Good morning, everyone. Thank you for joining us today for The Hershey Company's fourth quarter 2022 earnings Q&A session. I hope everyone has had the chance to read our press release and listen to our pre-recorded management remarks, 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. Actual results could differ materially from those projected. 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.

Thanks so much. Good morning, everybody. I guess just one from me. Trying to get a better sense of how you're thinking about elasticity for '23 versus what you saw in '22, which was very little? And what percentage increase in capacity you're expecting for this year? And I guess I asked because, if elasticity were to stay as benign as it has been, and you ramp some capacity, trying to get a sense of whether it could render your flat, just slightly down volume outlook for the year somewhat conservative, or will continued capacity constraints limit the potential for top line upside from here?

Yeah. Thanks, Andrew. As we look at price elasticities, we are assuming that they will be closer to last year than they were to historic, but not quite as good as last year. And as we look at our capacity, we will have low single-digit increases in capacity which do give us some ability to flex with demand as we see it. Steven, you can add.

No, that's fine.

Excellent. That's it. Thank you so much.

Thanks, Andrew.

Hi, thanks, and congrats, everyone, for such a great year. I wanted to know, the guidance for '23 is more aggressive than normal, like you normally start the year rather conservative. But this year, you're guiding above your normal algorithm. And I want to know if it could kind of isolate what the key drivers are, and why you've raised it compared to three months ago. Maybe drilling down looks like gross margin is coming in better than you thought, maybe you could explain why. And then also on market share. Are you expecting market share gains in confectionery in '23? Thanks.

Sure. Want me to start out?

Yeah, go ahead, Steve.

So just on, the big movers on the top line, obviously price driven, and we have good visibility into that. We saw that effect be part of the driver for the fourth quarter performance, but we see that carrying forward, especially through the first three quarters of next year. And we do have elasticity factors, as Michelle said in the last question. Our planning isn't quite down to the levels of historic elasticity, but something looks more like last year. And if you sort of drop further through the P&L, we do see some benefit from the gross margin side, as we could see more stabilization, the pricing coming down and some cost efficiencies, and a return to more historic levels of productivity. Now we still have efforts for more productivity. But at least this year, we're starting to see something that we hadn't seen in the last two years. So those are some drivers through the P&L that far. On the market share side, yes, we do expect to have a positive market share next year. I think that's one that we're disappointed about this year and want to see turn the other direction next year.

Yeah, and some of that market share will be helped by the incremental marketing investment, as we've taken that up, as we have additional capacity online and certainly, the additional capacity as well. As we think about the pacing of the market share, you should think about it relative to the beginning part of the year will be slower, and we won't see those declines probably until we get into the spring. But once we hit the spring, that will really kick into gear. We know that we had some lost opportunity this year around seasons that we weren't able to fulfill totally all of the orders. And then also a little bit of a mix impact from refreshment, being a late rebounder given social behaviors, but we think that'll neutralize going.

Okay, makes sense. Just one follow-up. On the gross margin side, are your costs, like inflation cost coming in better than you thought or is this really just productivity is accelerating more than you thought?

Yes, probably more on the productivity side. We have pretty good visibility in the cost, with the hedging program and so forth, particularly on commodities, and we're still expecting high-single-digit, year-over-year inflation through commodities, and a lot of the materials items and mid-single digits on things like labor and logistics and other supply chain costs. I don't think those assumptions have changed much from our outlook, but probably a little bit more productivity.

Great. Thank you.

Thanks.

Hi, thanks. You're guiding to a gross margin of around 44.5% next year. I'm just curious for this coming year, what do you see as a, I guess, normal level, if there is such a thing in this kind of environment? And I guess more specifically, if you can grow your gross margin by a healthy amount in an inflationary environment, is there any reason it can't ultimately get back to 45% or above?

Sure, again, our model is growing gross margin every year. That would be the goal. That's really part of the growth algorithm. And so we've had two years where that's been a challenge. We see that now turning for 2023 and really getting back on the algorithm. And so I would like to say it's price and inflation agnostic in terms of the strategy. How we get there will change based on the external environment. But yes, we do see restoring to gross margins that we had in the past and frankly, continuing to drive that forward.

