The Hershey Company (HSY) Earnings Call Transcript & Summary

Good morning, everyone. I'm Michele Buck, Chief Executive Officer of The Hershey Company. We're glad to be here with you today to discuss our strategies for sustaining the strong momentum we have on our business. Before we begin, let me remind you that our presentation contains forward-looking statements. Please keep this in mind as we move through the presentation and refer to the appendix of our presentation posted on our website for reconciliations of non-GAAP items. We hope that after today's presentation, you will come away with increased confidence that our brands and strategies enable us to continue delivering advantaged results in the coming years. We had a strong foundation before the pandemic with great brands in growing categories and a track record of consistently delivering strong earnings per share. While we have been extremely focused on execution in the past 2 years, we have also continued to advance our strategies to further transform our business and position ourselves well for the future. As I reflect on the past several years, we have made tremendous progress against our strategies. Within our confection business, we have accelerated both growth and share gains through enhanced revenue management capabilities, a more balanced approach to innovation, continued strong brand investment and executional excellence. We have improved our M&A capability and accelerated our diversification efforts, adding 5 scaled, high-growth brands to the portfolio that meet different consumer needs and add incrementality to our growth. And we have transformed our operating model to drive increased efficiencies and effectiveness across all aspects of our business while advancing our ESG efforts to better meet the needs of all stakeholders. And while growth across most food companies and categories accelerated during the pandemic, we continue to believe snacking remains an advantaged category that will continue to outpace broader food growth in the future. Within stacking, we have 2 of the most loved brands in America. We have leading share positions and an advantaged financial structure that enables us to invest differentially in our business for growth, while delivering strong returns to our shareholders. We have best-in-class capabilities across all aspects of our business that we continue to transform so that we are well positioned to change with our consumers and the marketplace to capture growth. We'll touch on a few of these capabilities in a bit. Our overarching strategies remain the same. We continue to believe that our focus on growing our portfolio of beloved brands and investing in capabilities and our workforce to differentially capture growth opportunities will enable us to meet the needs of our consumers and other stakeholders for many years to come. So let's spend a few minutes talking about our portfolio because it really all starts with having brands that consumers love. I'm going to start with a few words on our key strategies and focus areas, but then we're going to share a brief video that dives a little deeper and gives you the opportunity to hear from some of our consumers directly about what our brands mean to them. You've heard us talk before about the importance of balance in delivering sustainable growth, and we continue to leverage that model to drive all occasions and channels in our portfolio via both volume and price, whether it be through strong seasonal programming, incremental space in existing stores or new stores, we are reaching our consumers in many different ways, generating excitement and deepening our emotional connections to drive long-term brand equity and increase frequency. As we continue to drive the core, we have also prioritized growing our presence in fast-growing on-trend segments to capture new occasions and drive incremental growth. Within confection, we believe better for you remains an opportunity, and we have built on last year's Zero-Sugar relaunch with the acquisition of Lily's and the launch of [ Honest Gummies ] this year. Our Super King and Pantry packed items are great ways for us to leverage our core items in different sizes and price points to meet different consumer needs while limiting the amount of complexity that we're adding to our supply chain. And we continue to expand our presence in salty snacks with another fantastic acquisition, Dot's Pretzels, a disruptive offering that has captured the #3 share position by growing retail sales over $180 million in just 3 years. But more important than any of this is how our brands make people feel and the role they play in making everyday moments just a little more special. So we're going to show you a video that highlights not only some of the important trends and facts about our category, but also lets you hear directly from our consumers about what Hershey means to them. [Presentation]

