Hershey Q4 2023 Prepared Remarks Earnings Call Transcript

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February 8, 2024

There are 3 speakers on the call.

Operator

Good morning, everyone, and welcome to the prerecorded discussion of The Hershey Company's 4th Quarter 2023 Earnings Results. My name is Melissa Poole, and I'm the Vice President of Investor Relations at Hershey. Joining me today are Hershey's Chairman and CEO, Michelle Buck and Hershey's Senior Vice President and CFO, Steve Voskuil. In addition to these remarks, we will host an analyst Q and A only session at 8:30 am Eastern on the morning of February 8. A replay of this webcast our subsequent Q and A session will be available on the Investor Relations section of our website along with their corresponding transcript.

Operator

During the course of today's discussion, management will 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.

Operator

Finally, please note that during today's We will 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 issued for the financial information presented in accordance with GAAP. Reconciliations to the GAAP results are included in this morning's press release. It is now my pleasure to introduce our Chairman and CEO, Michelle Buck.

Speaker 1

Thank you, Melissa, and good morning, everyone. Thank you for joining us today. We executed well in the 4th quarter and we're encouraged by the resilience of seasonal tradition and the consumer response to innovation in our categories despite sustained macroeconomic headwinds impacting consumer behavior. As expected, October December delivered strong seasonal sales, yielding Halloween category growth of 7.6% and holiday category growth of 3.3% versus last year. This seasonal strength helped us to return to share growth within the chocolate category with gains of 10 basis points in the quarter.

Speaker 1

We operate in resilient categories and we have a long history of successfully adapting to periods of rapid change and uncertainty. This period of historically high cocoa and sugar prices, while challenging, is no different. While Cocoa is expected to limit earnings growth this year, we believe our business strategies will enable us to grow our categories and profitably expand market share over time. We have been preparing for opportunities that could be seized post S-four implementation and salty snacks integration, and we are accelerating a number of these initiatives that improve our agility and enhance our end to end connectivity. We are pleased with the enhanced insights and efficiencies our recent technology investments have enabled and we will continue to prioritize cost structure optimization moving forward.

Speaker 1

We remain confident in the long term potential of our business and we believe these actions will position us well to help offset some of the macroeconomic challenges we are facing and delivered balanced top and bottom line growth over the coming years. Moving now to our Q4 results. Overall marketplace food volume trends in the 4th quarter were comparable to Q3, with continued strength in non measured channels and a slight deceleration in sales growth as price realization moderated. Hershey chocolate retail sales growth outpaced the category in Q4 with solid measured channel growth of 2.9% as category price elasticity continued to outperform broader food and improved in the 4th quarter. Seasonal traditions were a key driver of this performance with Hershey outpacing category growth in both Halloween and holiday.

Speaker 1

We are also encouraged by the improvement in our everyday chocolate share following the launch of Reese's Caramel. Our largest innovation of the year is off to a great start and outperforming Reese's with Pretzels, our last scale launch prior to capacity constraints. As some of you may have seen, Reese's will return to the Super Bowl this weekend and our teams have done a fantastic job leveraging this event to drive consumer engagement and incremental in store merchandising. Our refreshment business continues to perform well with double digit retail sales growth in both gum and mints outpacing the category and resulting in share gains of approximately 45 basis points and 215 basis points respectively. While our Suite shares declined slightly, growth was solid and up mid single digits in the 4th quarter.

Speaker 1

Our teams have a robust calendar of incremental innovation, distribution and merchandising activations planned for 2024, supported by significantly more capacity. We will share more details later this year about some of our exciting second half suites innovation. Shifting now to Solpy Snacks. Net sales were below expectations in the 4th quarter, driven by continued softness within the ready to eat popcorn category. SkinnyPop declines slightly outpaced the category consistent with expectations driven by reductions in advertising and merchandising to ensure strong customer service during our S4 implementation.

