confection.
Speaker Change: Channel starting mid year. So we think it will take us through the first half to get through that the other pieces of the portfolio, we're expecting to continue to see recovery.
Speaker Change: In the U.S., we have lost share to smaller players and private label, particularly in take-home chocolate, where we had gained significant share of shelf through the pandemic.
Speaker Change: Thank you and then real quick just new head of North America, confectionery, and maybe just a little bit about what what do you see and bringing to the table and.
In our key international markets, we've seen an increase in activity from large global manufacturers.
Second, we experienced executional issues with our plans in both confectionery and salty snacks. For example, Olympics promotional programming fell short of our expectations as it competed for attention and resources with back-to-school.
Speaker Change: Where you know where where strategy could well change or is it more continuation with just more sort of energy around it just trying to get a better sense for that thanks. So much.
Speaker Change: Yeah, absolutely. So obviously, Mike has a really strong exec coming to us from Pepsico.
In North America Salty Snacks, we experienced replenishment delays as we executed planned route-to-market changes.
Speaker Change: Several things that I think he will bring number one always appreciate external perspective, and always a good chance to re look what we're doing well, where we can continue to be better secondly, he has a very deep and rich background of being incredibly close to customers and retail and I think that he will significantly.
We feel good that the second half growth plans we discussed last quarter are gaining momentum, though we continue to strive to accelerate our pace of execution.
Speaker Change: Dial that up.
Speaker Change: Even further as we go forward into the future to unlock new growth.
Last quarter we said consumption trends would improve as we lapped the onset of merchandising reductions at a key retailer and as we added new items in fall resets.
Speaker Change: And continue to evolve our portfolio to.
Speaker Change: Those channels, where consumers are migrating to.
Speaker Change: Thanks, so much.
Speaker Change: Thanks.
Speaker Change: Thank you. Our next question comes from the line of Peter Galbo with Bank of America. Please proceed with your question.
Speaker Change: Hey, Michelle Steve Good morning, Thanks for taking the question.
Excluding the convenience channel, our total everyday candy, mint, and gum business has also returned to growth in the last month.
Speaker Change: Good morning, good morning.
Speaker Change: Steven in your prepared remarks, you did give a bit of insight on twenty-five inflation and that rate you don't expect them to be.
We continue to have bigger, more impactful innovation. Reese's Caramel is the number one innovation in the category this year, and Reese's Lava is off to a strong start and outperforming expectations.
Speaker Change: More of a headwind versus what it was in 'twenty four but just wondering if you could elaborate.
Speaker Change: I think your guidance for this year is high single digit Cogs inflation and so when we think about more for next year is that a low double digit number of low teens mid teens, just anything else you can give us to kind of help as we think about modeling.
In fact, Reese's held share in Q3 despite outsized convenience and drug channel and programming pressures.
Speaker Change: Yeah.
We prioritize the acceleration of our sweets portfolio and shared the additions of Shackalicious gummies and Jolly Rancher ropes that are intended to accelerate our sweets growth into 2025 and beyond.
Speaker Change: They need the biggest piece is gonna be telco and the year over year removal will be significant and you look at the rates that we've been paying for cocoa. This year, we set that back when we set our guidance in February and so we said back then we're well hedged for 2024, so the cocoa prices we've been paying this year reflect of getting into the market really from.
Speaker Change: Our sweets consumption accelerated from 5% in August to 9% in September and 23% in October to date.
Speaker Change: Earlier, this year and preceding so now you'd flash had to current pricing and you look at pricing for next year, it's a pretty significant step up in it.
Speaker Change: It's not just the cocoa side, the cocoa beans course, the biggest piece, but theres also cocoa butter Coca liquor and some of the other physical derivatives of cocoa that'll be inside that inflation and so we'll get into a lot more detail on that when we come back in the fourth quarter, but that'll be the thing the biggest source of inflation clearly.
We anticipated we would deliver on our Halloween expectations and overall seasonal participation remained solid as we expected.
Speaker Change: I expect we'll see some labor inflation.
Speaker Change: Our shipments and seasonal sell-through are in line with our low single-digit growth outlook.
Speaker Change: I see some other inflation in specialty ingredients and things like that and alongside that we'll be talking about our plans for productivity and so forth to chip away at some of that inflation, but cocoa and sugar probably going to be the two biggest pieces.
and we gained share for the fifth consecutive season.
Finally, we have delivered on our plan to address Skinny Pop declines and expect the brand to return to growth in the fourth quarter.
Speaker Change: Got it okay. No that's helpful. But we'll wait for February for for more detail. There and then if I can just ask on the gross margin actually in the quarter. It seemed like it did maybe came in below not only just the street, but maybe your own internal expectations and just kind of what what drove the variance is the deleverage piece you know from from.
Speaker Change: Consumption has inflected from down 1% in the last 12 weeks to plus 8% growth in the latest four weeks, resulting in a 260 basis point share gain in ready-to-eat popcorn.