Now let's pivot to the capabilities that enable us to effectively reach consumers and partner with our retailers to deliver more of these special moments. We continue to invest heavily in capabilities across our business, whether it be within the supply chain, with our customers or directly with consumers. Having the right data, analytics and technology to support these capabilities is critical, and we have continued to make advancements across all of these over the past several years. While any one of these adds value by themselves, we believe the breadth and depth of our capabilities enables us to respond more quickly and more effectively to the changing landscape around us. Let's talk through a few examples that bring some of this to life. While many companies have recently begun to make investments in their supply chain to respond to strong demand and increased volatility, we have consistently invested in our supply chain over the past decade to drive capacity and technology improvements as well as increased automation. This positioned us well to capitalize on the strong demand we have seen over the past 2 years and maintain an advantaged margin structure versus many of our peers. We will continue to invest in a disciplined way to support our growth agenda in the coming years via incremental capacity for our largest and fastest-growing brands and enhanced technology to drive efficiency. Late last year, one of these investments came online with the opening of our new fulfillment center in Annville, Pennsylvania, Here's a brief clip that showcases the state-of-the-art facility. [Presentation]

Now let me spend a few minutes on media. As we shared on our last earnings call, this year, we will be scaling new capabilities that will enable us to target our consumers more effectively than ever before. With enhanced data and tools, we will be able to not only target consumers based on demographic information of the shopper but also based on knowledge about the household itself and their purchasing patterns, and we can execute more tests in real time and optimize our approach instead of waiting 6 or 12 months for third-party analytics. Let me give you an example of what this looks like in practice. With this new capability, we know more about the households we are targeting to make our copy even more relevant and impactful. Instead of just knowing a consumer might be in the 18- to 35-year-old demographic, we can also see that they are buying for a family and often buy multipacks in other categories, but have yet to discover our snacking or confection multipacks. We can then use this information to cater our copy and capture a new occasion with this consumer, or we can spot a household that tends to buy smaller amounts in more premium items and target them with our portion control and premium offerings. Media will remain a critical part of our business model going forward, and we will continue to advance these capabilities and others to drive strong ROIs in the coming years. None of this would be possible without the tremendous team of employees we have across the organization. We know that our employees are one of our greatest assets, and we also know that their needs are changing. We have adapted our approach to enable more real-time and continuous feedback so that we can identify opportunities and respond more quickly. While different employees have different needs, we know that there are some common themes throughout the organization, whether it be in our corporate offices or in our manufacturing plants or out in retail stores. Employees want more flexibility, more development and career opportunities, and they want programs and benefits that not only take care of them financially, but emotionally as well. We have increased incentives, added head count to reduce overtime requirements, provided employees with more scheduling flexibility and increased investment in training and development. We'll continue to listen to employees and make the changes necessary to remain a place where employees want to come to work every day, are passionate about what they do and can make a difference, both in and outside the workplace. We have also made a lot of progress advancing our diversity, equity and inclusion efforts over the past several years. Diversity is a source of energy and innovation at The Hershey Company, and we have a long-standing commitment to fostering an inclusive environment where all employees can bring their whole selves to work each day. Our Pathways Project looks to build on this by further strengthening pay equity and increasing the number of women and people of color leaders by 2025. We have focused our efforts to bring in a wider range of talent and perspectives as well as strengthened our development programs for underrepresented talent. We've made great progress, and we're really proud of the work that we've accomplished and recognition we've received. But there is more work to be done, and we remain energized by the opportunities ahead of us and the impact we can have as we move forward. All of these strategies strive to meet the needs of our consumers and all of our stakeholders for many years to come. This long-term view and our focus on investing for sustainable growth enables us to have differentiated and long-standing partnerships, which in turn enables differentiated performance. Once again, we thought it would be powerful for you to hear directly from some of the employees and partners on how these strategic partnerships are enabling us to thrive now and into the future. [Presentation]

Before I turn it over to Steve, let me spend a minute on ESG. As we have shared before, we have set and are working towards several ambitious goals designed to help us create positive change across global environmental and social areas supported by robust governance. We have made tremendous progress, but we know that there is much more work to be done. This year, we will continue to scale our cocoa programs to meet our enhanced commitments related to sourcing, child labor and deforestation. We are progressing our environmental agenda as we further reduce our greenhouse gas emissions while developing a deeper understanding of our water footprint and opportunity. Our ESG focus is aimed at creating a more sustainable, value-creating business over the long term. To that end, we continue to more deeply embed ESG into our governance, strategy and operations, provide increased transparency about our progress and hold ourselves accountable for delivering our goals. Now let me turn it over to Steve.