Speaker 1

Share trends improved in December as media and in store promotions were reactivated. While we expect Current category trends to continue through the first half of twenty twenty four, we remain optimistic about the long term opportunity and are excited about our team's investments and activations to drive growth in the second half of the year. DOPs pretzels had a strong quarter with gains in distribution and velocity driving a 50 basis point increase in pretzel category share. For the first time, you will see joint merchandising activations across our confection and salty snacks businesses this year, driving scale across some of our largest properties, including March Madness and Fall Football. We are excited to leverage the breadth of our portfolio to secure impactful merchandising in store and meet even more consumer snacking needs for these key events.

Speaker 1

We had a strong quarter within our International segment, driven by double digit growth across Latin America and World Travel Retail and more than 50% growth in Europe, driven by our leases expansion. India performance was in line with expectations growing high single digits in the quarter. In Mexico, we saw decelerated growth in the chocolate and spicy candy categories to more historical levels in the second half of twenty twenty three. Our brands have continued to outperform with share gains in both categories in the 4th quarter. As we look to 2024, we expect on algorithm growth of mid single digits within our international segment with household penetration, distribution and innovation gains partially offset by declines driven by our discontinuation of a dairy beverage product line in Mexico.

Speaker 1

In 2024, despite the challenging cost backdrop, we are continuing to prioritize brand investment with media spend expected to grow in line with sales. In addition, we have enhanced our media targeting for our largest brands, which will enable us to increase consumer reach at an even greater rate for more incrementality and stronger ROIs. Turning to the outlook. For the full year, we expect net sales growth of approximately 2% to 3%, consistent with current trends. Our North America Confectionery and International segments are expected to grow in line with our long term algorithm, While North America Salty Snacks segment sales are expected to be in line with or slightly ahead of 2023 levels with trends improving sequentially throughout the year as popcorn category sales stabilized.

Speaker 1

As many of you know, Cocoa is trading at historic highs and has risen significantly since our last call. We have a strong track record of managing through volatile and inflationary environment and we have very good visibility into 24 Cocoa and other ingredient costs. We remain committed to our long term strategy of pricing to cover raw material inflation and we expect several points of price realization this year. Despite expected operating profit margin declines this year, we remain ahead of pre COVID levels. 2023 operating profit margins came in ahead of expectations due to incremental price realization and favorable industry packaging and logistics costs.

Speaker 1

Importantly, we were able to achieve multi year margin expansion without sacrificing brand investment with advertising, people and capability investments all up double digits since 2019. The returns on these investments continue to lead the industry and remain an important part of our long term growth strategy. As is always the case, we are monitoring many factors to inform the go forward strategy, pricing and investment decisions that we believe will best position us to capture share and drive growth for 2025 and beyond. We are actively evaluating price pack architecture opportunities to help ensure we have the right offerings and price points to meet consumers' changing needs and we'll share more about the opportunities we see later this year. Given the rapidly evolving environment, we have accelerated several initiatives and opportunities that we highlighted last spring at our Investor Day to drive efficiencies and fuel investment and capabilities for future growth.

Speaker 1

We are in a strong position to increase productivity across the business by leveraging our insights and investments in S4 and other technology platforms in 2024 and beyond. We expect to see savings in both supply chain procurement and manufacturing, as well as SG and A, driven by automation, process optimization and operational synergies across our business segments. While this will be a multi year journey, our teams are off to a great start and we are excited by the organizational unlock this will enable in addition to the cost savings that we will secure. Additionally, given the confidence we have in our long term business opportunities and the strength of our balance sheet, we are doubling our share buybacks for this year and increasing our dividend an additional 15%. With that, let me turn it over to Steve for some additional perspective on our financial results and outlook.

Speaker 2

Thank you, Michelle, and good morning, everyone. For the full year 2023, we executed against our long term and demonstrated our agility in a dynamic and challenging environment. We reported 7.2% net sales growth, adjusted gross profit dollar growth of 10.4% and adjusted earnings per share growth of 12.6%.

