Thank you. Good morning everyone. Thank you for joining us today for The Hershey Company’s Fourth Quarter 2020 Earnings Q&A Session. I hope everyone has had the chance to read our press release and listen to our pre-reported management presentation, both of which are available on our website. In addition, we have posted a transcript of the prerecorded 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, including expectations and assumptions related to the impact of the COVID-19 pandemic. Actual results could differ materially from those projected as a result of the COVID-19 pandemic, as well as other factors. The company undertakes no obligation to update these statements based on subsequent events. 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.

Greetings! And welcome to The Hershey Company, Fourth Quarter 2020 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 conference over to your host. Ms. Melissa Poole, Vice President of Investor Relations for The Hershey Company. Thank you. You may begin.

Yes, hi. Good morning everyone. Happy New Year. A couple of questions. First on trade spend, thinking about how things have been pulled back quite dramatically in 2020 and as we think about 2021, I'm curious in terms of your discussions with retailers, how you're talking about trade spending. One of the things that we've been looking at is the reset of price sensitivity given that there's been no promotion in the market for the past nine to ten months. I'd like to get your thoughts on that. Secondly, can you give us a round-up of the innovation program that has already been announced, just so we can get a sense for the program in 2021? Thanks.

Sure. So relative to trade spending and promotion, we didn't have any meaningful shifts in promotion activity. Our levels for the year were pretty consistent with the prior year. So we were basically flat. The IRI data will support that; however, I think there is a little bit of a disconnect in the Nielsen data. We don't expect any material changes moving into next year. Regarding innovation, some of the bigger items we have include Kit Kat flavors, which have done exceptionally well globally, and we have the Stuffed Reese’s product, which also tends to be quite strong for us. We are developing a line of products that address the better-for-you segment, where we are underdeveloped across our portfolio. This will include Kit Kat Thins and a relaunch of our sugar-free line to Zero-Sugar, really focusing on Hershey and Reese and launching Hershey and Reese organic products. Those are the highlights for the year, and I would say overall, our level of innovation is comparable to the prior year.

Excellent! Thanks Michele. I’ll pass it on.

Hi, good morning. Thank you. Two from me if I can. First, I wanted to ask about the early holiday shipments that benefited Q4. Obviously, I think over the 4Q, 1Q ‘21 period it's overall a big benefit to you. I am curious how we should look at the potential for a difficult comparison in 4Q ‘21 or whether we should expect some of these additional orders to revert to normal with your competitors, who may be better able to fill demand going forward.

So Ken, if you think about Easter shipments for Q4 2022, it happens to be one of those incredibly long Easters, and typically we ship a bit more in the Q4 prior to a long Easter. So we don't expect there will be a material difference year-over-year because of that.

Thank you, and just for my follow-up, your commentary on cocoa butter costs seems more constructive than some observers may have expected. I'm hoping you can expand on that a bit, and maybe this is for Steve; how do we think about your all-in cost of goods sold inflation this year versus 2020?

Sure, yes I'm happy to take that one. We are clearly facing more inflation on an all-in basis this year than last year. As you know, we have a hedging program that mutes some of the cocoa impacts, but we have longer-term contracts on things like freight and warehousing. That said, neither hedging nor contracting will fully cover the exposure that we have to inflation. If I take freight as an example, we look at things like demand planning and how important that is. If our plans deviate from the volume that comes in, we may have to go to the spot market, where we have less cover, and there is some risk there. So net-net, we expect more inflation. We've got a good level of cover included in our guidance, but we're not fully covered either on the commodity or outside the commodities.

Great, thanks so much.

Good morning everybody.

Hi Andrew.

I guess first off it seems as though Hershey’s is building in a fair amount of reinvestment spend for ‘21 in both media and other capabilities. Can you give us a sense of the magnitude of this reinvestment and more importantly your ability to flex up or down depending on how things play out this year?

Steve, do you want to talk about that?

Happy to take that one as well, yes. So regarding media and SG&A in general, we’re probably looking at something like mid-single digits across those areas. We want to defend and extend our market share. We were thoughtful in deploying media last year, turning it up a little at the end of the year. We want to enter this year with enough to maintain our share. On the SG&A side, we think about it in two buckets; normal corporate expenses will be tight year-over-year, as will headcount. However, on the investment side, we have capabilities we want to fortify. So can we flex up or down? As we get into the year and see how the shape of the P&L plays out, we likely have some flexibility. But we have firm investment plans as we start the year.

