Hershey Q2 2022 [Q&A] Earnings Report

Hershey EPS Results

• Actual EPS: $1.80
• Consensus EPS: $1.69
• Beat/Miss: Beat by +$0.11
• One Year Ago EPS: $1.47

Hershey Revenue Results

• Actual Revenue: $2.37 billion
• Expected Revenue: $2.24 billion
• Beat/Miss: Beat by +$132.20 million
• YoY Revenue Growth: +19.30%

Hershey Announcement Details

• Quarter: Q2 2022 [Q&A]
• Date: 7/28/2022
• Time: Before Market Opens
• Conference Call Date: Wednesday, July 27, 2022
• Conference Call Time: 8:01PM 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 Q2 2022 [Q&A] Earnings Call Transcript

Key Takeaways

• Hershey saw a significant Q2 inventory pull-forward that won’t materially repeat in the back half, meaning volume growth may normalize without further refill tailwinds.
• The company continues to face wide-ranging supply chain disruptions from raw materials and labor to geopolitical impacts, but its $800 million capacity investments should add about 15% in internal production by 2024.
• Hershey expects high-single-digit pricing to take effect in Q4 2022 and fully in 2023, which should help offset high-single-digit inflation in its cost structure.
• Management plans to ramp up advertising, promotions, and merchandising in H2 2022 and 2023 to drive top-line growth, funded by the margin relief from price increases.
• The DOTS brand delivered over 50% retail sales growth in the past 12 weeks while continuing to expand its distribution footprint, particularly in the Eastern U.S.

Presentation

[Operator]

Greetings, and welcome to The Hershey Company second quarter 2022 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, VP of Investor Relations at The Hershey Company]

Good morning, everyone. Thank you for joining us today for The Hershey Company's second quarter 2022 earnings Q&A session. I hope everyone has had the chance to read our press release and listen to our pre-recorded management remarks, both of which are available on our website. In addition, we have posted a transcript of the pre-recorded 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.

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

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. We'll now be conducting the question-and-answer session. If you'd like to ask a question, please press star-one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Thank you. Our first question is from Andrew Lazar with Barclays. Please proceed with your question.

[Andrew Lazar, Managing Director at Barclays]

Great. Thanks so much. Good morning, everybody.

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

Good morning.

[Operator]

Good morning.

[Andrew Lazar, Managing Director at Barclays]

Hey, as you discussed in the prepared remarks, inventory refill has certainly been nicely additive to volume growth through the first half of the year. Where do you think retailers are at this stage, and how much more of a benefit, I guess, can this be in the second half? You know, from the prepared remarks, if I'm reading it right, seems to suggest maybe the bulk of that inventory refill is sort of behind you at this point and maybe no longer enough to necessarily offset, you know, what volume elasticity you are seeing. Just some clarity there would be helpful.

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

Yeah, that's exactly right, Andrew. We saw pretty strong inventory replenishment in the second quarter, as we commented. A portion of that was pulled forward from the second half, so really a timing move. As we look at the back half, we're really not seeing any additional meaningful inventory replenishment in the second half guidance.

[Andrew Lazar, Managing Director at Barclays]

Right. Then just sort of following on that, I guess, as you and others sort of slowly start to get back to a sort of a better inventory, you know, position and some of the supply constraints, you know, slowly ease. I guess, not surprisingly, we're starting to hear from, I think from Hershey and others, that they'll be in a better position maybe for the first time in a while, right, to begin to kinda, you know, ramp back up merchandising activity to sort of drive volume and traffic. I can understand why in this environment some might simply see that as, you know, sort of retailer concessions, you know, given all the pricing that's come through in the industry and, you know, with commodities starting to roll over.

[Andrew Lazar, Managing Director at Barclays]

I assume you see this as more getting back to a, maybe a more normal cadence of spending and really looking just to drive volumes and traffic and protect elasticities that I still think can be, in many cases, incremental to the business. I was hoping, Michele, you could kinda comment a little bit on that, if you could. Thank you so much.

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

Yeah, absolutely. As we have always talked about, our investment model or our model in running the businesses, we strongly believe in investing to drive the top line. With our strong margins, that enables us on the bottom line. We always wanna be spending to the consumer, advertising our brands, having the right levels of promotion, the right levels of innovation. As we mentioned earlier, given some of those supply constraints, we did have to pull back on that, a bit just because it didn't make sense to make those investments given some of those constraints. We very much look forward to re-upping the investments. As we look at the second half, we have always planned an increase both in DMEs as well as, incremental merchandising coming back online.