And then, how do we think about the breakdown of sales growth and operating margins by segment in 2023? You gave a little bit there. But are there any unusual items we should be aware of for either of these segments, just as we consider our models, maybe drivers that aren't necessarily apparent at first glance?

Yeah, the only things that are unusual or different, I kind of go to salty, and we mentioned some of this in the remarks. Salty is going to have a strong top line. We're expecting that. We're also expecting to see gross margin improvement year-over-year. We saw some of that in the fourth quarter, finally seeing pricing catch up in that business a little bit to inflation. But still some room to grow. But we'll see some reinvestment below that. And so we're going to activate more against the brands next year. We're going to do some capability investments between the lines to really scale up the infrastructure. And part of that infrastructure is the ERP transition that we talked about in the prepared remarks. And so that's probably the one area where I see strong sales growth, some gross margin improvement, less route through to off margin that we might see in a normal year on the back of those capability investments. Other than that, I think the other segments are probably pretty traditional in terms of the growth characteristics.

Thank you.

Thanks, operator. Good morning, everyone. My question is just around the advertising and consumer spend investments. And I guess I had two questions. One, in the prepared remarks, one of the things you talked about investing in is workforce. So I wanted to just understand, is that like more merchandisers and people in the field or something else? And then maybe I'll start with that, then I had one other follow-up.

Yeah, I mean, as we look at some of the investments that we're making in our employee base, clearly, one of our key strategic goals this year is really to integrate scale our salty business. And so we are adding some increments of talent there to really make sure that we have the right skillsets, and that we have all the employee base and talent needed to do that heavy lifting and the work, some of that also around improving our planning system. Some of the things that we buy a smaller company, we need some more sophisticated capabilities. Then obviously, given a lot of the work across the business on supply chain, where we are continuing to invest to build capacity and resiliency in the network, we have made investments in supply chain talent as well.

Okay, but it's not specifically adding merchandisers or more frontline sales people?

Oh, no, no.

Okay. Okay. And then the second, just was related to the kind of the thinking behind the double-digit increase in advertising and consumer spend. Is that partly a sort of a function of just inflation has been so persistent. Now obviously, you've got price increases on your own product lines, but consumers have seen a lot of inflation across a lot of consumables. And is it, if you're going to have that level of pricing, you really need to advertise in order to sort of make sure consumers stay engaged, because they're going to have to start making some choices? Or was there something else that kind of drove the decision or the need to increase advertising at that rate?

Yeah, absolutely. So our long-term model, we believe in advertising. We've seen the impact and the returns that we get on advertising in terms of having very strong ROI. So we take a very data-based approach to media spending, and we invest where we see that incremental profitable growth. Over time, we do know that that advertising builds consumer connectivity. And we know that, that consumer connectivity is part of what helps us to have the elasticities that we do. People are connected to our brands. And during the tough times, we know that that connectivity leads to them continuing to buy. So yes, it is important during an inflationary time, and we've done statistics over that, analysis to validate that. And then, as you know, we reduced spend last year really due to capacity constraints. And we did see an impact in demand on several of our brands. And so those are really the priorities where we are reinvesting this year. And we're also investing in some of our whitespace opportunities, like gummies and better for you to strengthen the business, as well as our salty brands, where we're really in a major growth mode, gaining household penetration, gaining market share, and we want to continue that momentum.

Right. Thanks, Michele.

Sure.

Thank you. Good morning.

Good morning.

I would like to follow up on the spending. Could you provide some insight? I understand that last year you adjusted spending to better fit capacity limitations. This year, will spending return to optimal levels, or do you anticipate it will continue to ramp up into next year? We're trying to gauge whether you’ll return to your steady run rate or ideal level, or if we might not reach that until possibly 2024.

