The Hershey Company (NYSE:HSY) Q4 2023 Earnings Call Transcript

The Hershey Company (NYSE:HSY) Q4 2023 Earnings Call Transcript February 8, 2024

The Hershey Company beats earnings expectations. Reported EPS is $2.02, expectations were $1.95. 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 Fourth 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 fourth 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 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: 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: Great. Thanks so much good morning everybody.

Michele Buck: Good morning, Andrew.

Andrew Lazar: Maybe to start off your guidance for 2024 calls for that 2% to 3% net sales growth with volume flat to slightly down so implies over a three point year-over-year benefit from price which seems to be mostly carry over related from actions taken last year. So I guess my question is just recurring outlook embed any additional pricing actions this year to address the currently elevated cocoa cost and if not I guess if Hershey were to take additional pricing actions. Would those benefit 2024 or with the typical timing lag and kind of complexity of the system’s transition, would that likely really be more of a 2025 benefit at this stage?

Michele Buck: Hey Andrew, let me talk a little bit about our pricing approach and strategy and then Steve will go into the numbers. It’s a dynamic environment out there and we are taking a measured approach given historic inflation. As we can’t talk about future pricing, but I do want to be very clear that there’s no change to our pricing strategy and our commitment to use pricing to cover inflation and to support the investments that we think are critical to drive the business. So given where Cocoa prices are, we will be using every tool in our toolbox, including pricing as a way to manage the business. Steve, do you want to talk about some more of the specifics?

Steve Voskuil: Yes, the way you laid it out, Andrew, is correct. The pricing that we’re counting on that 3% or so, a lot of it’s carryover, some of it from 2022 to Easter and Valentine’s Day, some we took mid last year on everyday chocolate and then a small increase we announced earlier this year on grocery items and food service. And you’re right, when we think about the impact of future price increase, we’re really challenged in the first half of this year just because of the ERP implementation, like you said, it puts some limitations on what we can do. And you can imagine enormous collaboration between us and retailers to execute that transformation. So we’re trying to keep things very stable during that period. And so further price increases should they come with benefit more the back half of the year and probably more so 2025.

Andrew Lazar: Got it, thanks for that. And then the EPS in 2024 is expected to be sort of flat for the year. There’s obviously a big discrepancy between what you’re looking for in the first half versus the second half in terms of EPS growth. I guess, I’m trying to get a sense of how much of this is anticipated improvement in the consumer environment versus what you have maybe more visibility and control over with things such as timing of your plan system spending and timing of cost saves and productivity. Just trying to get a sense of the visibility to that, to the swing, if you will, and EPS growth between the first half and second half. Thanks so much.

Steve Voskuil: Sure, yes, it’s not banking on cocoa relief and it’s not banking on some kind of surge in the consumer or really even a surge in the base business. The biggest factor is really two things driving it. One is the lapse from last year. And as we started out really strong the first quarter last year and then ran into things like softer, salty category growth in popcorn, the ERP implementation in salty, and then the change in strategy at a key retailer. So as we think about the lapse of those, that’s one factor that impacts this profile because the lapse gets much easier in the back half. And then the second thing you mentioned, Andrew, are things in our control. So the savings on the agility and automation initiative will get more traction in the back half again because the ERP places some limitations there.

The same with productivity in the manufacturing areas, back half loaded. And so those will accumulate as we turn the corner from the first half and pivot from the ERP sort of period of stability to period of driving impacts against those savings initiatives. So it’s really lapse combined with the things in our control.

Andrew Lazar: Thank you 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, good morning. Thank you. I wanted to ask a little bit, you have more innovation coming this year, you have more capacity, you’re battling an elasticity situation that I think it’s fair to say is higher than many people expected, but your media spending is only being increased by the same amount as sales growth. I realize you’re focusing on some key items a little bit more and you’re kind of rebalancing some of that, but just trying to get a sense of the risk of some of your more flanker type brands if media is pulled away from them, if that’s the impression I’m getting, if that’s the right one. And how to really to think about your decision to maybe not raise media spending a little bit more than sales growth to kind of make sure that, you’re battling elasticity in the way that’s appropriate.

