The Hershey Company (HSY) Earnings Call Transcript & Summary

Welcome back, everybody. And for our next session, really thrilled to welcome back The Hershey Company. With us today are CEO, Kirk Tanner, and newly minted, Hershey's CFO, Dave Hulays. Congratulations, Dave. .

Thank you.

And again, thanks to both of you for coming.

Thanks for having us.

Maybe to kick it off, Kirk, a lot of topics we want to cover today, including second half sales cadence, pricing elasticities, Coco, market share, salty snacks execution and sort of the 27 framework. But maybe we take a step back for a minute. As you laid out at your Investor Day, a strategy around leading the next generation of snacking, right, with '26 and '27, really framed as a period of sort of profitability restoration -- before returning to a more balanced growth algorithm in 2018 and beyond. Since then, you've now reported 2 quarters under that framework, what's giving you the most confidence so far that the strategy is working. And where do you still think investors may be underappreciating that have change underway at the company.

Yes. I think you mentioned it yourself. But we started out the year with some clear objectives of deliver profit restoration great top line and invest for the future, right? So profit restoration, we're ready to deliver that, what we committed to for '26 and the outlook for '27 looks good. Top line growth -- the category is performing better than we estimated by about 1 point, a lot of innovation in the category. We're performing against our top line expectations again. So -- it's important that we deliver what we said we're going to deliver from a top line standpoint and then importantly, invest in future growth. And the investment in future growth was in our investment in R&D for the innovation pipeline, which we know is critical to the category. Our investment in our brands to create pull around our big brands so that we have our core business running well, plus an innovation pipeline that delivers the growth. So when you think about what we talked about in March at the Investor Day is each of those platforms are underpinned by capabilities. Those capabilities are speed to market with our innovation, customer excellence with our relationships with our customers, building partner of choice type relationships and then building the capability across our confection business, our Salty business, international and functional business. And we are on track to deliver against that, and we're in a really good place right now, from what we talked about at the beginning of the year to where we are with 4 months to go. We're very confident in what we've achieved this year and what we have to achieve for the rest of the year.

Great. Hershey delivered another strong quarter in the second quarter. Organic sales and EPS both well above expectations. The full year guidance range raise was relatively contained with the company narrowing to sort of the upper half of the range rather than, let's say, raising the high end. We understand there were some timing items, including merchandising shipments pulled forward into 2Q some A&C weighted to the back half of the year. I think investors are still trying to understand the framework. How should we think about the degree to which the second quarter upside was sort of timing related versus, let's call it, better true underlying elasticity and consumption that flowed through to the bottom line.

Let me let Dave answer that. But before we get to let Dave answer that, I wanted to just say a few things about Dave, if that's okay.

Absolutely.

So we welcome our new CFO. You don't want me to talk about.

No, go for it. it was great. This is my opportunity.

Dave has been a high-impact leader at Hershey for 15 years and has had very aspect of the business. I think this is a perfect example of succession planning and preparing a CFO for the future. And Dave has worked hand-in-hand with Steve over the years developing, getting those experiences. I worked with Dave on day 1 from how we operate the business, our commercial planning, our strategic planning. I'm excited to have Dave lead the future and be a partner to me. I just wanted to say that I think it's important that we have great succession planning around these key roles like CFO, and we have that, and we're excited to have Dave here today.

Yes. Thanks for that, Kirk. No pressure. None taken. Maybe before I answer your question, Andrew, just stepping back, I've had the opportunity to partner with Kirk and with Steve to both developed the strategies that went into the '26 plan and outlook as well as the longer-term outlook that we shared at Investor Day, including the capital allocation strategy and priorities. So I just want to reiterate what Kirk said, I feel we feel good about where we are with our 2026 outlook and where we head from here. Specific to your question on Q2, the top line over delivery was primarily growth-driven, demand-driven on the business. slightly better elasticities as well as strong performance in foodservice and specialty, which are nonmeasured channels. As we look to the remainder of the year from a top line perspective, we're continuing to be prudent with our macro assumptions as it relates to the consumer, GLP-1 Snap, gas price pressures, financial pressure on consumers. On EPS, I would say that there was some timing with media investment. That was a big part of the earnings story in the second quarter. So that's why you see the impact to moderate as we look to the full year outlook. But we do have a ramp up in media investment that is programmed around all of our activation, our innovation. And our seasons -- and we did plus some of that up where we saw opportunities coming out of the strong Q2 performance.