Yeah, I mean we are always looking at the returns that we're getting on our spending, and making decisions as we go forward based on that. So we think that we're in a reasonable zip code. I think we've said before that we don't think we have to go back up to the very highest levels that we were at historically. We've done a great job over time, getting a lot of efficiency, getting very tight in our targeting, so that we're getting even greater returns. But I wouldn't also commit that this is the high mark, above which we're not going to move above. We're still probably not quite back to exactly the point we want to be.

Okay, that's really helpful. And just want to unpack a little bit more if we can, a comment you made in the prepared remarks about seasons being a growth driver. You said it's off to a great start. Obviously, last year went really well as well. And so just would love to understand a little bit better how that unfolds and how to be thinking about that.

Yeah, we continue to anticipate very strong growth in the seasons. We've continued to see that in the category. Consumers, during the past several years, have even dialed up their interest in seasons. So it is a strong part of our portfolio. It's a place where we do very well. It's a place where there's a lot of emotional connectivity. There's an anchor event, people want to participate in those anchor events with the brands that they love. And so we think that there's opportunity. We had some missed demand that we weren't able to fully fulfill because of capacity. And we're going to be in a much better position this year to be able to more fully capture that opportunity. And the first part of the year, as I mentioned earlier, from a share perspective, we won't be as strong as we anticipate that we will be for the seasons towards the back part of the year.

Okay, great. Thanks so much.

Good morning. Thank you for taking our questions. I just want to go back to the last question on volume and perhaps unpack cadence throughout the year. You have increased capacity for seasons coming on, but you're also lapping the over shipment in the first half this year. Can you just unpack a little bit how you expect volume to progress throughout the year, understanding that you expect for the full year to be flat to slightly down? That's my first question. Thank you.

Steve, can you talk that through?

Going into the first part of the year, we have already identified the volume and shipments. As Michele mentioned, we are still facing some capacity constraints as we enter the seasons at the beginning of the year. Overall, for the entire year, we do not anticipate any significant material changes in volume by quarter.

Okay, that's helpful. And then just one last question on capital allocation here. You're at the low end of your leverage target over the long term. Are you beginning to look at making additional acquisitions or perhaps return more cash to shareholders in the upcoming years? Thank you.

I just say job one right now for us is integrating the amazing acquisitions that we bought SkinnyPop, Pirates, and Dot's, and we're investing to leverage their full potential. However, we do always continue to be in the market, looking at assets that can continue to advance our strategies, expand our portfolio appropriately into high growth, consumer demand segments. And we certainly do have a lot of balance sheet flexibility to be able to do the right M&A, if it becomes available.

That's right. And I would say more broadly, from a capital allocation standpoint, no major changes. We definitely want to be giving back cash and repurchasing shares as part of our strategy. That puts good tension on the internal investments and M&A to make sure we're getting the best return. And so that's an area we'll continue to monitor. We've got a lot of CapEx this year. And so that's one thing that we're taking into consideration as we look at the overall balance of capital allocation.

Hi, good morning.

Good morning.

Hi. I just had a question. First, if I could, a bit of a follow-on to an earlier question, but in particular in the salty snacks division, with the margin being so strong in the fourth quarter and reaching over 20%. Was there anything unique to the quarter? And then I certainly heard about investments you want to make both internally and advertising throughout 2023. I guess I just want to understand how you expect the margin to fare throughout the year as margins expand, but just not to the level of which it did here in the fourth quarter.

Yeah, we're really pleased where the fourth quarter finished. Probably two things drove that. One we did have easier laps in the fourth quarter. And then second, you know, we said earlier, we are seeing pricing catching up a little bit more to some of the inflation that we saw over the course of the years. We've got a little bit of a benefit from that. As we look to a margin for that business going forward and into next year, we want to again, on the gross margin line, expect to see some continued advancement. We got a lot of plans to still optimize that business. And we've talked before about streamlining the back office, streamlining the supply chain, network, better integrating all of that with our existing Hershey systems, and so forth. And so in fact, we'll talk more about that when we get to our March Investor Conference and spend some time on that. But have aspirations to continue to see that profile up over the course of the year. But as Michele said, we are going to reinvest some of that back between the lines to accelerate the top line to invest behind the brands. And then on the capability investments like ERP. But I'd say the key takeaway is we have still high margin aspirations for that business as we look forward over the next couple of years.