Great! And lastly, I'm curious what drove the decision to take a better pricing on a portion of the seasonal business. Should we assume this does not preclude Hershey from looking at other parts of the seasonal portfolio in the future?

If we step back and think about seasonal pricing holistically, let me just remind you that we priced the Halloween portion earlier, as that's our biggest season, and that accounts for roughly 10% of our seasonal sales. We've priced Holiday, Valentine, and Easter, capturing at least another 10 points. Certain everyday items were priced alongside prior pricing actions. Recently, we really priced almost all of the season last year.

Great! Thank you very much.

Hi! Thanks for the question and congrats on a really strong year. You provided some helpful color on your cocoa buying and cocoa liquor and butter, but it sounds like these hedges are protecting you this year. Is there an extensive step up in 2022, and is it possible that more pricing will be needed when the full effect of the LID comes into play, not just for you, but perhaps for the overall industry?

Steve, do you want to talk about that?

Yeah, I’d be happy to. I don’t want to get too far ahead into 2022. Obviously, as we said in the past, our range for hedging could be anywhere from three months to 24 months, across commodities. But I don't want to get too specific in ’22. Hedging helps smooth the impacts over time. As the LID flows through, it will come into play in our costs, and we have to manage our pricing strategy accordingly.

And Rob, let me clarify. The LID is fully in play this year, so the hedges don't impact that at all. Part of what offsets the hedge is that we had an opportunity earlier in the year to capitalize on supply and demand imbalances. So the LID is going to be 100% in our cost base for 2021, but there are hedges benefiting us with supply and demand dynamics.

That's right.

Okay, I'll follow up. Can you give us a sense of where you think inventory levels are right now at the trade? Are you still below normal inventory or are you at normal and can you provide color on your shipping plans for the first half versus the second half?

Yeah, that's exactly right. We ended the year with trade inventories a little below historical averages. As we look to next year, that could be a tailwind in the first half and a headwind in the second half.

Good morning, everyone.

Hello!

So it seems the top line change was better than expected versus the guidance you provided last quarter. What was favorable compared to where you were three months ago in terms of the Q4 results, and I have a follow-up?

Sure. The most significant portion of our over-delivery in Q4 was seasons, accounting for about two-thirds of the over-delivery, somewhat one-time in nature. Retailers requested early shipments to ensure they had adequate supply for 2021, so those shipments were incremental. Additionally, we had exceptionally strong sell-through for Halloween and Holiday, leading to less needed discounting post-holiday and less cannibalization of the everyday business. Our media and in-store merchandising investments really drove category growth during the season.

Right, and as my follow-up, I wanted some color on China. You mentioned a change in your go-to-market model there. Is that instead of going through retailers, and how big is China today as a percentage of overall sales?

The shift involves relying less on a large owned retail sales force and focusing more on a master distributor type of arrangement, which we believe is more efficient. We will yield some level of sales, but we think this is the most effective way to reach consumers. Regarding the size of China, Steve?

Today, it's about 0.6% of company sales. In the past, it was approximately 1%. The decline mainly stemmed from the impact of COVID and our concentration in the gifting space, which was heavily affected last year.

Great! Thank you very much. I’ll pass it on.

Good morning, thank you. I'm curious about the sustainability of your share gains. I’d love to understand how much you feel is innovation-driven versus execution-driven or from higher marketing spending? I know it’s probably all of them, but how much are you still seeing efficiencies from marketing ROIs and is it a significant driver for share momentum in 2021?

Sure. Our share gains are a result of many components. We have a strong brand and operational capabilities. This past year, we leveraged our broad portfolio to pivot to occasions that resonated with consumers, including those at home. Items like S'mores and seasonal products were crucial for consumers during this time where connections with family were more important. Our investments in capabilities improved our ability to forecast consumer behavior and enhance our supply chain. This year, expect to see similar share growth as we continue investing and executing effectively.

Thank you, that's helpful color. As a follow-up on your portfolio shaping, how should we understand your interest in better-for-you products? How should we think about potential M&A driven by your efforts in this space?