Operator

In the

Speaker 2

Q4, we delivered reported net sales growth of 0.2%, while organic constant currency net sales declined 0.1%, slightly below our expectation. The North America Confectionery segment performed largely as expected, reporting an organic net sales increase of 2.1%. Volume declined 5.1% in the quarter as strong seasonal and non measured channel growth was offset by price elasticity declines within our everyday business. As Michelle noted, organic constant currency net sales for our international segment increased 8.3% as volume improved sequentially as expected. Organic constant currency net sales for our North America Salty Snacks segment declined 24.6%, reflecting an approximate 16 point headwind from the planned inventory drawdown following the Q4 ERP implementation, which we expected.

Speaker 2

However, the base business decline of high single digits reflects softness in the ready to eat popcorn category, compounded by fewer planned promotional programs as we emerged from the ERP transition, in part offset by incremental club distribution for Dots. We have good visibility to increase levels of distribution and merchandising and believe this, in addition to higher levels of media and innovation, will drive sequential improvement in retail trends as we progress through 2024. Moving down the P and L, adjusted gross margin increased 50 basis points in the 4th quarter as pricing and productivity gains, coupled with favorable manufacturing and logistics costs, more than offset inflation. This was ahead of expectations due to incremental productivity savings as well as lower freight and warehouse costs. Advertising and related consumer marketing increased 5 0.8% in the 4th quarter.

Speaker 2

Adjusted operating expenses, excluding advertising and related consumer marketing spend, increased 3.7%, driven by elevated investments in capabilities and technology as well as higher labor and benefits costs. The adjusted tax rate for the Q4 was negative 3.8 percent, an increase of 2 70 basis points versus the year ago period. This increase was primarily driven by fewer renewable tax credits in the quarter versus the prior year, as credits were realized earlier in 2023 as compared to 2022. While Q4 net sales Growth was limited by consumer behavior changes and planned salty snacks segment inventory declines, price realization, productivity and strong cost management allowed us to sustain business investment and deliver adjusted earnings per share of $2.02 in the quarter. Capital additions, including software, were $223,000,000 in Q4, supporting our previously discussed capacity expansion projects and ERP implementation.

Speaker 2

As several capacity projects reach completion in the first half of twenty twenty four, we anticipate capital spending as a percentage of sales to return to historical levels as we exit the year. Total capital investment this year is expected to be between $600,000,000 $650,000,000 there is no change to our capital allocation priorities, including reinvestment for growth, steady dividends growing in line with earnings and share repurchases. In the 4th quarter, dividends paid to shareholders totaled $238,000,000 an increase of 14.9% versus the prior year period. In 2024, our dividend increase will reflect a planned shift to earlier in the year to the Q1 from the Q3 in prior years. The company has $370,000,000 remaining under the May 2021, dollars 500,000,000 share buyback authorization.

Speaker 2

And in December 2023, the Board of Directors authorized an incremental $500,000,000 Now I'll share a few more details on the incremental cost savings opportunities we have identified, enabled in part by our technology and organization investments over the past 18 months. Our Advancing Agility and Automation or AAA initiative will provide fuel for investment and generate net run rate savings of approximately $300,000,000 pretax by 2026. Approximately 70% of these savings are anticipated to come from SG and A, with the remainder from cost of goods sold. For 2024, we are targeting $100,000,000 in cost savings with $90,000,000 coming from SG and A. When modeling, keep in mind that savings will build over the course of the year.

Speaker 2

Estimated cash costs in 2024 are projected to be $110,000,000 Total 3 year costs are projected to be between $200,000,000 $250,000,000 including approximately $25,000,000 of non cash costs. Estimated costs will include investments that advance digitalization and end to end connectivity and enhance our agility and flexibility to respond quickly in an increasingly dynamic marketplace. This program is incremental to our previously communicated $400,000,000 supply chain productivity initiative. Now let me share some perspective on 2024. As Michelle mentioned, we expect organic net sales growth within our North America Confectionery and International segments to be in line with our long term algorithm.

