North America Confectionery Sales and Market Share
Question
Did Hershey’s North America Confectionery segment show building underlying momentum in the core Confectionery segment outside of ERP inventory noise, and would a sequential improvement in volume trends be expected in Q2?
Answer
Hershey’s Q1 top-line performance was in line with expectations, with market share exceeding expectations.
Strength was driven by strong performance in seasons, particularly with Reese’s Caramel innovation and merchandising around events like the Super Bowl.
Improvement in trends is expected throughout the year, with sequential improvement anticipated.
Display Activity and Customer Partnerships
Question
Has the improved display activity in the first half of the year compared to the second half of last year indicated a shift in customer understanding of the impact of displays on snack sales, particularly in light of a major customer’s clean store efforts?
Answer
Hershey has a strong partnership with the retailer and recognizes opportunities to drive merchandising and display effectiveness.
Recent strength in merchandising was observed across other customers, with a focus on seasons, innovation, and tying media to events like the Super Bowl and March Madness.
Some strength from merchandising with the major customer is expected in the second half of the year.
Cocoa Sourcing and Hedging Strategies
Question
Can Hershey provide more detail on the levers and options available for cocoa sourcing in 2025, considering the volatility in the cocoa market?
Answer
Hershey employs a hedging program and diversified supply chain to manage cocoa price volatility.
The company has flexibility in sourcing, guided by taste profiles and recipes, and will continue to diversify its supply chain footprint.
Options include sourcing from other regions, timing of contracts, and building flexibility into the system.
American Consumer and SNAP Spending
Question
Can Hershey comment on the state of the American consumer, particularly lower-income consumers, and the impact of SNAP spending cutbacks?
Answer
Hershey observed the impact of SNAP reductions in the business in the latter part of last year.
Stabilization is beginning as the company laps those reductions, but value-seeking behavior from consumers persists.
While the situation is improving, value-seeking behavior remains, although to a lesser extent.
North America Confectionery Market Share and Category Performance
Question
Given Hershey’s comment that North America Confectionery performance, excluding ship-ahead, was in line with expectations but market share exceeded expectations, does this imply that the category performance may not have been as strong as hoped? What are the factors contributing to this?
Answer
The performance of the category is influenced by each key competitor’s programming and innovation.
A softer quarter for Hershey’s largest competitor, Mars, with share decline driven by innovation lap versus the prior year, was a significant factor impacting the category.
Salty Snacks Business and Investment
Question
Given the improved sales trends in the Salty Snacks business, what is the level of satisfaction with the A&P investment in that segment, and are further price investments expected?
Answer
The Salty Snacks business was on track with expectations, with strong performance from Dot’s and expected improvement from SkinnyPop as the company laps the Q2 period.
Strong media and trade investments, along with flavor and pack innovation, are planned for both brands in the second half of the year.
Profitability for the Salty Snacks business is expected to improve going forward, with the largest increase in advertising investments occurring in Q2 and beyond.
2025 Pricing Framework
Question
Can Hershey discuss the factors beyond cocoa inflation that will influence the 2025 pricing framework, such as market share trends, category volumes, the health of the consumer, the competitive environment, and cross-category elasticity concerns?
Answer
The 2025 plan is currently being developed, and levers such as pricing, supply chain savings, and transformation savings will be considered.
More details on the 2025 plan, including category health and consumer outlook, will be provided as the year progresses.
Q2 2024 Gross Margin and Cost Absorption
Question
Can Hershey provide insights into the cost absorption that might reverse out in Q2 after a strong Q1, considering the inventory dynamics associated with the ERP cutover?
Answer
The company expects the fixed cost leverage that benefited Q1 to fully reverse out in Q2.
The estimated benefit from fixed cost absorption in Q1 was $20 million to $25 million, along with a slight benefit from inventory mix, and both components are expected to reverse in Q2.
Channel Trends and Promotional Strategies
Question
What are Hershey’s observations regarding channel trends, particularly in C-stores, and how are promotional plans and price gaps being framed in light of potential cross-elasticity with other snacking alternatives?
Answer
Hershey’s C-store business has been holding up well, and no significant changes in trend have been observed.
The company evaluates price gaps and price points both within the category and across the snacking category when assessing price elasticity.
Q2 2024 EPS Decline
Question
Does the high single-digit EPS decline expected in Q2 due to inventory reversal align with the previously mentioned expectation of double-digit EPS declines in the first half of the year?
Answer
Yes, the expectation of a high single-digit EPS decline in Q2 is consistent with the previously stated expectation of double-digit EPS declines in the first half of the year.
Marketing Spend and Cocoa Volatility
Question
How does Hershey approach managing marketing spend in the face of cocoa volatility or cost uncertainty, considering the company’s long-term focus and commitment to brand investment?
Answer
Hershey maintains a strategic focus on brand investment while evaluating the return on spending each year and adjusting budgets based on performance, opportunities, and market conditions.
The company believes that consistent brand investment is essential but will adjust spending levels based on factors such as effectiveness, efficiency, and the need to support new initiatives.
Seasonal Business and Halloween Outlook
Question
Does Hershey’s experience with seasons in the first quarter, particularly around Easter, provide any insights into potential differences or adjustments needed for Halloween this year, considering the pressure on everyday business and the potential reliance on seasons for growth?
