Greetings, and welcome to The Hershey Company Fourth Quarter 2021 Question & 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 this call over to your host Ms. Melissa Poole, Vice President of Investor Relations for The Hershey Company. Thank you. You may begin.

Good morning, everyone. Thank you for joining us today for The Hershey Company’s Fourth Quarter 2021 Earnings Q&A Session. I hope everyone has had the chance to read our press release and listen to our pre-recorded management presentation, both of which are available on our website. In addition, we have posted a transcript of the pre-recorded 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 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.

At this time, we will be conducting a question-and-answer session. Our first question is from Andrew Lazar with Barclays. Please proceed with your question.

Good morning everyone.

Good morning, Andrew.

Good morning.

Hi there. I guess my question is it seems like the plan for this year is for Hershey to look to certainly leverage greater SG&A to more than offset some of the expected gross margin pressure during the year. I guess my question is how does the company balance leaning more heavily on SG&A this year to hit certain targets, including less aggressive marketing spend, albeit in light of capacity constraints? How do you balance that with continuing to lean in on reinvestment to protect as much of the current momentum and the market share that’s been gained in the last two years, really to benefit the outyears, right, of ’23, ’24 and beyond?

As you know, we take a pretty balanced approach in terms of focus on delivering the short term as well as making sure that we are building all the capabilities and continued investment to build the long term. So, as it relates to—let me start with some of our SG&A. We think it’s important to continue to build capabilities. Some of the places that we have been very focused on are in the areas of ERP, obviously, so that we can really get a solid foundation of technology that we think will bring us tremendous benefit going forward in the future. We incur a lot of the expense now, and frankly, more of the benefit in the future. Also, in terms of digital as a big investment area, specifically we’ve had a big focus in advancing our capabilities to deliver more sophisticated targeting and get more efficiency in media. So we believe some of those lean-ins are really important to help us build those capabilities for the future. As we look at brand investment, we are big believers in our business model that brand investment is key. We have always been very solid spenders, and we continue to believe that. We have moderated some of that spending as we’ve had supply challenges and constraints to make sure that we keep our very strong returns on that investment, so it’s a balancing act. Some of the investments in media have enabled us to get to efficiency so that we are still delivering a pretty strong number of consumer impressions out there. We feel good about where our share of voice is. So, we’re really trying to balance that and say, 'Okay, we’ll moderate a bit now in brand investment,' but certainly keep our eye on it as we go forward to make sure that we continue to protect that for the long term.

Right. Thank you.

Steve, do you have anything to add to that?

No, I think you hit the highlights. We have a compensation reset that happens as we set new targets, and so that gives us a little bit on the benefits side to deploy against the things that Michele said.

Right. Then just briefly, Steve, I guess where you say Hershey is right now with respect to retail inventory levels and finished goods inventory as well, relative to where the company might typically see itself at this time of the year? Just trying to get a sense of what sort of inventory refill opportunity there might be moving forward, obviously as capacity allows. Thanks so much.

Sure. As we formed our guidance for next year, we have an assumption inside there that there is an opportunity for some inventory build back into the network. Of course, we’ve also got some inventory building to do on our side, but from a retail distributor standpoint as well and that’s part of our guidance.

Okay. Thank you.

Our next question is from Robert Moskow with Credit Suisse. Please proceed with your questions.

Hi. Thank you for the question. I wanted to get a sense of what you’re seeing from competition. Is your competition facing the same supply chain constraints that you’re facing, and therefore, should we assume that you’re expecting a year of market share gains? Or do you expect to hold share this year? Do you expect them to reduce media as well?

Relative to the competition, yes, we would say everyone in the category seems to be having similar challenges, just as I would say pretty broadly in the industry that’s the case. We anticipate the situation relative to delivering on demand to be about comparable across the competitors. Relative to market share, we believe that we will hold share this year. As you know, we’ve had some really significant gains over the past two-year period of time. We will have more tepid share performance in the first half of the year, building to a bit more strength in the second half due to laps alone. And relative to share of voice on advertising, we do track that and we feel really good about where we are from an advertising share of voice perspective.

