Michele Buck: Yes, sure. So I would say, a year to 18 months ago, we had started working on some initiatives that we thought could create some real opportunity and value for the company. And executing those was dependent on two things. It was dependent on us getting through the S4 implementation, which we will be through Q2 of this year. And it was also dependent on us doing the unification of our Salty Snacks business, taking those disparate acquisitions we had and combining them together, which obviously we did this past year and also put in place S4 across that platform, across that business unit. That then can become an accelerator for us to really go after what we saw as some opportunities, both in terms of creating greater end-to-end connectivity and also using technology for automation and efficiency.
So this is really where we expected that we would be. Certainly with some of the pressure on coca prices, we accelerated that work a bit versus our original timeline, but the work was planned and underway accordingly. And we’re trying to be very choiceful about where are the choices that we are making across those initiatives, and certainly making sure that a lot of that implementation won’t happen till post S4, till we get through the implementation. So really measuring out when we do what to match with the organizational capacity. Steve, anything you would add to that?
Steve Voskuil: No, we’re excited. We’re going to get through ERP. We’ll have 95% of our business all on one platform and the opportunities that will unlock. And then as Michelle said, thinking ahead to things like integrated demand planning and bringing more automation to supply chain. These were things we had in the vision before, but now we’re much closer to being able to make them realized.
Bryan Spillane: Steve, you may be the first person that use excited in ERP in the same sentence.
Steve Voskuil: Oh, you might. I look forward to seeing you guys in Florida.
Bryan Spillane: Yes.
Operator: Thank you. Our next question comes from line of Alexia Howard with Bernstein. Please proceed with your question.
Alexia Howard: Good morning, everyone.
Michele Buck: Good morning.
Alexia Howard: Can I ask about honing in on the chocolate category in the U.S? You’ve obviously seen some nice recovery in volume and market share over the last two or three months. It’s been fairly sharp. Can you talk about what the main drivers of that are? I imagine that innovation with the Reese’s Caramels launch might be a piece of that. Just giving us some idea of what’s driving that and whether that trend is expected to continue.
Michele Buck: Yes, absolutely. I’d say there are two things that have really created some nice momentum on the business. One was we saw consumers have a huge affinity to the seasonal traditions. And we had very strong growth in the category in both Halloween and holiday. And we also won share. So that was certainly a key driver. And as you mentioned, we had talked about earlier this year, the opportunity for us in 2024 to really dial up innovation. We had a later year in 2023. Our innovation for 2024 is up about a third versus where it was in 2023. And we’re really excited that we have some big innovations. Reese’s Caramel, we believe will be a very nice addition. And that’s doing well in Q4, continues to. We’ll be featured on the Super Bowl. So you can look for that as well. And then we have some exciting sweets innovation later in the year.
Alexia Howard: Perfect. And just continuing on the theme of innovation, you mentioned a third increase. Are you able to quantify where you’re at in terms of percentage of sales from new products introduced over the last three years? I imagine that that would have come down significantly since the pandemic started.
Michele Buck: Yes, so we are up about 35% higher in terms of innovation versus prior year. And we are up slightly versus pre-pandemic as well. I think we’ve chosen not to talk about innovation as a percent of net sales.
Alexia Howard: Okay, perfect. I’ll pass it on. Thank you.
Michele Buck: Thanks.
Operator: Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.
Pamela Kaufman: Hi, good morning.
Michele Buck: Good morning.
Pamela Kaufman: A question on your capacity expansion plans. I think you previously mentioned you had a 15% increase in capacity coming online this year. Can you just give an update on that? And do your cost savings initiatives impact these plans at all? And then maybe you can remind us what products the capacity is going to be used for.
Michele Buck: So I’ll cover some of that and let Steve cover some of it. We’ve continued to invest in capacity in brands and businesses across the portfolio that have growth and opportunity ahead. Over the past couple of years, we’ve focused on Reese’s where we were short on capacity so that we could fulfill consumer demand. And then the other big area of focus we had was on the gummy side of the business in suites. And the first part of this year, we complete and have capacity coming online for that business that we will be able to leverage to better participate in that segment in the back half of the year. Steve?
Steve Voskuil: Yes, the only thing I would add is everything is on track. Yes, we’re proceeding per plan and the cost savings project that we talked about doesn’t have any direct impact on those plans other than as we look to the future, more opportunities to automate and create some agility and supply chain beyond those projects, so.
Pamela Kaufman: Great, thank you. And in the prepared remarks, you pointed to 200 basis points of gross margin contraction this year. Can you walk us through how you’re thinking about the puts and takes around gross margins in 2024? And if you could give some color on the cadence of gross margin progression this year.
Steve Voskuil: Sure, yes, I’ll give a highlight that the prepared remarks actually have a good section on that. So whatever I missed here, refer back to that. But with overall full year basis down 200 basis points, as you said, we’re going to see more of that in the first half than the second half for some of the reasons we talked about even earlier in this Q&A session. We will have in the second half higher commodity inflation, but in the second half, we’ll begin to see more benefits from continuous improvements, so manufacturing cost savings, the agility and automation program that we talked about will kick into more gear in the second half as we get past the ERP process. And then we’re lapping some one-time costs in the back half related to Salty and the ERP program.
So those laps plus the accumulated benefits that pick up on the savings side are what drive the biggest inflection from a gross margin standpoint as we look at the second half having less drag than the first half.
Pamela Kaufman: Okay, thank you. And just one more quick question. How are you thinking about the outlook for cocoa prices from here? And how is that influencing your hedging strategy?
Steve Voskuil: Yes, our hedging strategy has not changed. Our kind of principles around how we manage commodities hasn’t changed. It’s a dynamic market, and we’re not going to comment too much about future pricing. Our business, as Michelle said, we’ve seen cycles like this before. We’ve got a lot of tools at our disposal to manage the impact of cocoa, and we plan to use all of those, so.
Pamela Kaufman: Thank you.
Operator: Thank you. Our next question comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.
Robert Moskow: Hi, thanks. I guess I have two questions. The first is market share assumptions in the U.S. for 2024. Is it fair to say that you think you can grow share in confectionery? And the second thing, on the pricing strategy, Michelle, nothing’s changed, but this is a different strategy than what you’ve had in the past. The idea is to kind of squeeze out the pricing in maybe more frequently and in smaller increments. And I guess, is that still possible to do in an environment like this when the input costs spike so significantly? It sounds like that, it sounds like you’re doing it this year, but, is it more difficult to execute when you see this much volatility in the inputs or not?
Michele Buck: Okay. So I’ll take the first question, first relative to market share. We expect to see sequential improvement as we go throughout the year. The first half will be pressured by a shorter Easter. Easter comes much earlier this year. And also we will have about five, roughly five months in the first half of lapping the reduced merchandising and distribution at that one key retailer. And we know from this past year, the impact of that was about two points in total. We offset about one point of that on a takeaway basis. So that will pressure share. In the second half, we then are past those laps of the shorter Easter and the retail merch. And so we expect to see sequential improvement and to end the year in a much better place than where we’re starting.
As I think about our pricing strategy, I’d say what is consistent is our goal to cover inflation with price over time. Within that, how exactly we do that relative to smaller, shorter, more frequent, or bigger, the timing and the magnitude, to me are heavily influenced by other factors, such as where our input costs and general inflation are. So I think, yes, that the overall, we have a strategy to expand growth margins to price to cover inflation and allow reinvestment. That hasn’t changed, but how we go about doing that will be a bit different. We’re also very much focused, price pack architecture is an opportunity, all the tools in the lever.