Speaker Change: And we've seen DOTS sustain strong momentum up 31% in Q3 and nearing a milestone of $500 million at retail in the last 52 weeks.
Speaker Change: Volume more than you expected is it more mix just can you help us understand what happened there. Thanks very much sure sure. It was below what we were expecting just as we said we're disappointed on the top line disappointed by the margin performance as well you know the biggest piece was the sales flow through.
Given our fundamentals and momentum in key areas, we remain confident in our long-term strategy.
Speaker Change: And the fact that sales were down and then the mix of sales you know we've talked about C. Store. For example, so there were some negative mix inside the sales delivery.
Speaker Change: Impact on gross margin and then as you mentioned, we also had some volume deleverage when we have that big of an impact in the quarter.
Speaker Change: So between the sales flow through the mix of the deleverage those are really the biggest pieces that that drove that disappointment.
We are taking near-term and longer-term actions to position ourselves competitively for today and into the future.
Speaker Change: Great. Thanks very much.
Speaker Change: Mhm.
On North American Confectionery we are pleased to welcome Mike Del Paso to lead the U.S. confection business. Mike brings significant food and beverage as well as transformation expertise from PepsiCo.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.
Speaker Change: Right.
Speaker Change: Oh like OXEA.
Speaker Change: In his first several weeks, he has been engaging with customers and distributors, spending time in market with our retail sales team, and listening to our employees with a focus on improving agility and speed.
Speaker Change: Hi, there can you hear me okay.
Speaker Change: Now he can yeah.
Speaker Change: Okay Perfect tell me bring up the topic of the T. L. P. One drugs that they seem to be a few days now obviously, it's early days, but are suggesting that maybe mid single digit percentage of U S. Adults, perhaps a little high that are currently using these that was a little pulse than we expected them to be.
There are a few priorities where he will focus.
Our first priority is reigniting chocolate. For instant consumables, we intend to expand implementation of our gold standard planogram to improve productivity and findability and margin accretive growth for retailers.
Speaker Change: This time last year.
Speaker Change: How you're going about exploring what they need.
Trade and media investment is being redeployed to efficiently support variety brands like Almond Joy, Mounds, Payday, Cadbury, and Rolo, which have stronger velocities and brand equities than many new items and drive value for consumers and customers.
Speaker Change: How to respond to that whether you're seeing any impact on chocolate.
Speaker Change: I'm one of the possibilities on that and then I have a follow up.
Speaker Change: Yeah. So we would say we're seeing a mild year on year impact I'd say consistent with what I think we've shared before in line with what we would expect which.
Speaker Change: In Take Home Chocolate, we will deliver values for promotional optimization and compelling price pack architecture.
Speaker Change: Which I would say is a more of a gradual.
Speaker Change: Impact.
Speaker Change: We continue to see multiple sources of data.
We also continue to be relentless in accelerating our sweets growth.
Speaker Change: Validating that the.
Speaker Change: Consumers on those drugs aren't eating disproportionately less of our categories. I know there's been some mixed data, but we've seen a lot of that so it's it's in line with what we expect and we are carefully.
We are expanding our recent innovation launches nationally while rolling out new flavors and forms like Jolly Rancher Freeze-Dried.
Speaker Change: In that spirit, we are excited about our recent acquisition of Sour Strips, a fast-growing, emerging sour candy brand started by social media personality Max Tuning.
Speaker Change: Monitoring that that'd behavior, how it's evolving and certainly understanding what the needs are of those consumers. So that as we continue to evolve our portfolio, which we're always doing overtime that we are evolving in a way to make sure that we have the right offerings for those consumers as well.
Speaker Change: Sour Strips is a differentiated brand within sour candy with a shockingly flavorful sour taste experience that extends our reach to incremental consumers and occasions.
Speaker Change: Yeah.
Speaker Change: Many thanks, and then I have a quick follow up you mentioned an increase in competitive activity.
Speaker Change: Max will continue to lead the marketing and innovation efforts while we leverage our commercial capabilities to increase availability and expand into new occasions.
Speaker Change: International segment from global competitors and confectionery can you elaborate how much is that pricing competition or is there something else going on thank you and I'll pass it on.
Speaker Change: Yeah, a lot of it has been pricing competition, where certain competitors have chosen to really deal back somewhat deeply on price point.
Speaker Change: Finally, we plan to continue delivering share winning seasons by leveraging scale partnerships like Harry Potter and delivering best-in-class seasonal execution.
Speaker Change: And that's in some of the markets, where we tend to be we tend to be a smaller player.
Speaker Change: In North America Salty Snacks, we have seen continued growth demonstrating the strength of our diversified portfolio.
Speaker Change: And it's a smaller market for us, but it's been intense and in those markets where it has occurred yeah. We've had pockets of strength you know the U K Europe, winning with three and I think we're really pleased with the progress, but particularly Mexico and Brazil.
Speaker Change: We intend to maintain and grow our shared leadership through exciting partnerships, including a new celebrity brand ambassador and innovative package designs for Skinny Pop.