Answer
Valentine’s and Easter categories performed well, with Hershey gaining share, despite the Easter season being shorter and experiencing a decline.
Positive trends in the second half of the year are anticipated, but growth may moderate compared to the strong seasonal performance in 2023.
Pricing Actions and Customer Inventory
Question
Is Hershey’s strategy to evaluate pricing actions after the ERP conversion is complete still in place, and how was the estimate of excess inventory that customers pulled forward determined?
Answer
Hershey’s ERP conversion is nearing completion, and the company will have options available to evaluate pricing strategies by the end of Q2.
Hershey worked closely with customers to understand their inventory needs, and the excess inventory was a result of some customers not fully communicating requirements and others potentially being spooked by ERP implementation challenges in the market.
The company was able to meet customer demands more effectively than anticipated and does not see the excess inventory as an indication of customers trying to get ahead of price increases.
Chocolate Price Elasticity and Demand Drivers
Question
What is Hershey’s estimate of price elasticity for chocolate products today, and how might it change if cocoa prices remain elevated and a large price increase is necessary for 2025?
Answer
Hershey’s price elasticity for chocolate products remains consistent with historical levels, estimated at around -1.
The company assumes this elasticity will remain similar in the future.
Consumer Trends and Demand Drivers
Question
How does Hershey view the net impact of the post-COVID slowdown in at-home snacking, SNAP reductions, and a potentially weakening low-end consumer on its business, and are there any observed crosscurrents between different channels?
Answer
Hershey acknowledges value-seeking behavior among lower-income consumers, which has been evident in its business and across other edibles.
The company’s C-store business is performing well, while mass, club, and dollar channels are strong.
While some value-seeking behavior is observed, it is not considered significant or dramatic.
Gross Margin Evolution
Question
Has the complexion of Hershey’s gross margin evolved throughout the year, and are there any insights into how the company is delivering against its gross margin target in light of timing dynamics and the full-year outlook?
Answer
There have been no material changes in the gross margin outlook, with the full-year expectation of a 200 basis point decline remaining unchanged.
Productivity savings are on track with the plan, and there is no indication of a need for reshaping the gross margin outlook.
Category Performance and Innovation
Question
Was the lower category performance at the beginning of the year primarily due to innovation relative to Hershey’s expectations or were there other factors at play?
Answer
The lower category performance was primarily attributed to the lapping of innovation from a key competitor, Mars.
Cocoa Supply and Demand Dynamics
Question
Can Hershey provide general comments on how it views the global cocoa supply situation, considering its internal and external advisors and the available information on supply and demand dynamics?
Answer
Hershey’s views on the cocoa market are generally consistent with those shared by a large competitor.
The company acknowledges the influence of both structural and transient forces on cocoa prices, including poor weather, supply concerns, EU deforestation regulations, market speculation, and lack of liquidity.
Hershey closely monitors short-term supply and demand data, and early signals on the supply outlook for the main crop and mid-crop are positive but require further observation.
The company has full coverage for 2024 and some coverage for 2025, and it remains focused on executing its business strategy while monitoring the cocoa market.
Net Productivity and Savings Impact
Question
Given Hershey’s productivity and savings programs and the potential for cost inflation, how should the net impact on the P&L be viewed over the next three years?
Answer
Hershey’s model is to offset inflationary costs over time through various levers in the P&L, and this model remains in place despite the current stress from cocoa prices.
The company aims for its savings programs to be a net benefit to the P&L over the horizon, requiring ongoing normal efficiencies to offset normal inflation.
Seasonal Success and Learnings
Question
What factors contributed to Hershey’s success in the seasonal business, and are there any learnings that can be applied to upcoming events like the Olympics?
Answer
Winning in seasons is attributed to the right product portfolio, including strong innovation, effective merchandising, and improved supply availability.
These learnings will be applied to non-traditional seasons like the Olympics, with a focus on leveraging the same levers to drive a strong performance.
Olympics Marketing and Activations
Question
What are Hershey’s plans for in-store activations and promotions around the Olympics, and when can these be expected to start?
Answer
In-store activations for the Olympics are expected to start in June, ahead of the event, and will vary depending on the retailer.
International Business and European Market
Question
How does Hershey view the European market in the long term, and is the company still in a trial period or considering further expansion?
Answer
Hershey views Europe as a large and well-developed market, requiring a differentiated product portfolio for success.
The company has successfully introduced Reese’s to the UK market and is focused on maintaining a profitable business with efficient investments and strong margins.
Demand Drivers and Efficiency
Question
Are there any observed changes in demand drivers or the efficiency of demand generation, such as the need for increased advertising, price promotions, or in-store displays, as the consumer encounters an extended period of high inflation?
Answer
Hershey focuses on ensuring a good mix of pack types and entry-level prices to address consumer value perceptions, particularly for lower-income consumers.
Areas like seasons and innovation are also highlighted as drivers of value beyond base products.
Recent Cocoa Price Declines
Question
Can Hershey provide any comments on the recent 30% decline in cocoa prices over the past couple of weeks?
Answer
The recent decline in cocoa prices is attributed to the significant volatility in the marketplace.
While some early signs suggest positive supply outlooks for the main crop and mid-crop, the decline is believed to be driven by non-supply-demand economic factors such as speculation, regulation concerns, and market liquidity.
