Greetings, and welcome to The Hershey Company's third quarter 2022 question and answer session. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded. I'd now like to turn the call over to your host, Ms. Melissa Poole, Vice President of Investor Relations for The Hershey Company. Thank you. You may now begin. Good morning, everyone. Thank you for joining us today for The Hershey Company's third quarter 2022 earnings Q&A session. I hope everyone has had the chance to read our press release and listen to our prerecorded management remarks, 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. 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. Thank you. Our first question is coming from the line of Andrew Lazar with Barclays. Please proceed with your questions. Great. Thanks so much. Good morning, everybody. Good morning, Andrew. Good morning. Morning. Maybe first off, you discussed in the prepared remarks how you expect a strong top and bottom line performance in 2023. I guess, given where the markets are, it seems like items like pension and interest expense will be sort of incremental headwinds, obviously, for the group as a whole next year. I was wondering if you'd be able to help level set us a little bit on sort of where some of these items, at least that you do have visibility to, might sit for next year, and I guess if they're material enough to kinda derail, you know, the earnings performance in the year. Sure. Andrew, let me start with a little bit of an overview, and then I'll let Steve dive into a few more of the specifics. Overall, we believe we can deliver an on-algorithm year next year. We believe our sales will be slightly ahead of algorithm. Pricing will be about comparable to 2021. We anticipate that our growth margins will be stable. We will have a step-up in investment as we reinvest, reinstate some of the DME spend, now that we have more capacity available to really be able to take advantage of that, and also to invest in capabilities to secure profitable, sustainable future. We think all of that will net down to strong earnings performance that will likely be at the high end of our algorithm. That's a little bit of an overview, but Steve, I'll let you kind of go a little bit deeper. Yeah. Just on the discrete items, kind of to answer your question as a summary first, we don't see any derailers in terms of those discrete areas. We will have more pension expense. You know, our estimate today would probably be $5 million more year -over -year for next year. On the pension side this year, we've picked up about $10 million of incremental pension expense. Next year, I would, you know, again, markets can change, but today I would probably estimate that at probably twice that number for next year. But neither of those are material enough to shift the needle. Yeah. Sorry, just to clarify, that first $5 million was interest year-over-year. Oh, yeah, sorry. The pension probably about a $20 million. Yeah. That's really helpful. Yeah. Very helpful. Then just lastly, I mean, as you mentioned, you've got incremental pricing on tap for 2023. I appreciate you're planning for greater elasticity than you've seen thus far, which is prudent. Obviously, you delivered strong volume this year in the face of high single-digit pricing. You've got more capacity coming online. I think A&C is expected to grow faster than sales next year. Dot's entering, I think, the organic calculation to start the year and obviously strong underlying momentum. I guess at a minimum, shouldn't these help at least mitigate, you know, the potential for building elasticities in 2023? I'm just trying to make sure I'm not missing anything else on either side of the ledger. Thanks so much. Yeah. I mean, I think that's the right way to think about it. We as Michele said at the top, you know, I think we've got a lot of positives in the story for next year, as some of the things you mentioned roll through. I'm sure we'll have challenges, but we don't see anything yet that is a derailing sort of factor. Thank you very much. Thanks. Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your questions. Hey, thanks, operator. Good morning, everyone. Hey, Michele, in the prepared remarks, you referenced consumer behavior and maybe seeing some changes in where people shop, I guess channels and pack types. Could you just elaborate a little bit more on that and maybe how Hershey's adjusting to that? Yeah, absolutely. We are seeing some of those changes in how they're spending. You know, fortunately, we are seeing them continue to spend, but there is some reprioritization. Specifically, value channels and value packs are selling well. We are also seeing some improvements in private label performance. Really, we're seeing this across the board, slightly more noticeable with lower income consumers, but really across all different income levels. You know, within our categories, the trends have really remained very strong as the consumer continues to prioritize snacking and particularly sweet