Speaker 2

North America Salty Snacks segment sales are projected to be slightly below long term algorithm with growth rates improving once we begin lapping the onset of the popcorn category softness in the second half of twenty twenty three. Our full year net sales outlook of 2% to 3% growth is primarily driven by price realization, with volume expected to be flat to slightly down. We expect some headwinds to persist in the first half of the year, including consumer pressures related to the loss of SNAP benefits, the loss of merchandising at a key retailer and continued high raw material costs. We also expect a slight headwind from a shorter Easter season, which we plan to offset with a more robust innovation calendar, the increased media reach, distribution gains and price realization. In the second half of the year, we will begin to lap of consumer behavior and merchandising changes, but expect more muted seasonal growth based on difficult laps and slightly lower sell through in 2023.

Speaker 2

We remain on track to implement our upgraded ERP system in several markets, including the U. S, Canada and select international markets in early Q2. We anticipate an approximate a 4 point benefit to net sales growth in Q1 as we build inventory in advance of the implementation. We expect this inventory build to largely reverse in Q2. From a profitability perspective, we expect gross profit dollars declined low single digits and gross margin to contract by approximately 200 basis points.

Speaker 2

Historically high cocoa prices and elevated sugar costs, along with incremental labor inflation and negative product mix are expected to more than offset net price realization, supply chain productivity and incremental savings from the AAA initiative. We will continue to invest across our brands with advertising and related consumer spend planned to increase in line with sales. Incremental SG and A productivity, including AAA initiative savings, along with lower incentive compensation are expected to lower divisional and corporate expenses by 3% to 4%. We expect our full year and tax rate to be approximately 13%, which reflects incremental returns on our existing strategies. Other expense, which includes our spend on tax credits, is expected to be $220,000,000 to $230,000,000 interest expense is expected to be $165,000,000 to $175,000,000 which reflects the higher interest rate environment.

Speaker 2

Given the valuation contraction we have experienced, our strong balance sheet and our confidence in future business performance, we are planning for share buybacks to rise in our capital allocation priorities. We currently project shares outstanding to be approximately 1% lower for the year. Additionally, we expect some volatility in our results related to the S-four implementation. So we thought it would be helpful to provide some insight into first half and second half expectations. Relative to gross margin, we expect more contraction in the first half of the year as productivity will be skewed to the second half of the year due to the S-four implementation.

Speaker 2

In addition, we are lapping approximately $15,000,000 to $20,000,000 of incremental cost in the salty snacks segment in the second half. Marketing spending, S-four related costs and incentive benefits costs are expected to be front half loaded, while the timing of renewable tax credits are expected to normalize, creating a headwind to earnings in the 2nd quarter and a tailwind in the second half of the year. Combined, we expect this to result in a double digit adjusted EPS decline in the first half and a comparable increase in the second half as we exit the year. We look forward to sharing more details about the power of our insights driven strategies as well as updates on innovation, merchandising and consumer activation across our categories at CAGNY in a few weeks. With that, I will turn it back to Michelle for closing remarks.

Speaker 1

Thanks, Steve. To close, I want to start by saying that I am tremendously proud of what our teams have accomplished over the last year to advance our innovative portfolio and build a stronger, more resilient business for the long term. Our goal as we move through 2024 and beyond is to ensure that we continue to advance and evolve our strategies, maximize the opportunity to grow our categories, expand our margins and enhance our long term returns. As the environment remains dynamic, we will continue to prioritize cost structure optimization to strengthen our financial core. We are confident in the actions we are taking to drive efficiencies and enhance our capabilities and wholeheartedly believe that these actions will help us increase the productivity of our business.

Speaker 1

I want to thank everyone again for joining this morning and encourage you to listen to our live question and answer webcast, which will begin at 8:30 am Eastern Time today and will be available at thehersheycompany.com. Thank you for your continued support and interest in Hershey.

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