[Andrew Lazar, Managing Director at Barclays]

Thank you.

[Operator]

Thank you. Our next question is from Alexia Howard with Bernstein. Please proceed with your question.

[Alexia Howard, Research Analyst at Bernstein]

Good morning, everyone.

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

Hi, Alexia.

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

Good morning.

[Alexia Howard, Research Analyst at Bernstein]

Hi there. Can I ask about the general supply chain disruption you talked about that you're still experiencing? Can you talk about exactly where the pain points are? I'm thinking, you know, across raw materials, packaging, labor. Where are the things that you're really wrestling with at the moment, and are you seeing light at the end of the tunnel at this point? It sounds as though things are getting a little easier. Then I have a follow-up.

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

I mean, I'd say generally, we continue to see struggles across the supply chain. How I'd characterize it is what those are have evolved. So you know, where we are now, I would say early on, it was some of the basic logistics issues, largely driven by labor. As we've evolved, I'd say, we're now starting to see bigger concerns relative to scarcity of ingredients, needing to leverage different suppliers at higher costs and price points in order to secure production. Then also the geopolitical environment has put certain strains on the business. Certainly, the Ukraine-Russia issue created some scarcity and issue with ingredients. You know, more recently, there have been additional restrictions from Russia on the EU relative to natural gas. Germany will be impacted.

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

That's an area where we source a lot of equipment, supplies. As do many of our suppliers. I would say that that's kind of evolved. Steve, would you add anything?

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

The only thing I would add is that we're also starting to see more costs flow through from third parties, so co-packers, co-manufacturers. A lot of those are under contract, and so it sort of happens as those contracts renew. They're facing the same cost pressures and disruptions that we're facing, and so we're starting to see more of that impact the P&L as well.

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

I guess I'd also just add, you know, we have made significant progress in investments in capacity, significant investments. Part of our short-term pain was once you make those investments, it takes some time to get them up and running, to get the, you know, the lines actually in place. Part of some of the relief we're seeing is the gradual coming online of those capabilities as well, which is helpful.

[Alexia Howard, Research Analyst at Bernstein]

That's super helpful. Thank you so much for all the color there. Just as a follow-up, how big is India these days? You called it out in the prepared remarks. Haven't seen much news on India for a while. I'm just wondering, how do you avoid the same problems coming up that you had in China several years ago? I know you've backed off from China and are doing it more arm's length these days. But why is India a different market? Why can that work over the longer term? Thank you, and I'll pass it on.

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

India is still, you know, relatively very small for us, growing high double digits. Back when we really made our decisions on China and India, for me, the key difference in India is the cost of doing business in that market is very different. You know, media costs, labor costs. In both markets, we thought we had the potential to drive top line. As we really did the assessment and looked at the NPV of our investment, India is a market that we feel good about our prospects of getting to profitable growth. Frankly, we're already in, you know, a place that we like relative to where gross margins are on that business, very different than where we ever were in China.

[Alexia Howard, Research Analyst at Bernstein]

Great. Thank you very much. I'll pass it on. Appreciate the color. Thank you.

[Operator]

Thank you. Our next question is from Robert Moskow with Credit Suisse. Please proceed with your question.

[Robert Moskow, Senior Equity Analyst and Food and Food Retail at Credit Suisse]

Hi, Michele. Hi, Steve.

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

Hi.

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

Morning.

[Robert Moskow, Senior Equity Analyst and Food and Food Retail at Credit Suisse]

Morning. I thought the comments about 2023 were pretty encouraging, albeit at a pretty early stage. You said that you expect your pricing actions to be partially offset by high single-digit inflation, and then you also have productivity. Do you expect the pricing lag to offset inflation, COGS inflation in 2023? Because you've had lags in 2022, so I guess that's a positive. Maybe you could talk about, you know, the advertising increase that you're thinking you need to do. You know, how much of that is just restoring what's kind of lagged so far? How do you think about how much investment's needed?

