Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- The Hershey Co (HSY, Financial) has strong visibility into seasonal orders, with most orders already in hand, indicating confidence in upcoming seasonal performance.
- The company is taking a measured approach to pricing, aiming for a 6-7% net price realization to offset historic cocoa prices.
- Significant incremental innovation is planned for the second half of the year, including the Shaq launch and new product forms.
- The salty snacks segment, particularly Dot's and SkinnyPop, is showing strong momentum and is expected to continue growing.
- The company has robust internal processes for determining pricing strategies, ensuring a balanced approach to passing on costs to consumers.
Negative Points
- There was a 6% impact from lower retail inventory and a 2-3% impact from the Halloween shift, raising concerns about underlying demand.
- Market share trends in core chocolate have been weaker than expected, particularly in everyday items.
- The company experienced a reduction in key retailer merchandising, which has impacted performance and will need to be lapped in the second half.
- Incentive compensation has been adjusted down due to lower-than-expected performance, indicating some internal challenges.
- Gross margins are expected to decline by 200 basis points for the full year, with input cost timing favorability being a temporary benefit.
Q & A Highlights
Q: Within North American Confectionery this quarter, there was a 6% impact from lower retail inventory and around 2% to 3% from the Halloween shift. Is it unfair for investors to ask if there isn't at least a small red flag underlying this news?
A: As we've seen in the last few years, there's been quite a bit of volatility around inventory levels, partly based on the COVID era and supply chain challenges. We see it as a reversion to a traditional order pattern. We have good visibility into our seasonal orders and strong expectations for the seasons, so we don't see it as a red flag.
Q: Can you give us a sense of which products your recently announced pricing covers and the magnitude of the increase?
A: We have experienced historic cocoa prices for some time. Our approach on pricing has been measured. We are not pricing the entire portfolio and have a robust internal process to determine our approach. We expect about 6 to 7 points of net price realization. We are assuming historic elasticities, which are a bit worse than recent price increases.
Q: Can you elaborate on market share trends in core chocolate and what is driving those share losses?
A: We continue to see category growth around 2%. We expected the second half to be stronger due to laps and timing of programming. Q2 was lighter than anticipated from a category and share perspective. We saw pressure in sweet categories and C-store channels. We have significant incremental innovation and strong visibility into resets and seasonal orders for the back half, which should drive share growth.
Q: Does the reduction in incentive comp imply that this quarter was a disappointment relative to plan?
A: The biggest driver on the incentive side is tracking with our full-year expectations. We true-up every quarter based on year-to-date performance and full-year outlook. The full-year reduction in guidance does have a meaningful impact on the comp.
Q: What input cost timing favorability impacted gross margin this quarter?
A: We had some movement in mark-to-market of derivatives for our hedging and small changes in the way we match cost to products. These are timing-based and we expect them to come back in the back half.
Q: How do you think about consumer receptivity to a price increase given the current environment?
A: We focus on the consumer and take a surgical approach across the portfolio. We offer a range of price points and continue to optimize reinvestment. We believe our holistic approach, including innovation and promotional strategies, will help manage elasticity.
Q: Can you provide more color on the C-store weakness and how long you expect this dynamic to persist?
A: Consumers are focused on getting the best value, leading to a shift away from convenience stores to mass and dollar stores. We expect this trend to continue through the year but have confidence in our ability to offer the right offerings across all channels.
Q: How are you thinking about covering longer-term inflation with your recent pricing actions?
A: Our strategy regarding pricing to cover commodities hasn't changed. This pricing will not fully cover inflation, but it's a good first step. We will continue to monitor cocoa pricing and take other steps across all levers to address costs.
Q: Can you elaborate on your marketing support plans for this year and next?
A: We don't see a significant change in our marketing support versus what we had planned. It will be up in line with our sales growth this year and we expect it to match roughly in line with sales next year.
Q: How are you managing the elevated cocoa cost situation with your cost-saving initiatives?
A: We are very focused on cost savings through our transformation work, ongoing productivity, and leveraging ERP savings. We continue to look for additional cost savings opportunities to offset the elevated cocoa costs.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
