The Hershey Company (NYSE:HSY) Q1 2024 Earnings Call Transcript

The Hershey Company (NYSE:HSY) Q1 2024 Earnings Call Transcript May 3, 2024

The Hershey Company beats earnings expectations. Reported EPS is $3.07, expectations were $2.76. The Hershey Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Hershey Company First Quarter 2024 question-and-answer session. [Operator Instructions] 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 first quarter 2024 earnings Q&A session I hope everyone has had the chance to read our press release and listen to our pre-recorded management remarks, both of which are available on our website. In addition, we have posted a transcript of the pre-recorded 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 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, 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: [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: Great. Thanks so much. Good morning, everybody.

Michele Buck: Good morning, Andrew.

Andrew Lazar: Michele, I guess excluding the inventory build underlying organic sales in North America confectionery rose 2%. I think we in the Street had modeled it broadly more flattish. And recently, market share trends in chocolate have inflected following a year of weakness. I guess, my question is am I overplaying this or maybe are you too starting to see sort of building underlying momentum in the core confectionary segment outside of all the ERP inventory noise? And would you expect to see a sequential improvement in volume trends in 2Q?

Michele Buck: Yes. So Andrew, we are definitely, we’re very pleased with our Q1 top line performance. I would say that overall, it was in line with our expectations. However, our market share did exceed expectations and our strength was really driven by very strong performance in seasons both overall and takeaway as well as market share and also the strengths that we had in innovation with Reese’s Caramel, which not only did well with consumers, was the best innovation in the category and also was able to drive strong merchandising for us, particularly as we launched around Super Bowl. So we’re feeling good about what we’re seeing. And as we look to the rest of the year, we do expect some improvement in trends as we enter throughout the year and proceed towards the end of the year.

Andrew Lazar: And then you mentioned in the prepared remarks improved display activity in the first half of this year versus the second half of last year. I know there’s a lot that goes into that. But can we also take this to mean maybe that some of the headwind you faced last year from a major customer going through what seems like yet another sort of clean store effort maybe has started to realize a bit that display and sort of multiple points of interruption for snacks improved sales or is that too strong a way to characterize it? Thanks so much.

Michele Buck: Yes. I would say we are partnering very strongly with that retailer as we always do and certainly I think we both recognize some of those opportunities that we can go after. As we look at the performance year-to-date, a lot of the strength that we had seen versus second half of last year in merch was really across other customers versus that customer with seasons innovation and then really tying some of our media to events like the Super bowl or March Madness driving merch. So we do anticipate that we will see some of the strength from merch with that retailer in the second half of the year.

Andrew Lazar: Thank you.

Michele Buck: Thank you.

Operator: And our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

Alexia Howard: Good morning, everyone.

Michele Buck: Good morning.

Alexia Howard: Okay. So two questions. First of all, I know you’re not going to comment on what you’re doing with your cocoa forward contracting and hedging strategy, but could you give us a little bit more detail on the levers and options you have regarding sourcing for 2025, whether it’s sourcing from other regions, obviously, timing of contract, the amount of flexibility you can build into the system? Just some ideas of the types of levers that you can pull given the amount of volatility that’s out there in the cocoa markets today?

Steve Voskuil: Sure. Yes, I’m happy to take that one. So multiple ways to deal with the volatility. Obviously, the hedging program and the financial side is one way to deal and then the supply chain side making sure we’ve got diverse sourcing. And we’ve done a good job of that over the years of really trying to diversify that supply chain footprint. And no doubt looking back at the last few years, we’ll continue to move that diversification forward, but that does give us some flexibility on sourcing. And of course, we have recipes that went and taste profiles and things like that, that guide those choices, but within that, we’ve got quite a bit of flexibility on the sourcing side.

Alexia Howard: Great. And then are you able to comment on what you’re seeing in terms of the state of the American consumer? We’ve been hearing a lot about this recently with lower income consumers becoming more vulnerable. Any comments you can make on how much the SNAP spending cutbacks last year hit you? I don’t know whether you’re able to quantify that, but just comments on where you’re seeing the American consumer headed at the moment. Thank you. And I’ll pass. It on.

Michele Buck: Yes, absolutely. So we do know that we saw impact from the SNAP reductions in the business in the back part of last year. We are beginning to see some stabilization as we start to lap some of those reductions consistent with our expectations. As we built our plan, we anticipated that, that would occur. However, we do continue to see value seeking behavior from consumers. So that still hasn’t changed. I’d say it’s improving a bit, but is still there.

Alexia Howard: Thank you very much. I’ll pass it on.