Most of the changes will happen over the long term. We do not expect any significant margin improvement in 2023. Thank you for that insight. I would like to ask a quick follow-up about how inventory will perform this year. You mentioned depleting some inventory towards the end of the year and that you have switched to the new ERP system. Will inventory increase throughout the year and then decrease as you sell it off? Or will it remain at this level and decline as you move the inventory out? Have you already built it up, or do you anticipate needing to increase inventory?

Yeah, we haven't built it already. I mean, there will probably be some build, not that material. I mean there's a limit to how much salty inventory we can build. But as we said, when we get to the fourth quarter, we expect a pretty significant depletion. And that's really just to allow the cutover between systems. And so on a net-net basis that will look like a negative for the year for that business. We would expect to see that come back next year, probably with a strong start to the year.

Okay. Thanks so much for your time.

Sure.

Yeah, thank you. Good morning, everyone. Hi, Michele, hi, I was hoping you could just comment on fill rates, kind of where you guys are now versus kind of where you'd like to be. And I know things are below where they have been historically. Just curious, is that just a function of capacity? There's also a labor component to that. And then I had a bigger picture question.

Yeah, so I would say our fill rates are much better than where they were. There's been some significant improvement versus last year, as we've been able to invest in capital and get additional capacity on the ground. So and really, there's minimal impact from labor. It was really, largely very much tied to capacity. Now we did step up in labor to enable us to be able to obviously execute against the capacity and the incremental lines. But we're seeing less network disruption than we've seen in the past, not all the way back to the perfect situation it was before the pandemic, but it certainly improved.

Right, thanks for that color. And then just the bigger picture question is, look these categories, especially on the chocolate and confectionery side, I think, clearly, we can see a renaissance. And maybe we can attribute some of that to COVID. But I'm just curious like, what does your research, internal research say about what's actually going on with the consumer and these categories? Because I think we can all agree the underlying trend rate has been much better than I think anyone would have expected a couple of years ago.

Well, certainly we know that snacking has been on the rise, has continued to be on the rise as a consumer behavior, pre-pandemic, and also post-pandemic. We know that there still is a bit more at-home behavior versus folks cutting back on going to restaurants. And certainly that's a benefit across packaged goods snacking. We also know based on our insight that consumers are interested in snacking and particularly in confection and chocolate in two diametrically opposed parts of their emotional state. One is when they are incredibly happy and it's a treat time, and they want to treat themselves and the other is when there are downtimes, and they want a bright spot. But they do view these categories and especially chocolate as a part of kind of emotional wellness, what it does and how it makes them feel. And then of course I think that the more that we interact with consumers and this really hasn't changed over time, consumers have emotional connectivity to our brands. Our brands are more about the products more than just about the products. They are about the moments of connection. Many of them are used in special times. And we get letters all the time with people talking about the special role that some products played in their life. They remember when they were with a friend, experiencing it or with their kids at a season. And I think that continues to be timeless, and perhaps has even dialed up a bit since the pandemic.

Great. Thanks for that color.

Hey, good morning, folks. Thanks for fitting me in. My apologies I didn't get a chance to go through all the prepared remarks. We have a lot going on this morning. Apologies if you have answered the question. I have two quick things. First, the capacity expansion. You give some quantification for the year? What's the cadence? When should we expect to see that capacity coming along?

Yeah, it's going to be coming online throughout the year. And again, this sort of fits into a broader discussion we've had on capacity expansion. I think we've talked in the past, if you look at the 2020 to 2024 period, we were looking for a 15% ish increase in capacity across the network. And so what we're going to see in 2023 is going to be a low single digit contribution towards that goal. And I would kind of think about it coming in ratably over the course of the year.

Okay, and the elevated CapEx, it sounds like it's a long slog. Should we expect this elevated level to continue into next year, for the year beyond as well?