Thank you, Michele. We are well equipped to continue delivering sustainable, profitable growth on the back of our advantaged financial structure. We compete in growing categories with strong brands. And our margin structure allows us to reinvest in those brands even in times of volatility and inflation while delivering reliable earnings growth. We generate strong cash flow and have an advantaged balance sheet that allows us the optionality to invest in the best organic and inorganic options to drive shareholder returns. And we have a relentless commitment to execute and deliver peer-leading returns to shareholders. Of course, managing wisely for the long term also means making smart decisions in the near term. And we're going to continue to invest in capabilities, we believe, give us a strategic advantage. That includes staying close to the consumer with peer-leading levels of advertising investment. But it's not just about the dollars, it's about the reach and the impact. And I'm pleased with the work we've done in recent years to bring more analytics and ROI analysis to this important spend. We're also going to lean into our never say quit retail sales force to make sure that all the work we do behind the scenes to bring our products and our consumers together is one at shelf, where it matters most. Second, we're going to continue to build a resilient supply chain. That means investing in new capability, but also leveraging technology and data to optimize our network, to increase our flexibility and agility to meet consumers where they are and also to meet the needs of our customers. Finally, we're going to continue to build out our snacking franchise, which has advantaged margins and brings us to new consumers and new occasions to continue to build out this important part of our portfolio. Margin improvement has always been an important part of our growth algorithm. And fortunately, we have many levers at our disposal to drive that improvement. Of course, it starts on the top line, where we want a balance of volume and price growth to drive our top line. It also relies on optimizing our costs, not just in the supply chain area, but also in the back office. It means leveraging our new manufacturing capabilities to drive more efficiency in every part of our operation and distribution. And it means remaining disciplined on SG&A deployment, investing only in the capabilities we believe will provide lasting advantage for our company. All of these things, the advantaged financial structure, plus the levers, allow us to deliver consistent on algorithm earnings growth over time. In the next few years, as we continue to invest for growth, we're going to invest differentially in 3 areas. The first is core confection capacity. Our beloved brands like Reese were growing well before the pandemic and have only accelerated. And in fact, our Reese investments are among our highest returns on capital. In addition, we're going to go into new spaces where we believe we can have an even bigger impact in sweets and in gummies, for example. We're going to continue building on our snacking scale, optimizing our new manufacturing footprint and bringing what Hershey does best to this business, demand planning, lean manufacturing, network optimization and ultimately, margin improvement that will let us keep the flywheel going in snacking just like it does in confection, with customer reinvestment driving more top line growth. And finally, we're going to continue to invest in supply chain resilience, not just equipment, but partnerships and making sure that we have the data and technology to take us to the next generation. In fact, later this year, we're going to go live with the first phase of our ERP implementation, and we'll be talking more about that as the year progresses. All of that allows us to continue generating strong cash flow, where we will always seek a balance between investing behind our tremendous portfolio and returning cash to shareholders. And that leads to stock price, which is a testament to the fact that the strategy is working, and we're executing well, but it's also the impetus to continue the momentum and keep driving our business forward. With that, let me turn it back to Michele.

Thanks, Steve. While there continues to be debate around the stickiness of new consumer behaviors or pricing elasticity, we remain confident in our ability to consistently deliver against our growth algorithm in the years to come. We will continue to invest in differentiated capabilities to fuel growth while taking a disciplined approach to our cost structure, and we believe more balanced approach to innovation, enhanced revenue management capabilities and accelerated growth from our larger snacking portfolio and more profitable international markets will enable us to consistently deliver 2% to 4% net sales growth and 6% to 8% adjusted earnings per share growth in the coming years. Thank you for your time this morning, and we look forward to taking your questions in a few minutes.