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

Sure. Yeah, I mean, for 2023, we're still talking at a pretty high level. We'll get a lot more fine-tuned as we get through the third quarter and get more picture for next year. We are seeing, you know, high single-digit price is the expectation to come through. Volume-wise, we'll watch and see how consumers behave. We'll know more about elasticities as we come out of this year. As you said, overall inflation, we're still seeing high single digits. You know, when you peel into that, we'll have some, you know, I expect some commodity impact still as we'll be rolling off the more favorable hedges into hedges that were struck at prices that look more like recent times. You know, we still see logistics and third party cost impacts in there.

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

I think it's too soon yet to say whether the price is gonna fully offset all of those inflationary impacts. You know, we'll know more again as we get through the third quarter towards the end of the year. We do wanna increase advertising, and we called that out in the remarks. We see that growing faster than the rate of sales. As you said, it's really, as Michele said just a few minutes ago, making sure that we continue to reinvest in brands, reinvest in consumers, and have a healthy level of investment once we have supportability.

[Robert Moskow, Senior Equity Analyst and Food and Food Retail at Credit Suisse]

Okay. Did you say that, Steve, that you expect your pricing to be up high single digit next year because of the flow-through?

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

That's correct.

[Robert Moskow, Senior Equity Analyst and Food and Food Retail at Credit Suisse]

Okay. All right. Thank you.

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

You bet.

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

Thanks.

[Operator]

Thank you. Our next question is from Ken Goldman with JP Morgan. Please proceed with your question.

[Ken Goldman, Head of U.S. Equity Research at JPMorgan]

Hi. Thank you. One quick one and then a longer one on Halloween. I just wanted to get a sense, if possible, for the North America salty snacks business, the margin going forward. We, you know, we've seen some volatility there. Just wanted to kinda get a sense for, you know, how to sort of model that in the next couple quarters given, you know, some of the cloudiness we have in our model, or at least our model on that one.

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

Sure. Be happy to take that one. As you saw in Q2, looked a lot like Q1. We continue to see higher raw material costs and logistics costs that, for these two quarters are more than offsetting the price that we've taken so far. That said, we've announced more price increase in the second quarter. As we roll forward through the next two quarters, you know, we do expect to see some stability and relief there. We're also gonna begin to lap in the back half some of the higher logistics costs that we've been talking about, and so that will provide a little bit of relief there as well. Longer term, as we talked about on last quarter's call, we continue to advance the structural changes that we need to do for that division.

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

Things like setting up or formalizing the supply chain, some of the back office efficiencies that we need to put in place. Longer term, that will drive more structural improvement. Right now, it's kind of fighting the balance between pricing and inflation and commodities costs.

[Ken Goldman, Head of U.S. Equity Research at JPMorgan]

Thank you for that. Wanted to ask about Halloween, and it's early to be precise, but you got it to high single-digit sales growth. You said that part of the reason is you're still capacity constrained. Yeah, I was a little curious why the guidance wasn't higher. Maybe it's just there was a very difficult comp, or you're facing a difficult comp from last year. Maybe it's just a little bit of conservatism because it's still early. I would have expected maybe capacity to be less of an issue just given how important the holiday is. Maybe you could sort of be rather in an all-hands-on-deck mode, right, in producing as much seasonal candy as possible. Maybe that's just an overly simplistic view of your supply chain.

[Ken Goldman, Head of U.S. Equity Research at JPMorgan]

I was just curious why that guidance wasn't a little bit higher.

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

Ken, as we look at the business, you know, we had a strategy of prioritizing every day on-shelf availability. It was a tough decision to balance that with the seasons, but we thought that was really important. That was a choice that we needed to make. We had opportunity to deliver more Halloween, but we weren't able to supply that. We were really producing. We began producing Halloween back in the spring, and that's really when we needed to make these key decisions on what we were going to produce. Tough trade-off to make. We feel really good about having high single-digit growth, but we also feel good about as we get into the future, being able to have more capacity to really fulfill more of the demand that we see during the seasons.

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

Yeah. It's definitely all hands on deck. Make no mistake.

[Ken Goldman, Head of U.S. Equity Research at JPMorgan]

Understood. Thank you so much.

[Operator]

Thank you. Our next question is from Jason English with Goldman Sachs. Please proceed with your question.

[Jason English, Managing Director and Equity Research Analyst at Goldman Sachs]

Hey, good morning, folks. Thanks for slotting me in.

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

Hey, Jason.

