Release Date: May 03, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- The Hershey Co (HSY, Financial) reported strong Q1 top line performance, aligning with expectations and exceeding market share predictions.
- Innovative product launches like Reese's Caramel have been successful, driving strong merchandising and consumer engagement.
- The Hershey Co (HSY) has seen improved display activity in the first half of the year compared to the second half of the previous year, indicating better retail execution.
- Diversification of supply chain and sourcing strategies has provided The Hershey Co (HSY) with flexibility in managing cocoa volatility.
- The Hershey Co (HSY) has full coverage for cocoa in 2024 and some coverage into 2025, showing preparedness for market fluctuations.
Negative Points
- The Hershey Co (HSY) faces challenges with the SNAP reductions impacting lower-income consumer spending, although stabilization is beginning.
- Despite strong performance in Q1, the overall confectionery category did not perform as well as expected due to competitor issues, particularly with innovation sustainability.
- The Salty Snacks segment, although improving, continues to face pressure, especially in the ready-to-eat popcorn category.
- Fixed cost leverage benefits seen in Q1 are expected to reverse in Q2, potentially impacting financial performance.
- The Hershey Co (HSY) is experiencing significant cocoa price volatility, which remains a concern despite strategic hedging and sourcing adjustments.
Q & A Highlights
Q: Michele, excluding the inventory build, underlying organic sales in North America Confectionery rose 2%. Are you seeing building underlying momentum in the core Confectionery segment outside of all the ERP inventory noise?
A: Michele Gross Buck, Chairman, President & CEO of The Hershey Company, confirmed that Q1's top line performance was in line with expectations, with market share exceeding expectations. The strength was driven by strong performance in seasons and innovation, particularly with Reese's Caramel. They expect improvement in trends as the year progresses.
Q: Can you provide more detail on the levers and options you have regarding cocoa sourcing for 2025, considering the volatility in the cocoa market?
A: Steven E. Voskuil, Senior VP & CFO of The Hershey Company, explained that they manage volatility through a hedging program and by ensuring diverse sourcing in their supply chain. They have flexibility within their sourcing options and recipes to adapt to different market conditions.
Q: How has the reduction in SNAP spending impacted your business, and what are your observations on the state of the American consumer?
A: Michele Gross Buck noted that the SNAP reductions impacted their business in the latter part of the previous year, but they are seeing some stabilization. Consumers continue to exhibit value-seeking behavior, although it is showing signs of improvement.
Q: Regarding the Salty Snacks category, what are your plans for investment in advertising and promotions, and how do you see the profitability evolving?
A: Michele Gross Buck mentioned that Salty Snacks performed as expected, with strong media and trade investments planned. They anticipate profitability improvements throughout the year, with significant advertising increases starting from Q2 onwards.
Q: Can you discuss the expected gross margin dynamics for Q2 '24, especially considering the inventory dynamics associated with the ERP cutover?
A: Steven E. Voskuil indicated that the fixed cost leverage benefit seen in Q1 is expected to fully reverse in Q2, with an estimated $20 million to $25 million impact, along with some mix effects based on the type of inventory built in Q1.
Q: How are you managing the different demand drivers in your categories given the extended period of high inflation, and are there any changes in consumer behavior that impact your promotional strategies?
A: Michele Gross Buck explained that they continuously evaluate price gaps and price points both within and across categories. They focus on maintaining entry-level price points and volume-based value perceptions, especially for lower-income consumers, to ensure participation across all occasions.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
