Hershey Q1 2024 Prepared Remarks Earnings Report

Hershey EPS Results

• Actual EPS: $3.07
• Consensus EPS: $2.74
• Beat/Miss: Beat by +$0.33
• One Year Ago EPS: $2.96

Hershey Revenue Results

• Actual Revenue: $3.25 billion
• Expected Revenue: $3.11 billion
• Beat/Miss: Beat by +$140.50 million
• YoY Revenue Growth: +8.90%

Hershey Announcement Details

• Quarter: Q1 2024 Prepared Remarks
• Date: 5/3/2024
• Time: Before Market Opens
• Conference Call Date: Friday, May 3, 2024
• Conference Call Time: 7:00AM ET

The Hershey (NYSE:HSY) Company is a global confectionery and snack manufacturer headquartered in Hershey, Pennsylvania. Its portfolio includes chocolate, non-chocolate confectionery, salty snacks and pantry products sold under brands such as Hershey’s, Reese’s, Kit Kat, Jolly Rancher, Twizzlers, Ice Breakers, SkinnyPop and Dot’s.

Milton S. Hershey founded the company in 1894, and its milk chocolate business helped establish Hershey, Pennsylvania, as a center of American chocolate production. The company has expanded beyond its original chocolate offerings through product development, licensing arrangements and acquisitions in the confectionery and snack categories.

Hershey serves consumers primarily in the United States and Canada and markets its products internationally through retail, e-commerce and other distribution channels. As of 2026, Kirk Tanner serves as the company’s president and chief executive officer.

Hershey Q1 2024 Prepared Remarks Earnings Call Transcript

Key Takeaways

• Hershey reported 8.9% net sales growth in Q1, driven by approximately 2% base business growth and around 7 points from elevated inventory for the ERP cutover, with no change to its full‐year 2–3% net sales outlook.
• Both Confection and Salty Snacks outperformed broader snack trends, led by innovations like Reese’s Caramel (the #1 category innovation) and strong seasonal share gains during Valentine’s (+6.5%) and Easter.
• The SAP S4HANA ERP implementation went live across the U.S., Canada and select markets in April with minimal disruption, underpinning Hershey’s agility targets and contributing to a planned $100 million in cost savings this year.
• Despite record‐high cocoa costs due to market volatility, Hershey is well covered for 2024 and maintains its financial outlook, while investing in farmer support and supply chain resilience to mitigate 2025 inflationary pressures.
• Q1 adjusted gross margin reached 44.9%, aided by shipment leverage, advertising spend rose 12%, and adjusted EPS grew 3.7%, with a reaffirmed full‐year EPS outlook in line with the prior year.

Presentation

[Melissa Poole, VP of Investor Relations at The Hershey Company]

Good morning, everyone, and welcome to the pre-recorded discussion of The Hershey Company's Q1 2024 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, Michele Buck, and Hershey's Senior Vice President and CFO, Steve Voskuil. In addition to these remarks, we will host an analyst Q&A only session at 8:30AM Eastern on the morning of 3 May 2024. A replay of this webcast and our subsequent Q&A session will be available on the investor relations section of our website, along with their corresponding transcripts. 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.

[Melissa Poole, VP of Investor Relations at The Hershey Company]

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 in the company's SEC filings. Finally, please note that during today's discussion, 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 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, Michele Buck.

[Michele Buck, Chairman and CEO at The Hershey Company]

Thank you, Melissa, and good morning, everyone. Thank you for joining us today. We are off to a strong start and remain on track to deliver our business strategies and financial commitments for the year. Our investments in innovation, marketing, and in-store execution are driving consumer engagement and improving market share performance across segments. We are successfully operating in our new ERP system, a major milestone towards achieving our previously announced agility and efficiency targets. As we continue to navigate recent volatility in the business, we remain committed to strategies that drive long-term growth and sustainable value creation. Category growth for both confection and salty snacks outperformed broader food and other snack category trends in the Q1. This is a testament to the iconic brands in these categories and their sustained relevance with consumers. Performance strengthened throughout the quarter as the impact of SNAP reductions moderated.

[Michele Buck, Chairman and CEO at The Hershey Company]

Seasonals continues to perform well, with Valentine's category growth up 6.5%. Hershey's double-digit growth during the Valentine's season resulted in strong share gains. While a shorter season contributed to declining Easter category sales, Hershey outperformed and delivered strong sell-through and share gains. Easter marked four consecutive periods of seasonal market share gains for Hershey, and we are excited about carrying this momentum into the fall. Everyday market share trends improved across our confectionery and salty snack segments, led by higher levels of innovation, improved merchandising, and increased advertising reach. Reese's Caramel is off to a great start, and it is the number one innovation in the category this year, with trial and repeat tracking in line with expectations. Our Super Bowl ad was ranked one of consumers' favorites and generated strong consumer engagement and in-store merchandising.