Okay, great. Maybe a follow-up. Gross profit dollars, for the core business, not including the acquisitions, should we still assume that your gross profit dollars are growing? This is kind of a backhanded way to figure out what kind of gross margin I should expect for 2022.

Yes. Gross margin dollars are going to grow. As we talked about in the prepared remarks, from a margin standpoint we expect there to be some dilution comparable to what we saw in ’21. But from a dollars standpoint, yes, up year-over-year.

Okay. All right, thank you.

Our next question is from Nik Modi with RBC Capital Markets. Please proceed with your question.

Thank you. Good morning everyone. Just a housekeeping item and then just a broader question. I was hoping you could maybe just aggregate the shipping days and the elasticity impact that you discussed in the prepared remarks, if there’s any perspective you can give on the magnitude of each. Then, in the prepared remarks you also indicated you’re looking at historical elasticities when you think about this year, but as we’ve seen across the broader CPG landscape, elasticities have been better than expected, so I’m just trying to get clarification. Are you assuming kind of what you’ve seen historically, like pre-COVID? Or if you could just provide some context there.

Let me start and answer your elasticity question. I’ll give it to Steve to do the disaggregation. Nik, what we are assuming for this year is historical elasticities. To date on our pricing we have seen a little bit better performance versus historical. As we go into this year, we want to carefully keep our eye on the potential impact of broad inflation on the consumer. We know that there’s been a reduction, obviously, in government stimulus and SNAP, and with the inflation across the board it’s just a top of mind watch out area for us, and that’s why we really chose to say historical price elasticities is what we think is a smart and prudent planning move for us. Steve, do you want to talk about disaggregation?

Yes. Just to break that out a little bit, the shipping days we would estimate to be about a 2-point impact on the quarter. And from an elasticity standpoint, if you kind of took that to the side, if you took the shipping days to the side, pounds were about flat in the quarter, if that helps give you some idea.

That’s very helpful. Then, Michele, just one more question. Obviously, the issue with out-of-stocks has been a pervasive problem for everyone and labor obviously is a big part of that. Is this one of those scenarios where you just kind of have to manage through it and don’t really have a good handle on when things are going to start getting better? I mean, I guess because it’s so labor dependent.

Well, I guess what I would say is we have a lot of actions in place to drive continuous improvement relative to our own supply. So certainly yes, there is no certain end state where I can tell you this is where the switch flips. But what I can tell you is we have had numerous programs underway. So first of all we focused a lot on optimizing demand. How do we get the most efficiency out of the capacity we have? By reducing complexity in changeovers, prioritizing SKUs, part of that included working with retailers to double and triple face our core items, which is always a great move because they are very high velocity so that makes a lot of sense. As it comes to supply, we are continuing to invest in incremental capacity. There is incremental capacity that will gradually come online as we go through this year and also into 2023 and 2024. We’ve also made some significant investments in manufacturing labor. Frankly, last year was a real challenge. Our people did real yeoman’s work to just do whatever was needed to produce as much volume as possible, but it really wasn’t sustainable in terms of having a reasonable employee value proposition for those folks. And so we have invested in labor. We won’t get the benefit of that immediately because it takes time to train people, to get them up to speed, to be as efficient as our current workforce, but we do think it’s important and a lot of that really just helps us to manage some of the overtime as well. So, we do have a lot of activities underway. We think that we will make continuous improvement, but under no circumstances would we really be out of the woods totally; we will continue to have pressure throughout the year. Our goal is just to continue to make improvements.

Okay. Thanks much. I’ll pass it on.

Thank you.

Our next question is from Jason English with Goldman Sachs. Please proceed with your question.

Good morning, folks. Thanks for slotting me in.

Good morning.

Congrats on strong results and some sustained momentum. The cumulative volume growth in North America over the past two years of, by my calculation roughly 7%, it’s obviously a real stand-out here, especially given that it contrasts to what was very little growth before COVID. My question is kind of on that focus. How much of the volume that you picked up during COVID do you think is durable? How much is at risk of leaking back out as we kind of come out the other side of this? What’s embedded in your planning assumptions? I know there’s a lot there and it’s a bit tricky to unravel, but I would love your view on it.