Speaker Change: We've seen higher levels of competition, some of which has been price related.
Speaker Change: We have plans to continue to accelerate household penetration through investment in media and scaled promotions while leveraging our retail sales team to enhance our in-store execution.
Speaker Change: Great. Thank you very much I'll pass it on.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question comes from the line of Robert Moskow with Cowen. Please proceed with your question.
In international we are investing for growth in our focus and new growth markets.
Speaker Change: Hi.
Speaker Change: Yes, two questions.
Speaker Change: We are accelerating the growth of our power brands Hershey's, Pailon, and Kisses in Mexico through targeted investments.
Speaker Change: I don't think I heard you Michelle if you if you felt like 2026 can be an above algo year I know a competitive your competitor of yours is really.
Speaker Change: Calling that out.
Speaker Change: Based on what they think cocoa costs will do.
Speaker Change: So maybe you can give more specifics on how you think that works and then I also wanted to make sure I understand the comment from Steve on pricing I think you said, it's going to look a lot like pricing or twenty-five will look like 'twenty four but you have a high single digit price increase on chocolate so.
In addition to our Portfolio Action Plans, we are also continuing to transform our business for long-term sustainable growth.
In the third quarter, we executed the next phase of our operating model to better align our organization and our capabilities and drive more efficient growth.
Speaker Change: If it looks like 'twenty four.
Speaker Change: Just victor it looks lower than what I would expect so maybe I'm wrong, there, but can you could you give more clarity.
Speaker Change: Yeah. So I'll hit the 2026, so we do feel good that 2026.
This includes evolving our marketing organization to have a stronger portfolio focus and better address evolving consumer needs.
Speaker Change: Can be an algorithm if cocoa is stable and it's cocoa prices really the cooling there could be some outsized growth possible certainly.
Speaker Change: We are continuing to integrate our supply chain across confectionery and salty snacks to unlock efficiency and scale, leveraging our new ERP platform.
Speaker Change: So yeah.
Speaker Change: And we're watching the cocoa price carefully, but we are feeling good based on what we believe and see that we would be an algorithm or have some upside.
And lastly, we are rebuilding our technology group and advancing capabilities in data science and technology to enable deeper consumer and category insights.
Speaker Change: And on the pricing side I think the pieces, we've taken pricing on about half of our chocolate pounds and so when you factor that in it ended up netting out to low mid single digit pricing in total.
Speaker Change: And that's why I say, it's largely similar to what we saw this year.
and adjusted EPS to be down by mid-single digits from our prior guidance of down slightly.
Speaker Change: Okay. Thank.
Speaker Change: Thank you.
Speaker Change: Thanks, Rob.
Speaker Change: Thank you.
As we look ahead, we are confident in our ability to deliver on-algorithm top-line growth for 2025, as we end 2024 with improved momentum and stronger plans.
Speaker Change: Our next question comes from the line of Michael <unk>.
Speaker Change: Every week Piper Sandler. Please proceed with your question.
Speaker Change: Thank you good morning.
Speaker Change: Good morning.
Speaker Change: Just wanted to understand how youre thinking about marketing spending your advertising spending was down slightly but of course.
Robert Moskow: COCOA fundamentals are improving and we believe there will be a global supply surplus in 2025 driven both by a recovery in West Africa and significant production growth in the rest of the world.
Speaker Change: Our sales in.
Speaker Change: It wasn't down quite as much as sales so on a percent basis, obviously, even in this quarter, that's held up but.
Speaker Change: You've obviously got costs pressured environment.
Speaker Change: Despite that, cocoa prices have remained high. Earnings, as expected, will be impacted by this historically high cocoa inflation.
Speaker Change: <unk>.
Speaker Change: Marketing one of the ways you can do.
Speaker Change: We have some flexibility with the bottom line or you know how do you think about just protecting matter.
Speaker Change: And really trying to protect share as well given the price increases.
In addition to mixed headwinds and a few one-time benefits in 2024 that won't repeat.
Speaker Change: I'll I'll share some thoughts and I'll ask Steve too as well. So clearly we continue to believe in the importance of investing in our brands. We think that's also really important.
Steve will cover these topics in more detail.
Speaker Change: In closing, we are managing this business for the long term. Our team is taking action to control the variables we're able to control and we are carefully monitoring those we cannot.
Speaker Change: Not an environment, where prices are where they are and that said we have really good marketing mixed models.
Speaker Change: We continually look at generating higher rois each year, we hold ourselves to that standard and we are also always looking at things like New media agency Rfps that can drive meaningful productivity, we do have that as we approach 2025. So we're trying.
Speaker Change: We are addressing consumer and customer evolution while also making organizational changes needed to ensure the long-term competitive health of our business.
With that, let me turn it over to Steve to provide more details on our financial results and outlook.
Speaker Change: To be very thoughtful about.
Thank you, Michelle, and good morning, everyone.