Operator: 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 to your answer to Andrew’s question about North America confectionary. I think you said that in general, it came in underlying, right, excluding the ship ahead, kind of in line with your expectations, but that your market share exceeded your expectations. So I guess, just mathematically, the category maybe didn’t do quite as well as you would hope so. A, I’m just trying to make sure I’m hearing that correctly. And B, if so, what do you attribute that to? Again, we all know there’s been some elasticity and you mentioned the lower end struggling a little bit. Is it really just tied to that or are there other factors maybe we should consider?

Michele Buck: Yes. I mean, I’d say some of that is always tied to each key competitor and what their programming is like versus prior year. So our largest competitor mortgage was a little bit soft for the quarter with share down. And I think a lot of that was driven by their innovation, the lap versus prior year with some of that innovation not sustaining and those things do impact the category. So that looked to be one of the biggest drivers.

Ken Goldman: Thank you for that. And then just pivoting a little bit to Salty, obviously, your sales trends were much improved. I think it’s fair to say that there’s still maybe some opportunities in margin ahead. I just wanted to get a level of or get a sense of the level of how content you are with the AMP investment in that business? Do you expect to have to invest any more in price? Just I guess, how confident are you in the kind of the building blocks to really get that business a little more stable to a position where you can grow it and expand margins at the same time?

Michele Buck: Yes. So overall, Salty was on track with our expectations as well. We had very strong dots performance. And then, as expected, while Skinny Pop improved, we knew that the majority of that improvement would not occur until we get to lapping the Q2 period and going forward. Skinny Pop does remain pressured along with some of the rest of the ready to eat popcorn category. And we think that, that will shift once we get past that lap. As we move through the year, we do have strong media and trade investments behind both of the brands. We also have flavor and pack innovation that will help us both grow and also drive share gains in the second half of the year. From a profitability perspective, Q1 Salty profit was the weakest for the year of where the business will be for the year. So you can expect that to get better going forward and also the bigger increase in our advertising really starts to happen in Q2 and beyond working forward.

Ken Goldman: Very helpful. Thank you.

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

Max Gumport: Hi, thanks for the question. I realize you’re not getting into 2025 pricing conversation from this call or commenting on cocoa inflation. I’m just curious if you could talk about some of the other factors that go into that framework, though. So we’ve talked a little bit about market share trends, but also what you’re seeing with category volumes, health of the consumer overall, the competitive environment cross category elasticity concerns just as we try to think through what you’re seeing. Thank you so much.

Steve Voskuil: Yes. So on 2025 and I think that’s where you’re pointing the question, I would just say we’re in the midst of building the ’25 plan. And so obviously, we’re not going to talk about cocoa. As we look to the plan, a lot of levers we’ll be looking at and so pricing is a level we’ll look at, other supply chain savings. As we talked about in our last call, we’ve got some transformation savings that we’ll be building in the years to come, including 2025. And so as we get further into the year, we’ll be able to talk more about what we expect for 2025, including category, health and what we think about the consumer and so forth.

Max Gumport: Okay. And then turning to the comments on gross margin for 2Q ’24. Any help you can give us in terms of the cost absorption that might reverse out in 2Q after a strong 1Q given the inventory dynamics associated with the ERP cutover? I’ll leave it there. Thank you.

Steve Voskuil: Sure. Yes. We expect to see that fixed cost leverage that we benefited from in the first quarter effectively fully reverse out in the second quarter. So order a magnitude we have $20 million to $25 million of benefit on fixed cost absorption and then also a little bit of mix just based on the type of inventory that was built in the first quarter. And so both of those components should reverse out in full in the second quarter.

Max Gumport: Great. Thank you.

Steve Voskuil: You bet.

Operator: And our next question comes from the line of Nik Modi with RBC Capital Markets. Please proceed with your question.

Nik Modi: Yes. Thank you. Good morning, everyone. Just two questions. Good morning. Michele, I was wondering if you could just comment on kind of what you’re seeing from a channel perspective, primarily C-stores because some of the feedback we’re getting, the traffic is really starting to come under some pressure. So love your thoughts there. And then just kind of more broadly, one of the things that obviously we’ve talked about in the past has been just kind of cross elasticities between what’s going on in your business versus other potential alternatives for the consumer, whether it be snack bars or what have you. And I’m just curious as you kind of think about the year, are you framing your promotional plans and your price gaps more from that lens or you’re still just more holistically you’re focused more specifically on just the categories in which you’re competing. Thanks.

Michele Buck: Yes. So as it relates to C-store, our business in C-store has been holding up pretty well for us. So we really haven’t seen a big change in trend I would say that we are focused on there. And as we look to price gaps, we always look at price gaps both and price points — absolute price points both within the category as well as across the snacking category. So that is really a standard way that we view our price elasticity and we continue to evaluate it that way.

Nik Modi: Great. Thanks. I’ll pass on.

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

Michael Lavery: Thank you. Good morning.

Michele Buck: Good morning.