Great. Maybe following up on that, when a company typically shows this much sort of upside and doesn't necessarily flow through more of that for the full year. Naturally, investors ask whether some of the reinvestment is more, let's say, offensive or defensive. . In Hershey's case, I guess, is the increased second half spending primarily about maximizing a uniquely strong slate of innovation or air innovation, Halloween, The Hershey movie, all the football activations? Or is it also some of it coming from a place of sort of need given you've still been losing some share within key confectionery?

Well, we -- as you mentioned, we have a lot of activity that needs to be supported in the second half with The Hershey movie coming out, Halloween that we're looking forward to -- and then this innovation launch, we just launched Hershey Crem bars. I think you can find them across the way there, along with cookies. So we have innovation that is supported -- the upside that we had in the first half of the year gives us some flexibility, but we had already planned on investing at this level in the second half. We have looked at our opportunities to invest further to really advance our momentum in Q4 and in 2027. So we're evaluating those things. But I think for the most part, we had planned this level of activity based on the shape of the year.

Great. Yes. One question investors keep coming back to is sort of what happens once the benefit from the last round of pricing starts to roll off. elasticities have remained somewhat better than planned so far. But volumes in North America confectionery area were still down meaningfully in the second quarter, obviously, partly reflecting the price, PPA and timing. So I guess as pricing begins to sort of anniversary, how quickly should investors expect volume trends to improve -- and what would give you confidence that the business can return to sort of positive volume growth rather than simply better price-led sales growth?

Yes. So we do expect volume to improve at least the trends to improve. -- as we -- as pricing moderates. I will say as we think about next year, there are macro headwinds we've talked about that are contemplated in our outlook and our framework. There will be some carryover pricing from previously announced pricing on Seasons and PPA. We always do or always at least consider in our annual plan, some RGM activity surgically as well. We're going to see an uptick. We're already seeing it in the back half of this year, but we're planning it over the full year next year is around innovation, particularly in our confection portfolio. And we feel good about how we're seeing innovation impact the category now and our opportunity to do much better and participate at a higher level next year. So that's part of the algorithm. Soonest, we will expect a few brands to accelerate that volume trend faster because there's differentiated innovation and programming against them. One of them is Hershey. The other one is Jone Rancher and another one is Cadbury. It will be a little bit bumpy in terms of when we see and how we see that volume move because there's a big lap of a big innovation Oreo lap coming up, and there's a lot of dynamics around innovation and merchandising and seasons over the remainder of the year. But we're confident as we move through '27 and as we move into '28, we're confident behind our portfolio expansion an occasion expansion strategy and the fact that, that will translate into a better mix, a better balance of volume and price over the long term.

Great. You've noted that the consumer has been broadly tracking sort of in line with your expectations with Snap impacts modest so far. GLP-1 trend is also consistent with your planning assumptions. I guess that said, it's still a dynamic environment, especially for lower-income consumers. I guess what are you seeing most recently across channels, sort of pack sizes and occasions. And maybe what's your up-to-date sort of planning assumption around the sort of shape the macro environment can take from here as we think through the balance of '26 and into '27 and obviously now fuel prices back up to .

Yes. The consumer has been resilient, and the category is performing well across income cohorts and across channels. If you break it down and maybe start with the low-income consumer. So they're adapting. And there's movement within channels and they're -- there's more frequency going to convenience and online and into dollar stores. They continue to look for lower price and smaller packs as they're doing that, but they're eating more at home. And actually, that's translating into the low-end consumer -- low-income consumer in our categories actually growing at a higher rate than the mid- and high-income consumer, which is good, showing the resilience of the consumer and of the category. High-end consumers are also adapting more frequency in mass, online, club, larger packs, more value from a price per ounce standpoint. But we continue to see good participation across the all consumer cohorts. And there are headwinds. We've talked about the headwinds. There's financial pressure. There's staff. There's GLP-1. We continue to maintain prudent assumptions within the remainder of the year outlook as well as into 2027 as well. Talked about innovation. We're encouraged by the interest in the ongoing participation and the way that innovation is driving the category and translating into distribution and merchandising within the category, and we see ourselves in a much better position as we move through this year into next year.