Speaker Change: Investing where we think it makes sense strategically you know theres an area next year that we really wanted to focus on in terms of incremental investment in a variety of brands to really bolster the instant consumable business.
Third quarter reported net sales declined 1.4% as approximately two points of price realization was more than offset by volume declines.
Speaker Change: As Michelle noted, we fell short of our expectations due to softer consumption trends across our segments, incremental retailer inventory contraction and seasonal shipment delays, in addition to the planned lap of inventory increases ahead of last year's ERP implementation in the North America Salty Snacks segment.
Speaker Change: Other things you want to add there yeah I would just say you know Q3, we index a little bit to sales underway media hits P&L. So there is some impact there no pullback in terms of supporting our brands and as we look to next year. Our top priority is going to be driving top line driving share driving consumption and we're going to leverage media is one important tool.
Speaker Change: And that's not to say, we don't want efficiency as Michelle said, we're looking to do agency that'll drive some efficiency, we're bringing new tools to bear to make sure that we're allocating that money wisely.
Speaker Change: Our North America confectionery segment delivered organic, constant currency net sales growth of 0.9 percent. Price realization contributed approximately two points of growth in the quarter.
Speaker Change: But we are absolutely not pulling back.
Speaker Change: Volume was impacted by retailer inventory management efforts across both seasonal and everyday confection.
Speaker Change: Oh, Okay. That's that's helpful and then.
Speaker Change: Just a follow up on your inventory comments, a tighter retailer inventory you had called out is that's impacting the outlook.
While we saw a greater than planned increase in everyday retailer inventory, seasonal shifts continued as Halloween shipments that moved from Q2 into Q3 were partially offset by holiday deliveries shifting from Q3 into Q4.
Speaker Change: Coming into the quarter, you had pointed to a second house.
Speaker Change: Inventory restocking that would've been.
Speaker Change: Fourth you skewed I believe even maybe kind of a four five point lift in.
Speaker Change: The net impact of these inventory items was a one-point benefit to volume in Q3.
Speaker Change: Getting released congrats <unk> and <unk>.
Speaker Change: I don't know how specific you can be but it sounds like that's not coming through as expected can.
Speaker Change: Excluding these items, the base business declined slightly, driven by weaker-than-planned consumer trends, higher competition, and softer-than-planned summer promotional effectiveness.
Speaker Change: Can you just give a sense of maybe how much of the guidance cut is.
Speaker Change: From an inventory reset that isn't materializing the way you had initially expected.
Speaker Change: Sure Yeah, we still expect in the fourth quarter to see a mid single digit if I kind of say all shipping timing impacts of its still going to be pretty significant in the fourth quarter. If I take a look at full year guidance. The impact of all of these inventory moves is probably about a half point drag on the adjustment that we made.
Speaker Change: reflected an approximate 13-point headwind from lapping the planned inventory bill ahead of the ERP implementation in Q4 of last year, as well as a mid-single-digit headwind from retailers reducing inventory levels.
Speaker Change: Just to give some perspective and I think we acknowledge this is a noisy quarter with lots of you know between lapping as for in the case of salty and.
Speaker Change: Excluding these items, the base business net sales increased low single digits, reflecting continued strength in DOTS pretzels, partially offset by the planned shift of a Skinny Pop promotion into Q4, higher levels of competitive investment,
Speaker Change: Timing and the way retailers have laid out seasons heat up lots of factors, so, but when you look across all of it.
Speaker Change: Biggest pieces.
Speaker Change: and order timing shifts into Q4 due to the planned route-to-market changes.
Speaker Change: We expect to see less of that all in 2025, it should be a lot cleaner conversation.
Speaker Change: As Michelle mentioned, we're pleased that Skinny Pop has returned to growth in recent weeks behind media, distribution, and merchandising increases, and we continue to expect growth in Q4.
Speaker Change: Okay, great. Thanks, so much.
Speaker Change: Sure.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Tom Palmer with Citi. Please proceed with your question.
We also expect strong growth from DOTS, albeit moderating against last year's club distribution gains, as our new flavor, Parmesan Garlic, expands distribution.
Speaker Change: Good morning.
Speaker Change: Good morning, I know I know, it's still early for a fall 2025 outlook, but I wanted to just get maybe more specific on a couple of items. You noted for 25, but just any help on the incentive comp how.
Speaker Change: Our international segment reported a net sales decline of 3.9 percent. Organic, constant currency net sales were approximately flat, as about one point of price realization was offset by volume declines in Brazil and Mexico.
Speaker Change: How much that is tracking below this year and then second you have multiyear plans for productivity and cost savings you've laid out to what extent might you be able to flex these a bit higher in 2025 versus what the plan was for 24 months.
Speaker Change: Based on our third quarter performance, we are revising our total company net sales outlook to flat year over year.
Speaker Change: Yes, sure we could take that.
Speaker Change: Yes.
Speaker Change: Our reduced outlook reflects our Q3 performance, sustained consumer, competitive, and channel pressures into Q4, as well as lower-than-planned year-end retailer inventory levels in both confection and salty snacks.