Looking at our M&A strategy, it's focused on capturing incremental snacking occasions. We have a sizeable business in sweet indulgent products. Our interest in salty savory and better-for-you opportunities is clear, as our portfolio is underdeveloped in those areas. Many of our acquisitions, like Skinny Pop, reflect our focus in that space.

Thanks and congrats on the year. May I ask how much of your share gains last year were due to supply chain advantages over the competition? If it's mostly supply chain, wouldn't we expect diminishing share gains throughout the year instead of the opposite?

It's difficult to pinpoint exact amounts to any one factor given the circumstances last year. Supply chain did play a role, but we also pivoted our portfolio to meet consumer demands, particularly during seasonal promotions. If you do well in a season and maintain strong sell-through, that tends to lead to a beneficial situation the next year.

Thank you for that. A follow-up on advertising spend—a percentage increase is projected for 2021. I’m curious if you think you can normalize ad spend as a percentage of sales with a better sense of the returns?

Our approach on media spend is that our brands are incredibly responsive to media. While we are one of the highest spenders on advertising as a percent of net sales, we constantly challenge ourselves to enhance our efficiency. We’ve transitioned significantly from traditional television advertising to digital methods, which have enabled increased targeting and more efficient spending.

Good morning, thanks for the question. Regarding the Zero Sugar product, can you share what is enabling that relaunch and whether there's anything recipe-wise that's different, and where do you expect it to price relative to the baseline portfolio?

So, the relaunch is about repositioning the sugar-free product to a more contemporary image. This approach aligns with trends in other categories. We believe these products taste good, and we’re getting positive responses from consumers. The aim is to ensure it's not significantly different from a gross margin perspective compared to our baseline products.

It’s in the same zip code in terms of margin perspective.

Okay, great. Regarding retail assortments, has anything changed in the environment due to COVID that may force a pivot in how you're thinking about shelf gains?

Mint and gum certainly faced pressure during COVID, but we haven’t seen any material changes to our brand and portfolio overall. We feel good about our portfolio, specifically with Ice Breakers being a key brand that does well.

Hi, good morning. Ken earlier asked about the incremental shipments in Q4. Is it as simple as comparing your consumption to what you reported to understand how much that seasonal shipment pattern changed?

Non-measured channels played a role as well, driven by inventory replenishment. Additionally, we had more shopping days in Q4 compared to the previous year, which contributed.

Do you expect international sales growth this year, excluding China?

Yes, we do expect modest international sales growth, excluding China. Each market is different; for example, India saw a nice rebound, while Brazil faced currency challenges. Mexico continues to experience COVID-related pressures.

Hey, good morning folks. Congrats on a strong finish to the year. Regarding the market share, you mentioned strength into COVID, then a fade afterward. Is this referring to a loss of share or just a decrease in the rate of growth?

We expect to continue gaining share through the lap. Our focus will be on profitably sustaining as much of the share as we can, especially as we re-enter competitive pressures in the market.

You held your trade spend steady while competitors pulled back. Did you gain share in these areas, and do you see these competitors rebounding?

Yes, it’s fair to say we won competitive merchandising. We want share across all aspects of the business, and our gains were pervasive.

Hey, good morning everyone. Regarding share repurchases, will 2021 represent a more normal year for this? How will share purchases contribute to earnings growth?

Yes, we expect share repurchases to revert to a more normal level this year. Our goal is to deploy cash for profitable growth, and share purchases will help create constructive tension in that equation.

What are the expectations for capital spending? Will the current level reflect a higher-than-normal capital spending cycle?

Yes, we’ve planned for elevated CapEx in the next couple of years before returning to long-term targets. Last year, we pushed some projects into 2021 due to COVID pressures. We expect elevated levels for the next several years.

Can you elaborate on your pipeline for packaging innovation? How will this impact pricing in both 2021 and 2022?

When we think about packaging innovation, we consider design that meets specific consumer occasions. This strategy is part of our price pack architecture, allowing us to capture consumer needs effectively while maintaining margin neutrality.

In your prepared remarks, you mentioned the bar business. Are conversations with retailers suggesting a return to normal once this period passes?

Retailers are focused on optimizing their space based on consumer demand. Changes may not occur uniformly across different retailers, but our strategy is to ensure we meet demands with innovation. We believe our branding will support its comeback as demand stabilizes.

Thank you so much for joining us this morning. I will be available throughout the day to answer any follow-up questions you may have.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.