[Jason English, Managing Director and Equity Research Analyst at Goldman Sachs]

I guess I wanna start on capacity 'cause I'm there's a little bit of conflicting messages here. Like on one side, you've got enough capacity to be refilling retailer inventory levels, but on the other side, you don't have enough capacity to meet demand for some products. Can you help me foot those two conflicting things and also give me a little bit better understanding of where the bottlenecks are and what the pathway and timeline is to relieve those bottlenecks.

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

Yeah. Capacity is constrained, but obviously in certain parts of the portfolio more than others. There are certain places we have no constraints, and there are other places that we are more constrained. You know, we've shared previously that Reese's is one of the areas where, you know, we have seen high double-digit growth for extended periods of time. It's our very largest brand. That's certainly been a pressure point. Then there are a few other places that have been pressure points and where we've needed to make trade-offs in order to prioritize some parts of the portfolio. You know, we've continued to work through a capacity investment plan to address where the, you know, the soft areas are and bring capacity online.

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

That might be part of the mixed messaging, is that there are certain places we're not constrained, others that we are. Refreshment, specifically ICE BREAKERS Mints, is one area where we had some production difficulties as we ramped production back up after the COVID softness. That's one place as well that we're continuing to work to get more supply available. Does that help?

[Jason English, Managing Director and Equity Research Analyst at Goldman Sachs]

It does. It doesn't shed a lot of light on when you think the issues will be behind you, but it certainly helps in understanding where the issues are.

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

As we get through the issues, I would say I would characterize it as gradual improvement. Certainly, we are, you know, I would say quite constrained this year. We see that gradually improving as we get through 2023. As we get to 2024, we feel much better about our ability to be able to fully meet demand. That's how I would characterize it. Steve, anything to

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

Yeah, just to color around. You know, in the last three years, we've invested on the order of $800 million on capacity, mostly in the core. We've got, you know, 13 new lines in place coming online. We've refurbished 11. As Michele said, over the next, you know, year or two, we're gonna start to see more significant capacity available.

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

If it helps, the investments that we made will result in about a 15% increase in our internal volume production capability. That should allow us to catch up, but also to deliver some of that future growth.

[Jason English, Managing Director and Equity Research Analyst at Goldman Sachs]

For sure. That's helpful. I wanna come back to Robert Moskow's question real quick. I was surprised that you were offering color on 2023 this early. It's uncharacteristic of you, and it begs the question of why. I guess Rob showed one interpretation of, hey, like, you have inflation, but your pricing above it. Don't worry, gross margins are weak now, but they'll come back to growth next year. I guess that's one way to interpret it. The other is your emphasis on we're gonna lean into spending next year, so don't get out over your skis, in terms of how much margin flow through is gonna drop to the bottom line. Which of those two interpretations do you think we should be leaning towards?

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

I, again, I would just say, you know, it's still pretty early. We're trying to just give some broad movements on the top line and inflation. That's really the part that we could share. We're as we're learning more every month and quarter that goes by, we'll have a lot more to share as we get to the end of the year. Really not trying to get ahead of our skis, just extending some of the color we see right now.

[Jason English, Managing Director and Equity Research Analyst at Goldman Sachs]

Okay.

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

Jason, if I would just add a little bit, was just related to some of the pricing that's in the marketplace and expecting to come, trying to put that in perspective around how much 2023 factored into that choice and just trying to make sure that everybody was understanding some of the inflation that we see coming in 2023 to help put some of that pricing in perspective as well.

[Jason English, Managing Director and Equity Research Analyst at Goldman Sachs]

For sure. All right, thank you.

[Operator]

Thank you. Our next question is from Bryan Spillane with Bank of America. Please proceed with your question.

[Bryan Spillane, Managing Director at Bank of America]

Thanks, operator. Good morning, everyone.

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

Good morning.

[Bryan Spillane, Managing Director at Bank of America]

Just wanted to follow up on, I guess the commentary around inflation. I guess two things, Steve. One, you mentioned, you know, it's been mentioned in the call that there's, you know, some of the pressure is like scarcity of ingredients and, you know, it's more than just like market-based type things, right? I guess what I was trying to understand is just how much of the sort of increase in costs that you're experiencing now is maybe a more permanent shift, and how much of it is still, you know, sort of a function of just, you know, the current environment and maybe there will be some relief, you know, like disinflation at some point in time.