We’ve really tried to do a good dissection and deep dive to understand that as best possible, and I would tell you I think there are a number of things going on. First of all, we do know that there are some COVID-related impacts. The change in consumer behaviors with consumers spending more time at home has clearly benefited some of our brands and categories because they’re around their homes more to consume our products, and our products are more eaten in those types of environments than out and about restaurant environments, et cetera. I think that based on what we’re seeing in consumer behavior, I think that while more people – and people have become more mobile, there also is a change of behavior that I think is here to stay to some degree, right? People enjoy spending time with their families. They appreciate them more given the COVID situation. They’ve gotten comfortable, some of them, the portion who are flexibly working and want to continue some of that. So I believe that some of that is here to stay. At the same time, we also did implement a number of new strategies in our business over the years that we think have also helped us. We really tried to do a better job of balancing innovation and the core to get more sustainable growth. And we have seen that, that had an impact on the business. I think we also think we’ve gotten smarter about pricing, where we have multiple levers on list price and price pack architecture that we can utilize. So I guess I’d tell you, we believe that there’s part of both of that. So we do think that there is a sustainability and underlying sustainability, may not be all of it. But in addition to us, in particular, I think the category’s relevancy has just increased during COVID. So those are some of our thoughts, Rob, I hope that’s helpful.

No, that’s helpful. On – sticking on the topic of volume. It looks like your guidance for next year is predicated on fairly firm volume. But you say you’re assuming historical elasticities, which should be a net negative drag and maybe some of this COVID stuff comes back out. What are the offsets? Is this like the inventory reload later in the year on a catch-up? Or where are you seeing the offsets of that elasticity?

Sure. Yes, a couple of things. One, we touched on it earlier was the inventory. So we are assuming some inventory rebuild with retailers and distributors. That’s a component seasons – as a component of season were fantastic this past year. You get another 90% sell-through for holiday, and that will help from an ordering for this year. So we’re leaning into seasons. And then continuing to activate against our brands and go-to-market strategy, a portion of that innovation, a portion of that is just working with our retail team to make sure we’re bringing a new programming that we can support from a capacity standpoint. So those are the biggest factors offsetting the elasticity.

Understood. Thanks a lot. I’ll pass it on.

Thanks, Jason.

Our next question is from Michael Lavery with Piper Sandler. Please proceed with your question.

Good morning. Thank you.

Good morning.

You mentioned the stimulus benefits in SNAP in particular. And clearly, there’s some risk there. But can you give a sense of what, if anything, you’re hearing from consumers directly in terms of how they may have reacted with elevated benefits? And just how much of your performance could have been driven by that? Because we survey consumers. It looks like confection is the category that may have had the least benefit of all. Is that consistent with what you’re seeing? Or can you just give us a sense of how you think about some of the risk around that?

Yes. We do think that there could have been less benefit. That’s what we’re seeing as well for us than for others. So I do think that’s correct. At the same time, we do know that there’s significant pressure out there, and we just want to really keep our fingers on the pulse of it to make sure that we aren’t missing something. I mean certainly, we’re not a category where there’s a big private label component and people can easily just say, 'I’m going to still participate but switch to lower brands.' That’s always been a benefit for us during times like this, but we do understand the pressure consumers are under.

No, that’s great color. And then just on some of your outlook where you – from a planning perspective, can you give a sense of some of the timing you expect for any of the inventory restocking? And you touched on the SKU rationalizations. How significant are those? I know you’re swapping them out for higher velocity items. Is that a net positive? Is there timing for that, for anything we should keep in mind from how we think about modeling the year?

Sure. I’ll take the first part of that. If we look at the inventory deal, we’re kind of planning it to spread evenly over the year. Obviously, it’s gated a little bit by our capacity coming online. And so that’s one factor. If I look more broadly at the sales profile for the year, we’ll have more M&A benefits on the top line. In the first half of the year, we’ll have more pricing benefit in the top line for the first half of the year, but the inventory build will be spread more evenly. On the SKU side, we see a minimal impact from that for the reasons Michele talked about, where we’ve had to make choices for things we can supply. We’ve been able to gain more facings and sell more core product. So net-net, that hasn’t been a big factor. And we always – we had done SKU rent before we got into COVID just to make sure we were always thoughtful when we did add new innovation SKUs and make sure we had good velocity on those products. So we don’t see a big impact.