Speaker Change: The comp reset will talk more about that when we get to the fourth production, we're still or excuse me. When we talk about fourth quarter earnings were still working through this year, but obviously with the performance. This year, but you can imagine the incentive comp is going to be.
Speaker Change: Need to be reset next year back to target levels and again, we'll give more color on that but it's a meaningful year over year impact on the productivity absolutely. We have a great history of driving productivity here you know before we talked about things like the AAA program, which are incremental just our base level of Ci is something we try to push up.
Speaker Change: As Michelle discussed, we are taking actions to improve base business performance across all three segments.
Speaker Change: In the fourth quarter, we have good visibility on mid-single-digit sales growth from confection holiday shipments, two extra shipping days, and the lap of planned inventory drawdown following the Q4 2023 ERP implementation in Salty Snacks.
Speaker Change: Every year the teams are working hard to do that.
Speaker Change: To continue that trajectory and then we'll continue to look even within the bounds of the AAA program. You know what more can we do to help offset some of the inflation I'd say, it's going to be tough. The teams are working on it you know the savings that we share is a net savings. So it takes into account some level of reinvestment.
Speaker Change: Adjusted growth margin of 40.3% was below expectations, reflecting volume deleverage from lower-than-expected shipments and unfavorable mix.
We now expect full-year adjusted gross margin to decline approximately 250 basis points year-over-year.
Speaker Change: But we will definitely be looking to drive as much savings as we can for next year.
Speaker Change: Alright, thanks for that color.
Speaker Change: reflecting our reduced volume outlook and sustained channel and product mix headwinds, along with previously anticipated cocoa and sugar inflation, which more than offset net price realization and supply chain productivity.
Speaker Change: Quick one on cocoa.
Speaker Change: Prepared remarks indicated.
Speaker Change: It would be inflationary throughout the year are there periods, we should be thinking about next year, where we will see that rate of inflation more significant than others.
Speaker Change: Advertising and related consumer marketing decreased approximately one percent in the third quarter as higher investment in our North America salty snacks and international segments was more than offset by efficiencies in consumer marketing related expenses in North America confectionery.
Speaker Change: Yeah, I would say that's hard to call right now just because we're still we're still getting through this year and the Cocos been so volatile and we'll try to give more of that color. When we do talk about full guidance for next year to give a little bit of purse attractive clean up by then that will have a pretty good picture some of those year over year movement.
Speaker Change: Adjusted operating expenses, excluding advertising and related consumer marketing spend, declined approximately 14% due to reduced compensation and benefits costs and decreased capability and technology investments versus the prior year period.
Speaker Change: Alright, thank you.
Speaker Change: You bet.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Mexican importantly be Paraguay. Please proceed with your question.
Speaker Change: Our AAA initiative remains on track to deliver at least $100 million in savings this year, primarily within division and corporate expenses, and will continue to build in Q4 relative to Q3.
Speaker Change: Hey, Thanks for the question just going back to cost savings for next year. It feels like what we know now there could be a $140 million or so coming from the productivity program benefits.
Speaker Change: The adjusted tax rate for the quarter was 15.2%, a decrease of 5.2 points versus the year ago period due to higher levels of renewable tax credits in the current period and adjustments to tax reserves in the prior year period.
Speaker Change: Benefit in Cogs, and then maybe.
Speaker Change: $40 million or so of benefit in Cogs from the AAA program.
Speaker Change: Call it $180 million in total one do I have that right and then to your remarks about it being.
Speaker Change: Your your teams are working but it will be tough to get after those savings or are there incremental savings above and beyond those two buckets or should we really be thinking about a $180 million or so of being the number for 'twenty five thanks.
Speaker Change: We now expect a full-year adjusted tax rate of approximately 11%, which is lower than our previous outlook, driven by increased visibility into renewable energy projects, to be completed this year.
Speaker Change: Yeah, I don't want to give.
Speaker Change: As a result, other expense is now estimated to be between $260 million and $270 million.
Speaker Change: Pin down exactly how thats going to allocate the you know the 130 to 140 in Ci and typically are targeted at the operating supply chain area. So.
Speaker Change: The net effect of both adjustments leaves our overall tax impact relatively unchanged.
Speaker Change: I'll say ticked the box on correct on that we will give more details on the split of triple eight when we give our guidance for the fourth quarter.
Speaker Change: Interest expense of $44 million in the third quarter was in line with expectations, and we now expect full year expense of around $170 million.
Speaker Change: It's a mix of as we talked about before there is clearly a cogs component and there's a pretty significant SG&A corporate expense component as well and we'll give more detail on that break out when we get there.
Speaker Change: Capital additions including software were 128 million dollars in the quarter supporting our previously discussed capacity expansion projects.
Speaker Change: On.
Speaker Change: And what was the second question you had with theirs.
Speaker Change: What was that it.
Speaker Change: We now expect full-year capital investments of $575 to $600 million based on improved visibility to ongoing projects.
Speaker Change: That was really that was held by <unk>.