[Michele Buck, Chairman and CEO at The Hershey Company]

We plan to build on this momentum this summer with our first-ever summer seasonal shape, commemorating our ongoing partnership with Team USA ahead of this year's Olympics. Reese's Medals will be available for a limited time in concert with a new campaign featuring Olympic legends and newcomers, and 360-degree activation across advertising, social media, and in-store displays. Fans and Reese lovers alike can engage in the spirit of friendly competition and test how much they know about these athletes leading up to the Paris Games. These activations, in addition to strong in-store execution by our retail team and incremental programming on our salty snacks brands, are helping drive improved display activity in the first half of the year compared to H1 2023 levels. We are encouraged by the progress we've made and excited for the strong lineup we have planned for the H1.

[Michele Buck, Chairman and CEO at The Hershey Company]

As we mentioned at CAGNY, we will have a new gummy brand launching in late summer, in addition to great Olympics programming to drive strong display activity in stores. Later this year, we will also launch a new advertising campaign and new flavors of SkinnyPop, along with a new flavor of Dot's Pretzels. More to come on these. Sales trends within our international segment were in line with expectations to start the year. Distribution and innovation gains in Brazil, Europe, Asia, and Latin America built on strong category growth across markets. These gains were offset by planned declines in Mexico relating to exiting the beverage business in 2023, and softness in India related to difficult laps from the year ago period and lower seasonal sales.

[Michele Buck, Chairman and CEO at The Hershey Company]

Our teams have a strong calendar planned for the H1 of the year and continue to expect full year net sales growth of mid-single digits in line with our long-term algorithm. We remain committed to investing in our brands to drive long-term growth, as evidenced by our strong increase in advertising spend across all segments in Q1, with continued support planned for the rest of the year. Now for a brief update on our ERP implementation and our productivity and cost savings programs, all of which remain on track. Our US., Canadian, and select international markets successfully went live with SAP S/4HANA the week of 1 April. The implementation is on track and progressing well. All systems are back online, and we are executing a controlled ramp-up of our end-to-end processes. We are successfully taking orders, manufacturing across our network, shipping product, and invoicing customers.

[Michele Buck, Chairman and CEO at The Hershey Company]

Strong partnership and planning with our customers ensured they had inventory on hand, and there was little to no disruption in the marketplace. A heartfelt thank you to our teams who worked tirelessly to deliver this critical milestone. We are excited to leverage these new systems and processes to increase end-to-end connectivity and efficiency across the organization. Our Advancing Agility and automation initiative remains on track to deliver an incremental $100 million of cost savings this year, and we have a strong pipeline of opportunities for 2025 and 2026. These savings are enabled by leveraging the investments we've made in technology to drive automation, as well as harnessing the power of our scale across multiple categories to drive commercial advantage.

[Michele Buck, Chairman and CEO at The Hershey Company]

We have a dedicated team leading the effort and ensuring we have the right resources in place to continue executing with excellence while we create a foundation to make us even stronger in the future. None of this would be possible without the hard work and dedication of our teams around the globe. We have accomplished a lot to start the year, and I couldn't be more excited about the opportunity ahead of us. Before I turn it over to Steve, let me share a few thoughts on the continued volatility in the cocoa market and the steps we are taking to address these factors in both the short and long term. Cocoa is critical to our long-term business resilience and success, and as such, we have dedicated resources and strong investments in place to ensure we have a resilient supply chain for the future.

[Michele Buck, Chairman and CEO at The Hershey Company]

While the 2023, 2024 crop in West Africa declined, we are encouraged by the growth in other regions around the world and steps being taken in West Africa to improve supply. Farmer prices have increased, which should enable them to make more investments in fertilizer, pesticides, and other techniques to improve yields. Improving cocoa resilience requires active engagement by governments, civil society, and industry. Hershey and industry partners continue to invest in research and education to improve crop care, as well as efforts to strengthen economic resilience of farmers. As we've shared previously, the current market is being impacted by factors beyond supply and demand. Lack of liquidity, new regulations, and market speculation have all contributed to the record-high prices we are experiencing. We have robust processes in place to ensure continuity of supply and good visibility into our costs.

[Michele Buck, Chairman and CEO at The Hershey Company]

We are well covered for 2024 and do not expect recent volatility to affect our financial outlook for the year. As we shared earlier this year, sustained high prices will drive inflation in 2025. While our 2025 planning is underway, it is premature to discuss potential financial scenarios or impacts, and for competitive reasons, we will not be discussing our hedging policies or pricing strategies. But we remain confident in the long-term outlook and the levers we have to help mitigate inflation and protect our margins over the long term. We will share more information as we progress through the year and get closer to 2025. With that, let me turn it over to Steve for some additional perspective on our financial results and outlook.