That’s very helpful. Thank you.

Our next question is from Ken Zaslow with Bank of America. Please proceed with your question.

Hey, good morning guys.

Good morning.

Hey Ken.

Just two questions. One is you’re hitting your 9% to 11% EPS growth in a capacity-constrained environment with higher labor costs, even with lower ad spending. If we – you are in a normalized environment, how much incremental EPS growth? Or how would you kind of frame the pent-up that may not be in the 9% to 11% as you emerge from this capacity constraint issues?

Yes. That’s a tough one to kind of think about because there are so many interconnected variables inside that equation. We’ve got the robust volume, which is driving very high utilization on assets – too high, to be honest, which is why we’re adding capacity. So you pick up some benefits there. But a lot hangs on that relative with the pricing drop through in response to commodity costs. So that’s a tough one to say. There are too many interconnected components inside the P&L, Ken, to really probably give you a clear answer for that.

Would you think it would be higher or lower? And I’ll leave that question, and then I have another question.

Sure. Even that’s kind of hard, Ken, because if I start at the very top, we would probably not be taking as many price increases as we’ve taken, but for the need to cover the costs that we have coming through both commodities and the rest of the P&L. And so even at that very top line level, it’s hard to say how the construction then below the rest of the P&L would flow through.

Okay. Then my second question is with Pirate’s Booty and Skinny Pop, you guys are obviously crushing it on the sales line. What were the key learnings that has changed your acquisition strategy with that? And what are you going to apply to Dots that continues to keep this – the snacking business at these levels, right? So your acquisition strategy has clearly evolved into something that has been quite successful. Can you talk about where the evolution is done and how you apply it to Dots?

Absolutely. We know that at the beginning of our journey into snacks, we had some challenges in some of our first acquisitions. And I guess it goes to maybe you catch a few toads on the way to the prince. But we learned a lot about what we’re good at and what we’re not good at. And we established some principles. And one of those principles was there’s a certain size threshold that’s critical for us in order to absorb a business and be able to really build it from there. We’re not good creators of very small businesses and making them big. We also understand that our business model is all about a high gross margin, a strong gross margin that enables us to invest to grow capabilities and invest in our brands. And we got very, very stringent about those guidelines and those criteria for success. We focused a lot on building capability. Frankly, we didn’t have a lot of M&A capability. And so we got a lot smarter about how to do the right due diligence, what were really the key questions we needed to understand. We started to see what we have to know going in. And I think as we did each acquisition, we got better at that. So with Pirate Booty and Skinny Pop, we got amazing brands. And that’s what we’re good at, is really getting a brand that has a strong consumer following. We’d like to see brands that have tremendous repeat but low household penetration because that’s – as consumers love them, and we can apply our capabilities to expanding distribution and investing to create awareness of the brand. The other thing we learned was the importance of supply chain. And early on, we had some struggles absorbing a lot of these smaller companies, didn’t have their own supply chain. So thus, you saw when we went forward and bought Dots, we decided to buy the co-manufacturer Pretzels Inc. as well. So I think we’ve consistently applied those lessons. As I said, we built a lot of capability and muscle along the way and got better at those key criteria of support of the brand’s margins and the right supply chain.

Great. I appreciate it. Thank you guys.

Our next question is from Ken Goldman with JPMorgan. Please proceed with your question.

Hi. Good morning. Thanks so much. I just wanted to follow up on one thing. I know you talked about investing in digital capabilities. And I hear the goal, part of it is advancing targeting and efficiency in media. I guess I’m not quite sure what the mechanics are there and why those efforts would cost a good deal of capital. And maybe I’m digging a little bit too deeply here. I just – those things historically seem to be more about learning, education, hiring consultants to help you in capital. I’m just trying to get a sense of connecting the dots there, if I can.

Sure. So one of the things that we have seen has been really critical is what’s the data set. In the past, we relied on our own internal data set that we would analyze and do traditional marketing mix modeling kind of activities. But we’ve really created what we think is a proprietary approach to what we’re doing, investing in other data sources and then integrating them into ours, building the tools that allow us to do that, utilizing the cloud across what we’re doing. And so a lot of that has been in investing in those different areas to truly kind of break out in this space.

