Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Continued growth in the confection category with everyday candy, mint, and gum retail sales up 2% year to date.
- Strong performance in the North America salty snacks segment, with Q2 net sales growth delivering above expectations.
- Successful ERP implementation with little to no disruption across the network or in the marketplace.
- High retailer receptivity to new store formats and programs, resulting in mid-teen annualized sales growth in the dollar channel over the past three years.
- Robust innovation pipelines and exciting new product launches expected to drive growth in the second half of 2024 and into 2025.
Negative Points
- Reported net sales declined 16.7% in Q2, impacted by inventory reductions and seasonal shipment shifts.
- North America confectionery segment net sales declined 20.7%, driven by a significant decline in volume.
- International segment net sales declined high-single digits, driven by the exit of the Mexico beverage business and ERP-related inventory depletion.
- Adjusted gross margin expected to decline approximately 200 basis points for the full year due to cocoa and sugar inflation.
- Full-year EPS expected to be down slightly, driven by a reduction in the top-line outlook.
Q & A Highlights
Q: Can you provide more details on the impact of consumer trends on Hershey's performance in Q2?
A: Michele Buck, Chairman and CEO: The operating environment remains dynamic with consumers pulling back on discretionary spending. This has impacted our business, particularly in the convenience channel, which saw a notable slowdown. Despite this, we saw growth in the confection category with everyday candy, mint, and gum retail sales up 2% year to date. However, results came in slightly below expectations due to weakened consumer and class of trade trends.
Q: What are your expectations for the second half of the year?
A: Michele Buck, Chairman and CEO: We expect our overall business results to improve in the second half of the year. For the full year, we continue to expect low single-digit net sales growth in North American confectionery. We have strong plans in place, including higher levels of merchandising, more innovation, and good visibility into seasons, which should improve growth in the second half of 2024 and into 2025.
Q: How is the salty snacks segment performing?
A: Michele Buck, Chairman and CEO: We are pleased to see Q2 net sales growth deliver above expectations, reflecting robust consumer demand for Dot’s and strong execution by our teams. Hershey salty snacks retail sales growth of 8% in Q2 led to a 22 basis point share gain in salty snacking. We expect North America salty snacks segment sales growth of mid-single digits for the full year.
Q: Can you elaborate on the international segment's performance?
A: Steve Voskuil, CFO: Reported net sales in our international segment declined high-single digits, driven by the exit of our Mexico beverage business and planned depletion of S/4-related inventory builds. Excluding these items, sales were up mid-single digits, driven by double-digit growth in Europe, AMEA, and India, partially offset by declines in Brazil and LatAm.
Q: What steps are you taking to address cocoa price pressures?
A: Michele Buck, Chairman and CEO: Our robust hedging program gives us visibility into our costs and helps to smooth the impact of market volatility over time. While cocoa prices have improved since our last earnings call, they are still significantly ahead of prior year. We have taken steps to cover some of the expected inflation with pricing and will work closely with our retail partners to implement our announced pricing.
Q: How did the ERP implementation impact Q2 results?
A: Steve Voskuil, CFO: Second-quarter results reflected the planned reduction of inventory built in Q1 ahead of the April ERP implementation. This comprised 9 points of our Q2 decline. Retailers reduced inventory in the quarter to levels more consistent with year-end levels, which, combined with the timing of seasonal shipments, added an additional headwind to shipments in the quarter.
Q: What is the outlook for SkinnyPop and other salty snacks?
A: Steve Voskuil, CFO: While the Ready-to-Eat popcorn category remains soft, SkinnyPop sales, volume, and share trends continued to improve in Q2. We expect SkinnyPop declines to moderate and return to growth by year-end. Dot’s Pretzels is expected to continue growing double digits behind new flavor innovation.
Q: Can you provide more details on your capital investments and share buybacks?
A: Steve Voskuil, CFO: Capital additions including software were $130 million in Q2, supporting capacity expansion projects and ERP implementation. We expect full-year capital investments of $600 million to $625 million. The company completed $400 million of share repurchases in the first half, with $470 million remaining under the December 2023 authorization.
Q: What is your updated full-year outlook?
A: Steve Voskuil, CFO: We are narrowing our net sales outlook to approximately 2% for the full year, adjusting for softer trends observed across snacking recently. We expect an acceleration in performance in the second half across all three segments, driven by strong innovation, merchandising plans, and greater contribution from seasons.
Q: How are you managing profitability in the current environment?
A: Michele Buck, Chairman and CEO: We remain confident in our long-term outlook and the levers we have to both grow our business and manage profitability over time. Our investments in technology, supply chain, brands, capabilities, and people have elevated our ability to evolve and meet the changing needs of our customers and consumers.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