Michele Buck: Yes, thanks Ken. As we are big believers and our business model relies on media as a key lever to continue to drive our brands over the long-term. We’re constantly, we feel good about media going up in line with sales. We also constantly look to try and make those dollars work harder and harder for us. And we’ve made some pivots in terms of some of our targeting that are actually going to give us expanded reach levels that will be greater than sales. So the impact we will get from that media will be more than the dollar increase, but we will constantly evaluate that. And if we are seeing even better than we expected, we’ll revisit decisions and decide if we should be spending more as we always do during the year.

Ken Goldman: Thanks. And then quickly, it’s not often we see kind of a venerable, established category like popcorn maybe slumping to this degree. Not really thinking about share gains or losses for Hershey in particular, but what do you see happening most recently in popcorn and what do you think needs to happen for the category to rebound?

Michele Buck: Yes, I mean, I think what we saw this year was we did start to see some pressure in the category related to value. The fact that popcorn wasn’t quite have as much satiety as some other snacks and we saw some private label entries also get some focus. So I think what needs to happen and then compounded by that, in the back half of the year, we are the number one or number two player depending on the time frame in the category. And in the back half of the year, around our ERP implementation, we pulled back on merchandising and advertising support to make sure that we didn’t have issues with supply. So that certainly had an impact as well. So as we’ve gone into this year, what we think needs to happen, we have done.

So we have made some improvements in the value proposition, introduced a value side, a bigger pack. We’ve sharpened some of our merchandising price points and also increased merchandising. And we are back to a much heavier investment in advertising and innovation that we’ve had over time. So we think we’ll continue to see some of that lap through the first five months of the year and then really rebound to nice growth and market share gains in the back half.

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. With regard to cocoa prices, you’ve previously talked about how there’s a divergence between fundamentals and current market prices. I’m assuming you’re looking at underlying supply, demand and the stock to grinding ratio, but I’m curious for an update on that front and how that informs your visibility into cocoa for 2024. Thanks.

Steve Voskuil: Sure. Yes, we look at a variety of things, as you can imagine. I’ll say the fundamentals. And when I say look at, we have an internal team of experts in this domain, but we also have outside folks who also give us points of view to make sure we’re not myopic in the way we look at the market and what’s happening. But we look at the fundamentals, we look at grind data, we look at crop yields, we look at weather, we look at all of those fundamentals and, of course, demand. But at the same time, there’s a lot of financial activity, transactional sort of activity and speculation that overlays the fundamentals. And it’s been difficult, certainly, to untangle those two pieces. And so, that’s part of the reason that we have a hedging program is that, we’re not here to try to outsmart the market and beat the speculators per se.

We want to make sure that we have visibility and have the opportunity to reduce volatility to the extent we can in the P&L. But it’s certainly a very dynamic market.

Operator: Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question.

Bryan Spillane: Hey, thanks, operator. Good morning, everyone.

Michele Buck: Morning.

Bryan Spillane: Hey, so I’ve got two questions. And the first one is just, I don’t know if it was actually in the press release or not, but Steve, have you given us a sense of just what your overall inflation is or maybe what cocoa inflation is? I’ve got that question a few times this morning. So what’s the inflation rate, I guess, in the guide?

Steve Voskuil: Sure. If you look at it, kind of break it into two pieces, I’ll just say commodities of which I’ll just say cocoa and sugar are the two most inflationary. Low double digit inflation, if you look at other parts of the P&L, it’s more mid-single digit. So if you sort of average it over everything, it’s high single digit.

Bryan Spillane: Okay. And that’s pretty well locked in, right? I’m assuming that, like you’ve got coverage on commodities for the year. Should we, is that a good expectation?

Steve Voskuil: Yes, that’s correct.

Bryan Spillane: Okay, cool. And then, Michelle, just to, I guess, a bigger question or a broader question is just on the cost savings, the incremental savings this morning. Can you talk a little bit about maybe how you came, how as an organization you came to that? And, I think the question that some folks are asking this morning is just, are the cost savings a reaction, right, to inflation? You’re trying to preserve as much earnings as you can, which maybe implies cutting too much. You’ve got a lot of stuff going on, an ERP system transition. Like, is it really burdening the organization too much to try to focus so much on costs when there’s so much other stuff going on? So just your perspective on that, I think, would be helpful for folks.