[Bryan Spillane, Managing Director at Bank of America]

just trying to understand how much of these do you think is really just, hey, look, this is now our kind of permanently rebased higher costs, or do you think some of this could be more variable and you get some disinflation in the future?

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

It's a really good question, and it's hard to answer that one with precision. You look at all the moving pieces. There are clearly some that we would see as temporary. You know, the scarcity issues, you know, hopefully some of the commodities pressures that are being influenced by events in Eastern Europe, things like that. On the other side, you know, we've seen more labor inflation and other things that could prove to be more structural. Again, as we get to the end of the year, we get some guidance for next year, I'll probably give some more color on that. It is a mix. Some are temporary, and some at least have the potential to be longer lasting. That said, you know, we also focus on productivity and continuous improvement every year.

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

A goal of that program is to be able to more than offset over time some of those structural costs. You know, that also has to continue to advance.

[Bryan Spillane, Managing Director at Bank of America]

Right. Okay. All right. That's all I had. Thank you.

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

Thanks.

[Jason English, Managing Director and Equity Research Analyst at Goldman Sachs]

Thank you.

[Operator]

Thank you. Our next question is from Michael Lavery with Piper Sandler. Please proceed with your question.

[Michael Lavery, Senior Equity Research Analyst at Piper Sandler]

Thank you. Good morning.

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

Good morning.

[Michael Lavery, Senior Equity Research Analyst at Piper Sandler]

I just wanted to come back to Dot's, which obviously is up very strongly. I would love to understand a little bit more some of the dynamics there. How much is distribution driven, and maybe more importantly, how much distribution upside runway do you still have left?

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

Sure. We are absolutely very pleased with Dot's performance in the marketplace and the momentum that we see. I think what we're really happy about is we continue to gain distribution, but we are maintaining our velocities as we continue to broaden reach. That can be a challenge to do as you continue to broaden reach into sometimes some of the smaller accounts. You know, all the trends are in line with our expectations. You know, retail sales growing about 50% over the past 12 weeks, share up about 370 basis points. You know, we are right now lapping some large distribution increases from prior year. We do expect to see a little bit of softening in trend as we overlap that. We do have continued distribution upside.

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

As we took over the business, the distribution was really concentrated primarily in the center of the country, in the West, and we're really still filling out the East. Importantly, just making sure that we have the right placement in stores, and then of course, beginning to actually market and, you know, drive consumer messaging to the brand, which we think will further drive upside in velocities.

[Michael Lavery, Senior Equity Research Analyst at Piper Sandler]

Okay. That's helpful. Thank you. Just a quick follow-up on the pricing. I know you've said you've got at least most, if maybe not all of it that's announced. Is there any of that that's sort of TBD or to be negotiated, or is it all locked and loaded and just a question of on the clock ready to go out the door?

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

You know, our recent, announced pricing action is being executed. It is going as planned, and we're starting to see some of the new retail in the market already. We feel good that we really took a consumer-focused approach for the right retail price points, and we're also beginning to reset some of the promotional points. Overall, the prices are moving in line with our recommendations and our expected ranges, and we are pleased about that as we wanna really move ahead with further investments in the business and capacity and consumer spending, new capabilities and the right programming. All of this will allow us to do that to drive profitable category growth.

[Michael Lavery, Senior Equity Research Analyst at Piper Sandler]

Okay, great. Thanks so much.

[Operator]

Thank you. Our next question is from Chris Growe with Stifel. Please proceed with your question.

[Chris Growe, Managing Director at Stifel]

Thank you. Good morning.

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

Good morning.

[Chris Growe, Managing Director at Stifel]

Good morning. I just had a question first on the recent price increases you put into place in particular across confectionery. I guess to understand, I guess you see very little of that coming through this year. It would seem like some would come through, but very little. Just to what degree that's caused you to build in a higher degree of elasticity into your second half assumption. I just wanna get a better feel for that.

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

Sure. Yeah, I mean, it's right. Most of it will impact next year. We will get a benefit in the fourth quarter. Even a portion of that benefit, you know, we're reinvesting in, with the trade and to drive merchandising and so forth. Most of it will impact next year. In terms of elasticity assumptions, you know, we do have, in the back half, an elasticity that is, a little bit better than what we've seen historically.

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

A little bit worse than what we saw in the first half. It actually looks a lot like the second quarter. If you adjust it for the volume of replenishment, that level of elasticity is the assumption for the back half. Then, of course, the range on guidance kinda goes up and down from there.