Speaker Change: Uh huh.
Speaker Change: A second question, which is on going back to Alexia is question on on <unk>, and I think you've talked about seeing a mild impact.
Speaker Change: We remain committed to our capital allocation priorities, including reinvestment for growth, dividends, and share repurchases.
Speaker Change: I'm really I'm curious if you could put a finer point on what type of impact you're actually seeing and then.
Speaker Change: In the third quarter, dividends paid to shareholders totaled $270 million, an increase of 13.7% versus the prior year period.
Speaker Change: And related to that is yes, I think we're all of the mind that most of the snacking weakness. We're seeing right now is due to the consumer feeling financial pressure, but you talked about in your prepared remarks.
Speaker Change: The company did not repurchase any shares in the third quarter against our December 2023 $500 million authorization with $470 million remaining.
Speaker Change: But I'm curious.
Speaker Change: If you think there is a meaningful portion of the snacking weakness right now that is due to.
Speaker Change: Category level shifts related to G. L. P. One, particularly as we see some of these higher protein categories, even within snacking, such as meat snacks.
Speaker Change: Adjusted earnings per share declined 10% in the quarter as lower sales and gross margins were only partially offset by reduced SG&A related to lower compensation and benefits costs.
Speaker Change: Even better than others. Thanks Ali good day.
Speaker Change: Yeah, all the analysis that we have done has continued to show that.
Speaker Change: Our full-year adjusted EPS is now expected to be down mid-single digits, driven by the reduction in our top line and gross margin outlook.
Speaker Change: The year on year impact is not significant and that the pressure in the snacking categories are really driven by the consumers.
Speaker Change: Before we wrap this morning, I want to address the cocoa market and touch on 2025.
Speaker Change: Feeling pressured financially. So every every piece of data that we've seen has really indicated that and then of course.
Speaker Change: We are pleased to see COCOA Fundamentals improving, with multiple data sources indicating a global supply surplus in 2025.
Speaker Change: Some elements of our business.
Speaker Change: Some opportunities for us to be executing better so.
Speaker Change: The crop outlook in West Africa is positive and cocoa arrivals in Ivory Coast ports are up 27% compared to this time last year.
Speaker Change:
Speaker Change: That's really what our data has shown.
Speaker Change: Okay. Thanks very much.
Speaker Change: Thank you.
Speaker Change: Moreover, production outside of Ivory Coast and Ghana now accounts for nearly half of global supply and is growing, driven by record high prices.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of David Palmer with Evercore ISI. Please go ahead.
David Palmer: With your question.
Speaker Change: Thanks, Jim.
Speaker Change: However, low liquidity on the exchange is contributing to sustained high prices and normalization may occur gradually as cocoa production bills and origin sales continue in earnest.
Speaker Change: Wondering if maybe you know at the end of this call. Obviously, we're all going to have to take a crack at it earnings for 2025.
Speaker Change: And I'm wondering if maybe we could put some brackets around how you're thinking how you would think right now given some base case assumptions some of the things you're talking about the resetting of incentive compensation, you bet that 2% to 4% top line Coca cost realities today.
Speaker Change: We have robust processes in place to ensure continuity of supply and good visibility into our costs. However, remember that we were well covered for 2024 when we provided our full year outlook in February, and COGO prices remain significantly above those and prior year levels.
Speaker Change: Is it safe to say, we'd be thinking something like a double digit earnings decrease for 25.
Speaker Change: Regarding 2025, as Michelle said, we anticipate an on-algorithm, top-line growth.
Speaker Change: How how can we maybe think about that further.
Speaker Change: Yes, I mean.
Speaker Change: Driven by strong plans, the benefit of a longer Easter, the flow-through of previously announced pricing and price pack architecture, and fewer headwinds than we experienced in 2024.
Speaker Change: We'd love David to give more precision around what that range would look like I think the challenge and you kind of set it and the question is you know the cocoa reality today is evolving and so it's very hard to kind of give guidance on the total until.
Speaker Change: However, historically high COCO costs, other commodity and supply chain inflation, unfavorable mix and elasticity more in line with historical rates will more than offset our pricing, productivity and cost savings initiatives.
Speaker Change: We get more visibility or full visibility, let's say into what that impact is going to be next year.
Speaker Change: We've talked about some of the headwinds from tax normalization and incentive normalization, clearly theres going to be a significant year over year impact of cocoa, but exactly what it is we're just not in a position yet to share it.
Speaker Change: Okay understood on that and just one question on the topline.
Speaker Change: You went through in the prepared remarks.
Speaker Change: Great reminder, about the long term growth of 15 year growth in the confectionery category.
Speaker Change: Additionally, bear in mind that earnings in 2024 included a historically low economic tax rate and reduced incentive compensation, which are not expected to repeat in 2025.
Speaker Change: Not only that but Hershey has done a great job in terms of market share growth.
Speaker Change: Big areas of growth and outsized growth from things like seasons, or the Reese's power brands I'm wondering how you're thinking about that.