[Steve Voskuil, Senior Vice President and CFO at The Hershey Company]

Thank you, Michele, and good morning, everyone. Q1 results were relatively in line with expectations, with a larger benefit from inventory associated with our April ERP implementation compared to our initial expectations. Reported net sales growth of 8.9% was driven by base business growth of approximately 2% and an approximate seven point benefit from higher inventory levels in preparation for the ERP cutover. This was approximately three to four points ahead of expectations, as our teams did a fantastic job partnering with retailers to achieve optimal inventory levels without disruption ahead of the transition. We expect the majority of this inventory to be depleted throughout the second quarter. Excluding this inventory impact, consumption trends across our segments were in line with expectations, and there is no change to our full year outlook of 2% to 3% net sales growth.

[Steve Voskuil, Senior Vice President and CFO at The Hershey Company]

North America Confectionery segment net sales growth of 10.4% was driven by price realization of nearly 6% and volume growth of 4.5%. Higher inventory levels contributed approximately eight to nine points of volume growth, which was partially offset by elasticity-related volume declines of approximately 4%. Excluding inventory, base business growth of approximately 2% was in line with expectations and driven by seasons and Reese's Caramel innovation. North America Salty Snacks segment net sales growth of 1.9% was driven by continued strength in Dot's Pretzels, partially offset by expected declines in SkinnyPop, related to broader category weakness. While the category remains challenged, both sales and share trends improved in the Q1 compared to the H1 of last year, behind media and merchandising increases.

[Steve Voskuil, Senior Vice President and CFO at The Hershey Company]

International segment net sales growth of 1.8% was driven by strength in Europe and Latin America, partially offset by planned declines related to the discontinuation of the dairy business product line in Mexico. Adjusted gross margin of 44.9% was ahead of expectations, driven by volume leverage from higher than anticipated shipments. Excluding this impact, gross margin was in line with expectations and below prior year, as pricing and productivity were more than offset by higher commodity costs. There is no change to our full year gross margin outlook, and we expect full year declines of approximately 200 basis points as cocoa and sugar inflation more than offset net price realization and supply chain productivity. Advertising and related consumer marketing increased 12% in the Q1, with increases across segments.

[Steve Voskuil, Senior Vice President and CFO at The Hershey Company]

Adjusted operating expenses, excluding advertising and related consumer marketing spend, increased 3.3%, driven by elevated investments in capabilities and technology, as well as higher labor and benefits costs. We remain on track to deliver an incremental $100 million in savings this year as part of our AAA initiative, with the majority of these savings realized in division and corporate expenses. As we shared previously, we expect the majority of these savings to be realized in the H1 of the year. The adjusted tax rate for the Q1 was 20.4%, a decrease of 240 basis points versus the year ago period, driven by higher levels of renewable tax credits versus the prior year.

[Steve Voskuil, Senior Vice President and CFO at The Hershey Company]

We continue to expect a full year tax rate of approximately 13%, with other expense of approximately $220 million to 230 million. Interest expense of $40 million was in line with expectations, and we continue to expect full year expense of $165 million to 175 million. Q1 adjusted earnings per share grew 3.7%, as sales growth more than offset gross margin declines and higher capability and technology investments, primarily related to our ERP transition. As a reminder, we expect high single-digit sales declines in the second quarter as inventory levels normalize. These sales declines will drive additional gross margin pressure in the quarter as the Q1 cost absorption benefits reverse. There is no change to our full-year EPS outlook, and we continue to expect earnings in line with prior year.

[Steve Voskuil, Senior Vice President and CFO at The Hershey Company]

Capital additions, including software, were $213 million in Q1, supporting our previously discussed capacity expansion projects and ERP implementation. We expect this pace to moderate and return to more historical levels as we progress throughout the year. We continue to expect full-year capital investments of $600 million to 650 million. In the Q1, dividends paid to shareholders totaled $273 million, an increase of 31.8% versus the prior year period. This reflects the strength of the company's performance over the past several years and our commitment to a dividend payout ratio of greater than 50%. Additionally, the company repurchased $400 million of shares in the Q1.

[Steve Voskuil, Senior Vice President and CFO at The Hershey Company]

This completes the May 2021 $500 million share buyback authorization, and $470 million remains under the December 2023 authorization. This further reflects the strength of our balance sheet and our confidence in the long-term opportunity at Hershey. With that, I will turn it back to Michele for closing remarks.

[Michele Buck, Chairman and CEO at The Hershey Company]

Thanks, Steve. We continue to believe we have the right strategies, right portfolio, and right team to deliver leading performance over the long term. While we are experiencing unprecedented volatility in our largest commodity, we are focused on executing the things within our control with excellence, delivering great-tasting products, compelling media campaigns, and strong in-store execution, all while enhancing our capabilities and operating our business more efficiently. We have learned a lot about how to operate in a volatile and uncertain environment over the past several years, and we will continue to act with agility and take a long-term view as we evolve with the market. We remain optimistic about our long-term future.

[Michele Buck, Chairman and CEO at The Hershey Company]

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

Participants

Executives

• Melissa Poole, VP of Investor Relations
• Michele Buck, Chairman and CEO
• Steve Voskuil, Senior Vice President and CFO