The operator welcomes listeners to The Hershey Company's Fourth Quarter 2023 Question-and-Answer Session and introduces the host, Melissa Poole. She reminds participants that the call is being recorded and that forward-looking statements may be made. Non-GAAP financial measures may also be discussed. The CEO and CFO, Michele Buck and Steve Voskuil, are present for the Q&A session. The operator then opens the floor for questions.

During the Q&A portion of the earnings call, Andrew Lazar from Barclays asked about the company's guidance for 2024 and specifically questioned if there would be any additional pricing actions taken this year to address the elevated cocoa costs. Michele Buck, the CEO, responded that the company is taking a measured approach to pricing and remains committed to using it to cover inflation and support investments. Steve Voskuil, the CFO, added that the 3% net sales growth projected for 2024 includes carryover pricing from 2022 and some increases already announced this year, but they will continue to use pricing as a tool to manage the business in light of current cocoa prices.

In the third paragraph, the speaker acknowledges the challenges posed by the ERP implementation and states that any further price increases will benefit the company more in the second half of the year and 2025. The EPS in 2024 is expected to be flat due to a discrepancy between the first and second half, which is not dependent on cocoa relief or a surge in consumer demand. The main factors driving this are the easier lapses from the previous year and factors within the company's control such as timing of spending and cost savings.

The speaker explains that the company is focused on increasing media spending in line with sales growth in order to drive their brands over the long-term. They also mention making adjustments to targeting in order to achieve greater reach levels.

In the fifth paragraph, Michele Buck discusses the impact of media on the company's growth and plans to constantly evaluate and potentially increase spending if results exceed expectations. Ken Goldman then asks about the recent decline in the popcorn category and what needs to happen for it to rebound. Buck attributes the decline to value pressure, private label competition, and reduced support during the company's ERP implementation. To address this, the company has made improvements in value, merchandising, and advertising, and expects to see growth and market share gains in the second half of the year. The next question comes from Max Gumport of BNP Paribas.

Steve Voskuil discusses the factors that are taken into consideration when looking at cocoa prices, including supply, demand, crop yields, weather, and demand. He also mentions the difficulty in separating the impact of financial activity and speculation from the fundamentals. The company has a hedging program in place to reduce volatility in their P&L. A question is asked about inflation rates, but the response is not included in the paragraph.

The company has experienced inflation in commodities such as cocoa and sugar, resulting in high single digit inflation when averaged over all parts of the P&L. The company has locked in coverage for commodities for the year. The cost savings announced are the result of initiatives started a year to 18 months ago and are not solely a reaction to inflation. The execution of these initiatives was dependent on completing the S4 implementation and unifying the Salty Snacks business, which have both been completed.

The speaker discusses how the company has seen opportunities in creating greater end-to-end connectivity and using technology for automation and efficiency. They accelerated their work due to pressure on coca prices and are being careful about implementing changes after the implementation of ERP. The CFO adds that they are excited about the potential opportunities that ERP will unlock, such as integrated demand planning and automation in the supply chain. The next question is about the recovery in the chocolate category in the U.S., which the speaker attributes to innovation, specifically the launch of Reese's Caramels.

Michele Buck, CEO of Hershey, discusses the factors driving the company's recent growth, including strong consumer demand for seasonal products and a focus on innovation. She mentions a 35% increase in innovation compared to the previous year and a slight increase compared to pre-pandemic levels. She declines to disclose the percentage of net sales from new products. In response to a question, she confirms that the company has a 15% increase in capacity coming online this year.

The company has continued to invest in capacity for brands and businesses with growth potential. They have focused on Reese's and gummy products, with plans to leverage their new capacity in the second half of the year. The cost savings initiatives will not directly impact these plans, but may create opportunities for future automation. The company projects a 200 basis point gross margin contraction for the year, with more of the impact expected in the first half than the second half.

In the second half, there will be higher commodity inflation, but there will also be benefits from continuous improvements, such as manufacturing cost savings and automation programs. The company's hedging strategy for cocoa prices has not changed, and they have tools to manage the impact. In terms of market share, the company aims to grow in the confectionery market. The pricing strategy remains the same, but it may be challenging to implement in a volatile market with significant input cost increases.

Michele Buck, CEO of a company, discusses their market share and pricing strategy for the year. She expects to see improvement in the second half of the year after being pressured by a shorter Easter and lapping reduced merchandising and distribution at a key retailer in the first half. Their goal is to cover inflation with price over time, but the timing and magnitude of their pricing strategy may vary depending on input costs and general inflation. They are also focused on price pack architecture as an opportunity. The CEO also mentions the ERP transition and how it may impact their strategy.

The company is not applying the same approach they did with Salty in terms of cutting back on merchandising and marketing spend during the transition to a new product. They will still be building inventory in the first quarter and draining it in the second quarter, but they have a full merchandising and promotion plan in place. The company learned from their previous transition with Salty and have incorporated those learnings into their plan for the current transition. They also have less complexity to deal with in terms of integrating systems compared to previous acquisitions. The company expects elasticities to be similar to historic levels.

Tom Palmer asks about the productivity and cost savings initiatives, wondering if they are new or previously planned. Steve Voskuil clarifies that they are incremental to previous plans and made possible by new technology and increased capabilities. Palmer then asks about pricing, specifically what is included in the 2024 outlook. Voskuil explains that there are three pricing components, including actions taken last year and a small increase that just went into effect this month. These are the only assumptions currently included in the outlook.

The speaker responds to a question about gross margin and clarifies that there will be less contraction in the back half of the year. They also discuss the impact of inflation on different segments and how snacks may require more investment and experience more margin pressure compared to confection. Additionally, the speaker addresses a question about SM&A as a percentage of sales and explains that the company has been increasing efficiency in this area over the past 15 years.

The confection business will be most affected by the margin impact of cocoa, but salty margins are expected to increase in 2024. The company is focused on becoming more efficient and getting leverage from its larger size, but not at the expense of its capabilities and growth potential. Operating costs as a percentage of sales are expected to be at a 15-year low in 2024 due to efficiencies in the P&L and international business. The company is not cutting costs excessively and is still investing in its brands and capabilities.

Rob Dickerson from Jefferies asks a question about consumer shopping behavior and potential shifts in the confection category. Michele Buck responds by saying that overall, consumer confidence has improved and there is some value-seeking behavior, but the behavior in confection has mostly normalized. She believes they have taken steps to address the issue of satiety in popcorn and expects to see normalization in the category. She also mentions the potential for growth in the salty segment in the long-term.

The speaker asked about the long-term growth potential for the salty snack segment and if there would be any changes to the company's previous targets. The CEO clarified that there would be no changes and the long-term outlook remains around mid-single-digit growth. The company also plans to have joint merchandising activations between the confection and salty segments to increase buy rates and visibility for both.

The company has seen success with its major brands and expects to see cross household purchases as well. They anticipate more distribution growth for Dot's in untracked channels. The outlook for ad spending in 2024 is expected to be in line with sales, as they balance spending across DME, marketing, consumer marketing, and trade to efficiently drive revenue.

The speaker thanks the audience for their participation and announces the end of the question-and-answer session. She invites them to follow up with any additional questions and wishes them a good day. The operator then officially concludes the call.

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