Market share remains one of the biggest investor focus areas. Earlier in the year, you called out increased competitive innovation and merchandising, including from both mainstream, I think, and premium players, while also emphasizing that the pricing environment has remained rational. I believe this came up in your commentary around 2Q results as well. I guess as you sit here today, how would you characterize the competitive intensity in U.S. confection -- and what are the sort of key levers that should drive Hershey's share stabilization and eventual share growth from here?

Yes, let me comment on that and you can pile on. When you -- what I love about this category is its competitiveness. This is a category that is an emotional category that has a lot of meaningful innovation that keeps consumers hyper interested in the category. We saw that competitively in the beginning of the year, a lot of competitive innovation that was gaining distribution, et cetera. You saw the summer months start coming in, you saw momentum in the Hershey business, if you're tracking the last 4 weeks, you'll see the Hershey business growing faster than the category. So that's a kind of a tribute to some of our core growth and some of the tentpole activations around smaller, et cetera, like that. Now the second or the last 4 months of the year will play a role in driving category growth with innovation launches as well as some executions around the Hershey movie like we talked about before. But the category is going to remain competitive through innovation and new consumer ideas. That's exciting. That drives growth -- it drives profitable growth through the retailer. It drives profitable growth for ourselves. It's not about price discount and buy one, get one free, and those kind of elements that show up in other categories. you have to win consumers over with the best ideas and core brand relevance. And that's what we're prepared to go do. That's the investments we made to do just that to deliver a pipeline of innovation that we have for the back half of this year, but for next year. And we've already reviewed innovation for '28 and '29, so that we can see this pipeline of highly engaged innovation coming. And I think innovation that has purpose that goes after certain opportunities, if it's accessible premium or suites or better for you or functional. We're developing capabilities and skills in those areas so that we can be in the highest consumer growth basis. .

I think one of the more interesting shifts in your strategy has been the move beyond traditional seasons into sort of year round, as you call them, cultural tentpoles. Historically, Hershey's been synonymous with occasions like Halloween and Valentine's Day and Easter in reactivating around events such as SMORS, season, football, the World Cup and the Hershey movie. How do you think about the incrementality of these activations? How do you ensure that these efforts create a more durable sort of growth platform rather than sort of a onetime benefit that becomes a tougher comparison down the road, especially since some of these activations are not necessarily repeatable year in and year out. .

Yes, cultural moments are so important to consumers and our retail partners. When you walk into a store, you want to see the relevance of what's going on in the world, what's going on in our country here if it's domestic, -- and that shows up in these cultural tentpole moment. So when I think about what Hershey is great at, season execution, so the core seasons our resources to deploy the best ideas and then activate it with our resources in the marketplace to execute with excellence. So we had that as a strength. The opportunity was you had these peaks and valleys. So in between the seasons, there were opportunities, and there were big cultural moments like the fourth of July is a big cultural moment. Obviously, we played a role in the -- celebrating the 250, but fourth of July happens every year, and that's relevant for both our confection business especially Hershey with the small season, but our pretzel business, our salty snack business, it shows up. When you get into fall football, it's again, it's a repeatable tentpole moment where consumers gather, they celebrate, they party. Our brands belong in those spaces. In the past, we just executed the season, but these moments that are coming are important for the broader portfolio. Now the broader the portfolio that we have, we have more tools to execute against these moments where consumers gather, celebrate and leverage our brands. But those are those repeatable things. Now we'll opportunistically take advantage of the Olympics or any other cultural moments that fit our World Cup as an example. But this will be a skill ongoing that we build so that we're kind of always on with our capability versus kind of peaks and valleys because our resources are in the marketplace to do just that. .

Innovation has clearly become a bigger part of the Hershey story from recent Oreo last year. Hershey's cream-filled bars, recent pieces with cookie, Jolly Rancher, premium offerings and functional snacking. At your Investor Day, you discussed a goal for a 3-year innovation to contribute a high single-digit percentage of revenue. What's changed inside the company's innovation process, right, that gives you the confidence that the company can sustain that higher innovation contribution over time? .