At this point, I don't think so. However, I can say that for 2024, we will have some level of increased capital. We will still be completing the ERP program and likely dealing with some ongoing investments related to capacity. These are the two main factors to consider. Regarding capital expenditures, as we've discussed previously, most of it is focused on expanding capacity. A significant part of that is driven by the strong growth we have experienced recently, and our network capacity has improved markedly. Nevertheless, we still have opportunities to enhance efficiency and capacity, some of which are recent developments and some tied to other brands. Thus, the combination of capacity expansion and ERP investments, which will eventually decrease, are currently the primary components of our capital expenditures.

Understood. The last question for me. I've always considered your European venture to be a bit opportunistic. It's a small tactical export business. Yet, recently, you've kind of carved it out as a standalone business. Does this signal anything in terms of your strategic intent on expansion in Europe?

No, not at all. If that's in reference to any of the talent changes that we made, they were really in the course of just normal development and expansion for people to get new opportunities. Europe continues to be small. We continue to feel that we are making great strides and seeing a lot of growth there. But there is no strategic change in our approach to that market at all.

Understood. Thank you.

Hi, good morning.

Good morning.

Can you talk about your key innovations planned for '23? And how are you thinking about the drivers of top line growth between innovation versus existing brands, where you've been capacity constrained?

Sure. So innovation continues to be an important part across our portfolio. And we have several items that are launching this year that we think will generate a lot of consumer excitement and merchandising. And if we look at our core confection business, the highlights there would be Reese's Stuffed with Reese's Puffs. We have a limited edition, which is a Reese's Creamy, and then a Reese's crunchy product. So a line of limited editions that let consumers pick their favorite, which texture they like. And then we have an exciting new kisses flavor that is called Milkilicious, which is a kiss filled with a milk chocolate filling. On our salty business, we launched as a limited time edition this year, a dot cinnamon sugar flavor. And so folks will see that in the market as it's been very successful. So those are probably the highlights of some of the biggest innovation. We continue with our strategy that we employed several years ago, that's really helped to accelerate our top line growth, which is while innovation is important and we will support innovation across the board, for news and excitement. We really don't want to stray away from a primary focus on our core. Our core are brands that are sustainable. They have been out there for a long time. Consumers love them. The velocities on them will always be stronger than innovation. So across our entire portfolio, driving our core is job one. And then using new innovation for news and excitement.

Great, thank you. And just in terms of your organic growth outlook for '23, how are you thinking about the growth between North America confectionery and salty snacks? And maybe if you could just touch on some of the key growth drivers behind the salty snacks business for '23?

So I can talk about some of the growth drivers and then let me have Steve talk a little bit about the part of your question. So as we look at salty snacks, we will be, as Steve mentioned investing in marketing, so that we can continue to expand those brands and business and continue our growth in household penetration. So that is clearly an investment that will drive growth. We continue to have some level of distribution upside, especially on Dot's. We saw distribution upside as well as increased item counts in 2022. And we'll see some of that growth continue as we go through '23. Once we get beyond that, we think will then start to be going more to velocity increases and price pack architecture opportunities. So those are some of the biggest ones. Investments in SkinnyPop, in advertising as well will continue to unlock growth potential. So I think those are some of the biggest growth drivers across the salty business.

Yeah, just at a very high level, from a projection standpoint, we're expecting high single digits, top line price being the primary driver there. And as we talked about earlier seasons, underneath best seasons, and then media investment behind the brands are going to be big components of that. On the salty side, double digit growth, which is what we should expect from that business, and more is price there as well, but also volume. And again, as we said, there are two we're investing behind the brand. We have some distribution opportunities, as Michele mentioned. On the international side, solid mid-single digit performance on the back of distribution, volume, some pricing as well, and some innovation. So at a high level, those are sort of the big targets.

Thank you.

Hi, good morning. Thanks for the question.

Good morning.

Steve, you gave good information on gross margin ranges for the year, a little bit on cadence with the Q1 and the impact of inflation. It's just striking to see high single digit commodities with labor, which is this dynamic of sticky inflation that we're seeing, across the staples landscape. But clearly, you have good visibility into that outlook. I guess what I'm wondering is, this is going to be a probably a volatile environment for inflationary drivers, namely commodities over the next year. And I'm just trying to frame if there is a change in the commodity outlook. Is that something that changes your own outlook? Or are you so locked in on costs at this point, that it's we have good visibility on the year and we're fairly locked in. And that's really more of a consideration, from a year from now, something like that. I have a quick follow-up.