Okay. That’s helpful. And then I may just be missing it, but I hear that – I see in the press release and in the prepared remarks commentary on strong innovation. I’m not sure I see a list of products that you would consider strong innovation. I can’t recall Hershey ever not listing the new products as a new – as the year starts. And I realize this year is a little bit unusual, just as last year was. But I’m just trying to get a sense of what those new items are that you’re most excited of – or for and how you might qualify them?

Absolutely. I mean I’d start by saying, first, hey, given where we are in a capacity-constrained world, our first focus is the core, the core, the core. And if we are masking out capacity with the core, we’re really balancing what’s the right innovation to continue to drive news, but we also want to be very efficient and we just want to maximize throughput. But that said, we do have several items that we are excited about. Reese’s Potato Chip, Kit Kat Dark Chocolate with Strawberry, Kit Kat Hazelnuts. We also have, importantly, some really great new pack types. So we’ve talked to you about price pack architecture, and we’ve put a lot of focus on understanding different consumer occasions and where there was a need or an opportunity for a pack type that best meets that occasion and drives incremental consumption. So we’re really excited about two of those. One is called the Pantry Pack. And think about that as – I don’t know, I’m going to describe it as almost a case of your product or a case pack of your product that’s designed to sit easily either in your refrigerator or in your pantry that you can easily get out multiple units of single-serve product. And then we also have an item that’s called the Super King. We have a standard bar, which is a smaller instant consumable item. We have a king-sized bar, which is a bigger instant consumable item. And consumers identified interest in Super King, which is an instant consumable pack that has more products and more individual units for sharing. And those pack types have tended to be really great innovation for us over time, highly sustainable.

Thank you so much.

Our next question is from Bryan Spillane with Bank of America. Please proceed with your question.

Hey, good morning, everyone. Just a couple of quick ones for me. First, just – as we’re looking at the gross margin guidance that you’ve given for 2022. Just what do the acquisitions – are the acquisitions accretive, dilutive or neutral to gross margins?

Yes. On the gross margin line, they’re dilutive. And you can get a little sense for that with the new segmentation detail that we provided, but particularly dropping those in versus where before does create some dilution.

Okay. And then I know there’s been a few comments, Steve, that you’ve – or questions around just phasing. Could you just help us a little bit if – with regards to how we should think about the phasing, I guess, of margins through the year? So does pricing help a little bit more later in terms of gross margins? Just any guidance or any color you can provide in terms of how we should be thinking about the phasing of costs over the course of the year.

Sure. Yes. We have – if I go back to kind of first half, second half, I won’t get down to the quarters, but we expect to see tougher laps – a lot more pricing in the first half of the year. But we expect to see probably tougher gross margin in the first half. And probably Q2, in particular, will be a tough, just looking at the lap that we had last year. And we would expect to see gross margins – again, everything else equal in the plan, gradually improving as we get to the fourth quarter next year.

Okay. And then, Michele, in the prepared remarks, there was a comment around Salty Snacks talking about being in a position, I think, to integrate – more efficiently integrate future acquisitions. Can you just touch on that a little bit, just what that means?

Yes, absolutely. So we’re at a point now, where we are continuing to build scale in Salty Snacks. We started with SkinnyPop and Pirate’s Booty. With the Dots business, we have sizable brands and so we are really looking at what is the optimal way to build the operating model around that entire piece of business. And that includes everything from – obviously, right now, we’re very focused on integrating Dots and Pretzels Inc. But what’s our end state of – from an operating model, how we operate, from a supply chain network, how we operate. This array of products do not require condition distribution, so they are very different than our core portfolio. So that’s really the work that we’re talking about there.

Okay. Great. And then last one for me. Plain household is very activated right now around the Cadbury Bunny Tryouts.

All right.

All right. I’ll leave it there. Thanks, guys.

Thank you.

We have reached the end of the question-and-answer session, and I will now turn the call over to Melissa Poole for closing remarks.

Thank you so much for joining us this morning. I’ll be available throughout the day for any additional questions you may have. Have a great day.

This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.