The Hershey Company is hosting a Q&A session for their second quarter 2023 earnings. The call is being recorded and a transcript and audio replay will be posted after the session. Forward-looking statements may be made and non-GAAP financial measures may be discussed. Joining the call are Chairman and CEO Michele Buck and Senior Vice President and CFO Steve Voskuil.

The operator gave instructions for the first question to come from Andrew Lazar with Barclays. Andrew asked about the balance between pricing and volume for the full year sales growth outlook. Steve Voskuil responded that it was primarily driven by the extra price impact and that volume was expected to be down year-over-year in the second half. Bryan Spillane was then called on, but was apparently muted, so Ken Goldman with JPMorgan was called on next. Ken asked about the pricing implementation to offset inflation, with cocoa and sugar being up a lot more.

Steve Voskuil and Michele Buck comment on the current inflationary environment and how Hershey is managing it. They mention that price is one lever, but not the only lever, and that they have experience managing through commodity rushes. They also comment on the increased competitive innovation in confectionery in North America, noting that it is having an impact, but that it is up off of a relatively low base.

Steve Voskuil and Michele Buck discussed the increased chocolate and sweets capacity for the year, with the capacity increases estimated to be around 5%. They also discussed the integration in salty snacks and the transition to SAP, noting that there have been some hiccups along the way.

Michele Buck discusses the focus on stellar execution for the business in the coming year. She expects there to be some volatility in the back half of the year but believes the team is well-equipped to handle it. Buck also discusses the impact of pricing delays and implementation on the 2024 year, estimating that the low single-digit pricing has already had an impact of about 3 points.

Michele Buck and Michael Lavery discussed the pricing outlook for 2024, with Michele indicating that it would be low single digits. Steve Voskuil then indicated that there were no fundamental changes to their plans for marketing spend for the year, which was expected to be a year of brand investment. Michele also mentioned that they were looking to front-load more of their salty planning due to S/4. Finally, Pamela Kaufman asked about private label launches in the Salty Snacks categories, to which Michele answered that there was a bit more private label than in CMG, and that they were looking into managing the private label competition.

Michele Buck expects a strong Halloween season and has taken an approach of leaning into it. She believes there will be plenty of candy and that the overall market share will remain stable, but there may be some pressure on everyday candy.

Michele Buck discusses the execution issues that occurred in Salty Snacks, which included promotions shifting from Q2 to Q3 and disconnects between sales, commercial, and supply chain. She is confident that the team is working to fix the execution, but there will be volatility in the back half of the year due to inventory buildup and lighter sales in the fourth quarter. Alexia Howard then asks about market share trends in U.S. chocolate, which have been impacted by capacity constraints and other issues. Buck believes that there will be improvement, but there are a few things that are affecting the share.

Steve Voskuil discussed the drivers of margin expansion for the company, which was higher than initially expected. Factors such as pricing, inflation, and increased promotion have contributed to the margin expansion in the first half, but the company expects tougher comparisons in the second half.

Steve Voskuil from the company discussed the mid-year mark on productivity and how pricing drops have worked in their favor. He also mentioned that there will be some fixed cost absorption impact in the back half of the year, as well as some inflationary commodities such as cocoa and sugar. Lastly, Steve mentioned that there will be a gross margin benefit in the third quarter as they build inventory with retailers ahead of the cutover in Salty Snacks.

Steve Voskuil and Melissa Poole answered Cody Ross's questions regarding the ERP implementation in the salty business, which is expected to result in a double-digit decline in sales. Michele Buck then addressed Ross's question about the competitive environment, noting that the categories in which they compete have always been competitive but that they have rational competitors and that they have seen some higher levels of innovation and increases in private label, but that their brands have held up well and they are focused on driving sustainable profitable growth.

Michele Buck and Steve Voskuil discussed how display and promotion have been stable in the impulse-driven category, and that they will continue to invest in marketing support and the right level of promotion. Jason English asked if the decision to cancel promotional activity was due to supply constraints, and Michele Buck clarified that it was their choice to move a promotion in advance of S/4, and that they had experienced temporary out of stocks due to their go-to-market approach with dots, but that they had adjusted and service levels had improved.

Michele Buck, Steve Voskuil, and Melissa Poole discussed the accelerating volume declines in the chocolate confectionery category. They attribute these declines to price increases and focus on driving the category to maximize benefits. The trio also emphasized that they want to win with innovation and not through spending, and have more tools and sophistication today to look at the ROIs for how they are deploying promotions.

Steve Voskuil and Melissa Poole discussed the organization's sales force bonus structure, which does not currently include market share as a component but is instead focused on delivering revenue. They also discussed revenue management opportunities, such as package resizing and bar weights, to increase net price realization in the future.

Steve Voskuil commented on the pricing approach and how they look more holistically at strategic pricing, particularly in categories such as confection and salty snacks. Rob Dickerson asked why they wouldn't want to take more pricing given the current input cost complex. Steve Voskuil explained that they take into consideration many factors when thinking about pricing and promotional activity for 2024 and beyond.

Michele Buck explains that they have a lot of visibility into the Halloween season due to their advanced planning with customers, and they have strong programs to drive sell-through. They are confident that consumers will be interested in the simple pleasures of Halloween during difficult economic times, which is why they are leaning into the season.

Rob Dickerson asked Steve Voskuil and Michele Buck if the shipment side had any changes compared to the year prior, to which they both responded no. Chris Carey then asked if the deceleration in consumption was due to a lack of supply or a shift in promotional programs, to which Michele Buck responded that promotional declines had caused the deceleration, and it should pick up in Q3. Bryan Spillane then asked if there were any pronounced differences in elasticity across channels.

Steve Voskuil, CFO of the company, discussed the company's capital allocation philosophy, which includes returning cash to shareholders through dividends and share repurchases. He mentioned that the recent dividend increase of 15% was due to the company's strong earnings progress over the last few years, and that they are still slightly behind their target for payout ratio. He also noted that share repurchases are used as a stop gap when there are no better-returning alternatives.

Michele Buck and Steve Voskuil answered questions about the elasticity of Hershey's products, with Buck noting that they had not seen any material differences in pack size and Voskuil noting that they expect the competitive nature of the category to remain the same. They also discussed the guidance of North America Confection organic sales in the low single digits, including flat volume, with no fundamental changes to the algorithm of sources of growth.

The call concluded with no further questions in the queue and Melissa Poole thanking participants for joining the call and encouraging them to follow up with any remaining questions. She wished everyone a great day and concluded the teleconference.

This summary was generated with AI and may contain some inaccuracies.