Sure. Generally, we have decent visibility on costs and commodities. Our hedging program contributes to that visibility. However, over the last two years, we faced challenges with items we don't hedge, which have been volatile, such as packaging, resins, specialty ingredients, and dairy. We monitor those closely, as significant changes in those areas can impact us. We experienced some of these fluctuations in the past few years. We hope some of this volatility will ease, which will improve our overall visibility. While there is still potential for volatility, we believe we have set a guidance range that accounts for most of it.

Okay, that makes sense. One quick follow-up and perhaps something that's even better suited to the Investor Day coming up. But this sounds confidence on long term margin improvement. And clearly we saw an inflection in the snacks business today with positive commentary on the medium term in that business. So when you think about that long term margin between the confection the sack size do you have any sense of what would be driving that between those segments? Or is it more of a holistic target for the organization over time? Thanks so much.

That is a great topic for the investor conference. Our expectation is to see margin improvement across all parts of the business and all segments. We have noted significant improvement in international recently, and we anticipate that trend will continue. We aim to optimize and grow sustainably and profitably in that area. Given the investments we've made in acquisitions and the opportunities at hand, we recognize areas like private label and their ongoing impact on the business as we look ahead. There are opportunities to increase margins in that sector. Additionally, on the confection side, we want a model that promotes margin growth.

Thanks. A question on gross margin in this latest quarter, especially versus the third quarter. The reason I'm asking for color about what might have been your biggest unlocks that fourth quarter is because on a one and multi-year basis, it looks like pricing was rather similar to the third quarter. Yet your margin trend improved. And that fourth quarter was actually higher than it was in the fourth quarter of 2019. So any color about unlocks and gross margin would be helpful?

I believe the main factors we discussed include improved productivity due to enhanced supply chain efficiencies that have been developing. While Michele mentioned we're not fully back to optimal supply chain efficiency, we expect to see an increase in the fourth quarter. Additionally, the volume growth on the elasticity side is contributing to reduced fixed cost absorption reflected in the profit and loss statement. These are the key points I would highlight.

I have a holistic question that I've been considering regarding the COVID era. It's clear that at-home snacking has seen success. Your innovations with s'mores and seasonal products have made an impact, and it appears you have solid visibility for your annual seasonal strategies. This suggests that you are likely on track for a strong 2023. However, I'm curious about your perspective on the overall momentum for at-home snacking as a trend. Do you believe this trend can maintain its growth rate moving forward? I'm interested in your insights, not just for Hershey but for the industry as a whole. Any comments would be appreciated. Thanks.

Sure. So let me start by saying as much as we have benefited on our take-home business, with at-home snacking, our instant consumable business has also been quite strong. So we've really seen growth across all what we say, all three segments of our business seasons, take home and instant consumable. We don't expect that we're going to lose volume on those segments going forward. So we don't see a reversal in the trend. But we would say that growth may moderate. We would expect it to moderate a little bit versus where it's been as consumers just shake out into their normal ongoing behavior.

Good morning. I want to revisit the two topics you mentioned earlier: the A&P investments and workforce investments. Specifically, can you provide details on the timeline for the additional spending on A&P and what factors are influencing that timeline? Additionally, Michele, you discussed several priorities on the salty side that I find compelling. Where do you currently stand with those hires? Should we expect to see these investments reflected early in the year, or will the spending ramp up more gradually as the year progresses? I'm interested in your current status regarding those hires. Thank you.

As we reviewed our marketing spending, it's important to note that our investments in the confection segment will remain quite stable throughout the year. In contrast, our investments in salty products will be more concentrated at the beginning of the year, as we will be focusing on the S'more conversion towards the end of the year. Therefore, we plan to push harder for volume and increase those investments early in the year. Regarding SG&A spending, we expect to see variations across the quarters, particularly beginning in the first quarter.

