The Hershey Company (NYSE:HSY) Q3 2023 Earnings Call Transcript

The Hershey Company (NYSE:HSY) Q3 2023 Earnings Call Transcript October 26, 2023

The Hershey Company beats earnings expectations. Reported EPS is $2.6, expectations were $2.47.

Operator: Greetings, and welcome to The Hershey Company Third Quarter 2023 Question-and-Answer Session. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. I’d now like to turn the call over to your host, Ms. Melissa Poole, Vice President of Investor Relations for The Hershey Company. Thank you. You may begin.

Melissa Poole: Good morning, everyone. Thank you for joining us today for The Hershey Company’s third 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. 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. 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 will provide useful information for investors, the presentation that 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, 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.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

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Q&A Session

Andrew Lazar: Good morning, everybody.

Michele Buck: Good morning, Andrew.

Andrew Lazar: Thanks. At Hershey’s Analyst Day earlier this year, I know that the company expressed confidence in sort of generating the high end of its sort of long-term growth algorithm for 2024. And we know some things have changed since then. There’s been some more inflation. You talk about what seems to be the need for maybe some more aggressive investment spend behind stepped-up innovation as well as some shifting between trade and consumer spend and some consumer behavior shifts. So I was hoping maybe you could take us through, I guess, some of the key puts and takes for next year, how you’re seeing all of this rolling up at this point? And basically, if 2024 can still be sort of an on-algorithm year even if not necessarily at the high end.

Michele Buck: Sure. So certainly, Andrew, we recognize that the world continues to be very dynamic out there, but we think we’re very confident that we can pivot and adjust to those changes. If we think about things that we’re anticipating strength on from a top line perspective, we’ve got good visibility with the capacity enabled growth, the capacity that will come online. Gummies in particular, is an area where we’ve not been able to fully take advantage of the growth in the Sweet segment. We’re going to be in a much better position next year to do that. Certainly, some of the capacity that came online this year has been helpful to us relative to seasons and better being able to take full advantage in that area. That will be a benefit next year as well as additional Reese.

Certainly, we have higher levels of innovation. Reese’s’ Caramel is one that we have highlighted already, but that’s going to be very helpful for us in terms of driving the overall business as well as merch. We have some opportunities in distribution on salty Dot’s in particular. And of course, we also have pricing carryover from this year. From a margin perspective, we know that we’ve got inflation that’s a bit of a headwind with all-time high commodity costs in cocoa. But we also have pricing and productivity that will help to offset that. It will have some one-time pressures related to the S/4 transition. But again, that’s really a transient event and will create some issues relative to inventory in the first part of the year. So that’s kind of a little bit of an overview.

Steve, anything you would add to that?

Steve Voskuil: No. I think you hit all the key pieces. Obviously, the next time we talk, we’ll have a lot more details on next year. So…

Andrew Lazar: Yes. Great. And maybe just as a follow-up, you mentioned pricing and productivity. We know that there’s already some pricing that will flow through and benefit 2024 from initiatives you’ve already announced and sort of put into the market. Have there been any other incremental pricing actions announced or that you think there’ll be potentially the need for given where some of the cost increases are coming from?

Michele Buck: We have not announced any incremental price increases. We always evaluate the marketplace and have a lot of factors that we consider to determine how to best grow the business. Pricing is certainly one tool. I mentioned productivity. Now that we’re in a better shape from a capacity perspective, we have more ability in our supply chain to activate productivity, and then we also look at productivity across every line item of the P&L, whether its trade, media, organizational processes and make sure we’re really leveraging the best capabilities and investments to drive the business.

Andrew Lazar: Okay. Thanks so much.

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

Ken Goldman: Hi. Thank you. I just wanted to follow up on Andrew’s question a little bit about next year. I very much understand you’re not necessarily in a position yet to discuss all the details of 2024, but you have given us some sales outlook and EPS outlook for next year. And I guess the question was whether you can hit the high-end of algo or the numbers that you put out there, and I realize things are still changing and pivoting. But I’m just really curious, because I think it’s an important question to kind of follow-up on that guidance that you had given and really get a better understanding of how the incremental headwinds that have come since your Investor Day? I guess it’s been a little more powerful than some of the tailwinds that have come as well. I’m just trying to get a sense of kind of balancing all that, I think, a little bit in the context of the fact that some numbers have been provided already. Thank you.