Speaker Change: As usual, we will provide a detailed full year 2025 outlook with our Q4 earnings.
Speaker Change: Sort of the shape of your growth in the contributors of growth maybe those outsized areas of growth that youre going going forward, whether that be non chocolate confectionery, which has been outperforming chocolate recently, maybe channel how are.
Speaker Change: Despite another year of expected commodity-driven earnings pressure in 2025, we will continue to invest to drive top-line growth, market share, and innovation that delights consumers.
Speaker Change: Are you thinking about the candidates for outsized growth for you in 'twenty five and beyond thank you.
Speaker Change: We remain confident in our ability to support peer leading margins through efficiencies and cost savings programs over time. With that, I will turn it back to Michelle for closing remarks.
Speaker Change: Yeah, So I would say certainly salty as we looked at our entire portfolio is gonna be a big area of growth.
Speaker Change: Strong growth in the categories lots of household penetration upside for us on those businesses distribution expansion.
Speaker Change: Sweet certainly because suites is a growing area of the category.
Speaker Change: And also an area, where we are underdeveloped.
Speaker Change: Certainly seasons, we've continued to have strength and so we will continue to look at ways for that to drive us going forward.
Speaker Change: I would say some of the the channel opportunities, we think are big ones and a lot of those would come through relative to chocolate and I think I'd kind of categorize the chocolate would be more in line with and slightly better than the category, but probably the biggest inflect.
Speaker Change: <unk> point in 'twenty five.
Speaker Change:
Speaker Change: Versus some of the others that I mentioned.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Chris Carey with Wells Fargo Securities. Please proceed with your question.
Speaker Change: Yeah.
Speaker Change: Hi, Hi, everyone.
Speaker Change: I just wanted to go back to a reference in the prepared remarks that you'll be.
Speaker Change: Dealing with fewer headwinds in 2025 that you experienced in.
Speaker Change: In 2024.
Speaker Change: Really a topline comment Michelle you flag.
Speaker Change: And stores, probably a week into the front half, but then maybe get better it sounds like you expect execution.
Speaker Change: They get better in store as well.
Speaker Change: Potentially with.
Speaker Change: Our new leader.
Speaker Change: Or infection.
Speaker Change: What are the things that when you think about fewer headwinds in the year over year helpers that.
Speaker Change: You're really thinking about when I comment in the prepared remarks.
Speaker Change: Yeah, there were several and Steve can jump in if I Miss some of them, but you know we exited the Mexico drink business. So that was a drag on the business. This year that we won't experience retail inventory, which I think Steve referenced a little bit earlier, certainly some of the pressures that we had at that key REIT.
Speaker Change: Taylor around reduced merch that we will have fully lapped.
Speaker Change: <unk>.
Speaker Change: You know the ready to eat popcorn softness that we had seen on skinny pop again.
Speaker Change: We should be through most of the ramp on that that was creating pressure there were some pressures from here to leaky buckets on some innovation that we've pulled in some of those smaller item.
Speaker Change: To get away from that.
Speaker Change: He was there and that was the only.
Speaker Change: One I think that we've called out and then of course, you have positives on the other side right. We've got a longer Easter we've got very strong innovation pipeline, both year, one and year two for next year with some strong investment behind it michelle's talked about the suites momentum.
Speaker Change: The inflection in skinny up so absence of negatives and opportunities on the girls side.
Speaker Change: Okay. Thank you and then one quick follow up would be so you did referenced several times.
Speaker Change: And throughout this Q&A session.
Speaker Change: What it sounds like.
Speaker Change: Desire for execution, just to be a bit better and then clearly you have new leadership.
Speaker Change:
Speaker Change: With the business.
Speaker Change: How how would you frame maybe this past couple of years of market share between.
Speaker Change: Innovation versus.
Speaker Change: In store execution that can be merchandising Archie.
Speaker Change: What have you but.
Speaker Change: Yes, it does feel like this is it.
Speaker Change: Execution that you feel like that's been lacking and that can improve so when you kind of think about the past several years, how meaningful is that execute ship it end market versus say some other factors. Thank you.
Speaker Change: Yeah. So I think there have been a couple of areas that I wanted to do better certainly this past year, our summer activations in market did not perform as strongly as we had hoped things like the Olympics and I think that there are some areas where there was some changing dynamics in the category. So there was increased competition.
Speaker Change: And from private label and smaller manufacturers in take home. So we had a really good innovation calendar.
Speaker Change: But it was focused on suites, and an instant consumable and our innovation did incredibly well there, but with that stepped up level of new competitors in telecom you know we found that we need even more there so.
Speaker Change: As we are you know as we look at season, we had some instances where we.
Speaker Change: We had a variety of offerings and perhaps.
Speaker Change: Our retail partners Didnt always have the optimal or choose the optimal portfolio, we think that we can.
Speaker Change: Partner with them and influence in a greater way and then I think just some areas of opportunity probably not weak execution, but opportunity we've talked a lot about some of the work we did on gold standard shelf for take home a few years back you were implying.