Okay. Okay. Thank you very much.

Hey, thanks for the question. Just one for me, and it's on gross margin. So you expect gross margins to be up 40 to 50 basis points year-over-year in 2023, given net price realization and higher levels of productivity, which are expected to offset inflation. But it sounds like 1Q '23 gross margins will be pressured due to lack of a timing benefit related to inventory valuation last year. I'm trying to get a sense if you could close frame the magnitude of that 1Q, '23 impact. Thanks.

You are correct. The first quarter will be the most challenging for our gross margin. In fact, I anticipate that we will still see a decline year-over-year for the first quarter due to those laps. I can't provide specific guidance on that now, but you are right that this will be our most pressured quarter for gross margin.

Good morning. Thanks for the question. First off, Michele, in confection, you're bringing more capacity online, increasing brand spending as well. But how are you thinking about in-store activation at this point? I think going back pre-COVID, there was an increased focus in the aisle with the king size and some different shelf sets. Then you move to the checkout lines, and then you would take in some shelf space for magazine and non-consumable. So as we think about 2023, and I guess even beyond at this point, where the levers you see as most impactful from here? Where do you can you still benefit from activation going forward?

So we are always looking to optimize across the entire mix of levers that we have to drive activation. Managing the shelf distribution, shelf space is always a priority. There were some areas as we were lighter on capacity, where we were unable to fill some of those distribution needs. So we see some of that ahead of us as an opportunity as we have improved service. We talked a little bit earlier about the marketing spending where we had pulled back again, because we were lighter on capacity, so reinstating that. We know that there's a very strong return on that, reinvesting the front end. Retailers are always looking at how they optimize front end space. And so we partner with them. And we continue to see opportunity there. And as we look at our in-store promotional spending, we do believe that getting visibility and display in store is important to our business. That said, our promotional spending is below COVID levels. And we've seen that we've continued to be able to drive the business, where those promotion levels are today. So that's not a key priority to reinstate back to the past.

Okay, thanks for that. And then Steve, on the salty snacks margin. There was a lot of noise this year, you mentioned the catch-up on pricing. You had the warehousing in Q4. You had some reduced promo and advertising spending. As we think about the sequential increase in margin from Q3 to Q4, is it possible to bucket those tailwinds across the different elements? Or maybe what do you think the underlying run rate is for segment margin exiting '22? Is mid-teens, high teens, just trying to think about the moving pieces versus the structural improvements there, just far. Thank you.

Yeah, it's a fair question. There have been a lot of movements across the quarters. I think, think about run rate in the mid-teens. That's probably a good baseline to operate from let's say. There will still be movement across the quarters, probably, especially as we look to the back half of this year with that ERP transition that we talked about. As we get further into the year we will give more color to some of that variability. But if you think about mid-teens, that's probably a good starting spot.

Good morning. Thank you. Over the past two years, pricing has increased by about 15 points or so. I was curious if you could provide insight into how much of that increase was influenced by the narrative around rising costs. If costs start to moderate or even decline, should we expect that some of that pricing might be reduced, or has the conversation shifted to focusing on collaboration to grow the category? I'm interested in understanding the risk you foresee if costs do begin to decrease. Thank you.

Sure. Michele, do you want to take that?

No, we always work together with retailers to try and maximize category growth. That is our fundamental premise, especially being leaders in all of the categories that we are in. If the category is growing, we feel really good that we will benefit from that growth. Historically, there hasn't really been a move in the category to execute price declines or price rollbacks. As prices kind of have gone up, they have tended to stick in the marketplace, as a matter of principle of how that category dynamics have worked. And what we really try and do is to leverage some of that favorability in price in our holistic model, to reinvest for growth, whether that's reinvesting in capabilities to get smarter about managing the shelf with the retailer, helping them to find new points of interruption, or whether that is incremental consumer investment.

Makes sense? Thank you.

Thank you.

Thank you so much for joining us this morning. We will be available for any follow-up questions you have. Have a great day.

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