Steve Voskuil: Sure. Yes, I’m happy to take it. It is an important question, and we’ll address it a lot more fully on the next call. I think, the key right now is there are a lot of moving pieces even since we had that call, and some things are progressing in a positive way. We talked about productivity a little bit already. Productivity was one of the upsides we talked about on the call, we’re having a great year from a productivity standpoint, and I expect that to carry forward. As Michele just said, we’ll continue to look at pricing in all variables, pack price architecture, regular pricing and other places for productivity. And then we’re watching the commodity markets closely. And there’s been a pretty significant change there, too, from the beginning of the year.

And so as we get together next time, we’ll be able to pull all of that together and give you a better picture on how we feel about what we said back at the investor conference. But right now, we’re still looking at, as Michele said, a pretty dynamic environment.

Ken Goldman: Okay. Thank you for that. And then my follow-up is, as we think about the trade de-load, you mentioned with the key retailer. Can you talk a little bit about what drove that and what some of the risks are that additional de-loads happen with maybe some of your other customers?

Michele Buck: Yes. And really, what we saw from the key retailer was a reduction in merchandising, which did pull back on shipments into that retailer. And this is really about their strategy to improve the shopping experience for their consumers and also to make fulfilling online orders easier for their pickers in store. This was a change that impacted many categories. Confection was one of those, and we had a disproportionate impact because we have had a very high share of merchandising. And therefore, that pullback impacted us, but it impacted many other categories in both edibles and nonedible. Now this, I want to point out, this is really related to every day. So as you think about Q4 and the importance of Halloween and Holiday this did not impact season. So we don’t expect the same impact in Q4 given how much of our business is seasonal. We do think that this will be a headwind in the first part of 2024, where we’re lapping higher levels of March.

Ken Goldman: Thank you for the clarification. I appreciate it.

Michele Buck: Sure.

Operator: Thank you. Our next question comes from the line of Max Gumport with BNP Paribas. Please proceed with your question.

Max Gumport: Hi, thanks for the question. First, I just wanted to follow up on your commentary on the retailer merchandising reduction. It sounded like it was to help improve the shopping experience and the e-commerce and picking ability as well. Is there any reason to think other retailers could follow the same path? It sounds like it’s just one key retailer for now. But are there any reasons to expect other retailers will follow?

Michele Buck: I don’t anticipate that. I think this retailer, the degree of merchandising at this retailer was much greater than at many others. So I wouldn’t anticipate that.

Max Gumport: Great. And then on Halloween, it sounds like it’s up slightly so far. I know there was a low double-digit expectation. And I know that this year, shopping patterns have been a bit more normal, so less shopping earlier in the year. So I think that would be one key reason to think you can still get to that low double-digit number, but I just wanted to make sure you still have visibility to low double target for Halloween this year. Thank you.

Michele Buck: Yes I think the way you characterized it is certainly correct. We have seen a normalization of patterns from consumers in terms of when they’re shopping as their concerns about potential availability are not there this year like they were last year. 50% of the season does sell through in the last two weeks of October. So we still do have a bit of product to sell through. And with Halloween falling on a Tuesday, there will be a lot of sales this weekend. We have seen a little bit of softness in the season from some cohorts that have indicated affordability was a concern in their participation and it wasn’t just candy it was some other seasonal categories including decoration, costumes et cetera. But we are out there building aggressive displays, the product is out there and we are continuing to drive to deliver our expectation for the season

Max Gumport: Thanks very much. I’ll leave it there.

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

Michael Lavery: Thank you. Good morning.

Michele Buck: Good morning.

Michael Lavery: Just I was wondering if you could catch us up on Cocoa. Obviously, we see the market rates or the spot rates. But you’ve always done, I think it’s anything from three to 18 or maybe even more months of hedging and contracting. And, can you just give us a sense of maybe what, if anything, you expect the market to do, how you’re positioned relative to that? I know the pricing question came up a little bit earlier and you haven’t announced anything, but is there any reason to believe that you would have any different approach than normal where if it remains an elevated source of pressure, you could take the pricing to cover it? Just some thoughts on how all that looks from your seat?

Steve Voskuil: Sure, I’d be happy to do that. On the Cocoa side, our policies haven’t changed. You reference the hedging horizon and those fundamentals haven’t changed. I would say as we sit here today, we probably have less visibility on a full year 2024 pricing locked in that we might have had in prior years. And some of that is driven by the high pricing right now. But we’re staying very close to the market and of course that influences other parts of the strategy as you mentioned like pricing. From the pricing standpoint, as Michele said, there’s also nothing fundamentally has changed there in our strategy. Pricing is one — tool and there’s a lot of ways to deliver pricing and there’s productivity and other things in the P&L that also have to be part of that equation.