Speaker Change: Lamenting that right now for instant consumable I think that that will lead to some stellar results for us as well as the focus that we're putting on some of our variety brands portfolio and really executing that well within instant consumables as well. So those are some of the areas of focus.
Speaker Change: That's really helpful. Thank you so much.
Speaker Change: Sure.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jordan with Goldman Sachs. Please proceed with your question.
Speaker Change: Good morning, and thank you for taking my question I was wondering if you could provide more color on the increased competition that you're seeing in confection domestically. What do you think is different in the environment now that that smaller players in private label are having a meaningful impact as you've called out in and how do you plan to address these pressures.
Speaker Change: So I think as it comes to.
Speaker Change: Private label, certainly I think that's driven by the the consumer pressure and focus on value.
Speaker Change: And certainly I think you know retailers looking to at their margins and the potential that exists there I think as it goes to smaller players you know some of the you know some of the barriers to entry with digital media enables a.
Speaker Change: A bit more of that to come into the category as well as with suites, because I would say suites has some and easier.
Speaker Change: Door to open that as a category as well.
Speaker Change: Where we're really focused is.
Speaker Change: How do we really have the right offerings. The total value proposition. So if we look at instant consumables. For example, you know its always.
Speaker Change: It's always about the highest velocity items everywhere. So there were some instances where we.
Speaker Change: We put out some innovation.
Speaker Change: And shelf space that we took during the pandemic and the items, we're doing okay, but now there are some smaller players who came in and have competitive law cities and we need to switch out some of the items, we have for even stronger items. So I think it's really a focus on on that.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: As a quick reminder, if anyone has any questions you May press star one on your telephone keypad to join the queue.
Speaker Change: Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.
Rob Dickerson: Oh, great. Thanks, so much.
Speaker Change: Steve I don't want to beat the horse so to speak but I do want to come back a little bit to the.
Speaker Change: Pricing conversation for next year I know you had said previously.
Speaker Change: We sit at today you've taken.
Speaker Change: High single digit pricing on about half of that.
Speaker Change: North America confection portfolio, maybe the total.
Speaker Change: Total portfolio.
Speaker Change: But I feel like that still implies probably somewhere around a mid single digit range for North America for North America construction in 'twenty five.
Speaker Change: I'm just trying to marry that comment that pricing next year would be essentially similar to what we're seeing this year because.
Speaker Change: It would seem like it's actually would be a little higher next year, given some of the pricing on Coca So maybe if you can just sort.
Speaker Change: So to help me help me understand that.
Speaker Change: Sure I think the biggest disconnect is probably just due to the mix of items that are being priced.
Speaker Change: I think we talked a little bit about.
Speaker Change: On a pounds basis with.
Speaker Change: But 50% of the pounds being priced and when you kind of flow that through the portfolio. That's what kind of gets you back to that I'd say similar not exactly the same but similar to what we saw this year.
Speaker Change: Okay, Okay fair enough.
Speaker Change: And then I.
Speaker Change: The other question is.
Speaker Change: Just kind of a rail.
Speaker Change: Comment you made in the prepared remarks about kind of trade and media spend.
Speaker Change: Increasing a little bit it sounds like maybe there's a little bit more push on.
Speaker Change: On core brands, maybe not reese's, but you know brands like all enjoying barrels pay day.
Speaker Change: I just remember Michelle I don't know, if we go back and kind of making yourself like five years ago or so right. There was a little bit of an initiative to kind of lean into those brands a little bit it seemed like maybe.
Speaker Change: They need to lead into them, but if we lean into them a little bit more now what.
Speaker Change: What does that mean does that just mean kind of more social media.
Speaker Change: Overall marketing dynamics that mean, maybe a little bit more innovation coming from those brands just trying to gauge kind of where you can take those brands maybe.
Speaker Change: Improved the overall efficacy of the portfolio that's all yes.
Speaker Change: Slowly so it is prioritizing the distribution of those brands most of those brands the biggest parts of their growth isn't regular count. So we've king-size brands and we have brands that are big and regular count. We think now given the you know the focus on consumer value and entry level price points.
Speaker Change: Really making sure that we have a robust portfolio there and then continuing to invest in those brands.
Speaker Change: Give them the marketing support.
Speaker Change: Which then of course leads to those strong velocities that will outpace many of the other newer competitive items, who may be you know trying to gain distribution in the category.
Speaker Change: Alright, thank you so much.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: As a reminder to ask a question you May press star one from your telephone keypad.
Speaker Change: We'll pause a moment to assemble the queue.
Speaker Change: Thank you.
Speaker Change: There are no additional questions at this time would you like to make some further remarks.
Speaker Change: Yeah. So I'll just say thank you all for joining US today I look forward to speaking with many of you in the next few days in coming weeks.
Speaker Change: Thank you. This will conclude today's conference. Thank you for your participation you may now disconnect. Your lines at this time and have a wonderful wonderful.