[Chris Growe, Managing Director at Stifel]

Okay. One related question to that would be, do you expect pricing just to sequentially accelerate in the second quarter? I'm sorry, in the third quarter from the second quarter? Or maybe it'd be more Q4 with the confectionery pricing coming through. Do you believe you can grow volume in the second half of the year? You've had some really strong volume trends to date.

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

Yeah. We don't see sequential improvement in the third quarter. We do in the fourth quarter, and that's when we'll see.

[Chris Growe, Managing Director at Stifel]

Okay

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

the beginning effects of the price increase. We don't expect to see volume growth, you know, again, with that elasticity impact.

[Chris Growe, Managing Director at Stifel]

Yeah

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

Combined with the pull forward of the value of the inventory replenishment from the second half into the second quarter.

[Chris Growe, Managing Director at Stifel]

Okay. That's all I had. Thanks so much.

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

Thank you.

[Operator]

Thank you. Our next question is from Cody Ross with UBS. Please proceed with your question.

[Analyst at UBS]

Good morning. This is Simon Neagan filling in for Cody Ross. Could you give some additional detail into the delays in capacity coming online next year? Is this only impacting Reese's, and how much of an impact is expected?

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

Most of the capacity that will be coming online is focused on the core. Reese's is one significant component of that. I don't think we're gonna be specific about exactly how much is coming on when, but that is the focus of the capacity.

[Analyst at UBS]

Gotcha. All right, just one smaller question. Obviously, Dot's is demonstrating incredible growth, largely by distribution gains. Moving forward, do you expect a change in consumers trialing new brands and products when budgets are squeezed more in this environment, perhaps sticking to what they're comfortable with?

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

You know, it's a good question. I think across snacking, what we tend to see is consumers very much like their brands. If you look across total food, as budgets are tighter, certainly private label brands have grown share versus across snacking, private label has not, and consumers tend to like their brands. I think that consumers will continue to try new brands given that they have a real focus on brands within snacking. We will closely monitor that, but at this point, we haven't seen any concerns around the slowdown in trial as a result of that.

[Analyst at UBS]

Great. Thanks so much.

[Operator]

Thank you. Our next question is from Jonathan Feeney with Consumer Edge. Please proceed with your question.

[Jonathan Feeney, Director of Research and Head of Product at Consumer Edge]

Good morning, and thanks for taking the question, and great quarter. As far as pricing over the next six to 12 months, assuming if we did have a moderating cost environment, and I'm sure you've lived through a lot of ups and downs in costs in this business. If there's been so much conversation, so much acceleration in pricing, much of that headline cost-driven, what changes about the conversation if costs move sharply in the other direction like they did in grains, for example, at least so far off their peak? If costs moderate, how do you handle that? Does it typically play out that it's increased promotion? Do you see decreased list prices, or do you see no impact and just a significant increase in gross margin? Thanks.

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

Yeah, I mean, our focus is always on driving profitable category growth and looking at how we can invest to do so. We have a deep list of investment priorities and growth-driving opportunities. We believe that this enables us to really invest, to unlock, whether that is in capacity, whether that is in the right consumer marketing support, whether that is in more impactful promotions, investments in innovation, technology, et cetera. You know, we like to invest back in the business, and I would say that's the overall approach and strategy that we take.

[Jonathan Feeney, Director of Research and Head of Product at Consumer Edge]

Okay, thank you.

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

Thank you.

[Operator]

Thank you. There are no further questions at this time. I would like to pass the floor back over to Michele Buck for any closing comments.

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

Thank you very much for your time today. We appreciate all the questions, and I know that many of you will have follow-ups with Melissa throughout the day. Thank you.

Participants

Executives

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

Analysts

• Andrew Lazar, Managing Director at Barclays
• Alexia Howard, Research Analyst at Bernstein
• Robert Moskow, Senior Equity Analyst and Food and Food Retail at Credit Suisse
• Ken Goldman, Head of U.S. Equity Research at JPMorgan
• Jason English, Managing Director and Equity Research Analyst at Goldman Sachs
• Bryan Spillane, Managing Director at Bank of America
• Michael Lavery, Senior Equity Research Analyst at Piper Sandler
• Chris Growe, Managing Director at Stifel
• Analyst at UBS
• Jonathan Feeney, Director of Research and Head of Product at Consumer Edge