treats. Obviously, we have minimal private label presence. We continue to see that our products remain an affordable treat for families and for consumers. We know that part of that is they want to reward themselves when times are tough. They also use these products to relieve stress, and we think that those trends will continue. I think on a classic trade basis, just to augment relative to the channel piece, we have seen particular strength in mass, in club, and in dollar. Certainly in channels that represent strong value. Okay. Thank you. Sure. Thank you. Our next question is from the line of Michael Lavery with Piper Sandler. Please proceed with your question. Thank you. Good morning. Good morning. Good morning. You've got strong momentum on Reese's obviously, up I think it was 16% in the quarter, and certainly adding capacity is paying off even Payday, which we don't hear too much about typically is up very strongly behind some new capacity. Can you just maybe give us a little bit more specifics looking ahead in terms of how some of the capacity unfolds? I think you've given maybe like a five-year outlook, but in terms of, say, next year, would it be a fifth comes over the next five years? Is it, do we have to wait longer? Is there a bigger bump near term? Just help us maybe think about some of the pacing because the capacity certainly is working when you can add it. We certainly have a, I would say, a continuous effort against broadening our capacity, certainly focused only on where we see those really strong returns. Next year, for example, we are planning for five new manufacturing lines to start up throughout the year, and that includes three new Reese's lines. We do expect a pretty nice increase in capacity. However, some of the investment that we have in 2023 will also be for production that doesn't come online until 2024. Not all of the incremental spend directly relates to 2023, but we do have continuous capacity coming online into the future years with a big focus on 2023 and 2024. Okay. Does that help, Michael? That's helpful. Yeah. It's a little bit more near term skewed, it sounds like. Just on Dot's, if I could follow up there. Very strong momentum. It looks like it came in about 40% ahead of what we had thought the run rate was, when you bought that business. Can you just point to what some of the drivers are and how to think about the sustainability of that kind of momentum? Yeah, absolutely. On Dots, a big piece of our gains have been continuing to grow distribution. As we purchased the business, there was significant opportunity, particularly on the East Coast and with certain customers. We were somewhat underdeveloped with Walmart, so Walmart was a big gainer on distribution. Obviously, that's a huge customer. At the same time, we're also focused on optimizing the consumer model and all of the spend to maximize impact and starting to drive incremental investment in brand building, which is our model across our entire portfolio, which we think will give us further upside beyond the distribution going forward. The other thing I wanna just clarify on the capacity piece is, while we have significant effort in 2023 and 2024, there will be continued. If you look across our entire portfolio, continued capacity coming online into the future years beyond that as well, if you look at confection, snacks, et cetera, across the board. Really helpful color. Thank you. Thank you. Our next question is from the line of Robert Moskow with Credit Suisse. Please proceed with your question. Hi. Thanks. Two very different questions. Are there any initial efforts being made to try to consolidate your snack brands together in either route to market or any other operating functions? My understanding is that they get to market in very different ways. For Steve, just wanted to know if you can help us with seasonality in 2023. The first half looks like a tough comparison, but maybe that's just optics. Yeah. Relative to our snack brands, to date we have been running those businesses separately as we have had a dedicated focus on continuing to drive ahead the Amplify business and also to really integrate the Dot's business as we just took it over in December. Going forward, we are now starting to take a much more holistic look across all of salty with a focus as we go into 2023 on really how we integrate those businesses together across the board to really capture and leverage scale and synergy across everything, supply chain, marketing, go-to-market, et cetera. That's really the phase that we are entering now, and I think we believe that's how we will also begin to unlock some of the gross margin expansion that we need to go after on that business. Steve? Yeah, very good. Nothing to add to that. On the seasonality, I don't think there's a big story. You know, we've got a big year to lap full stop, first and second half. I don't think it's. We're not thinking about a big nuance right now, first half versus second half. I don't know if that's helpful. It's simple. Thank you. I'll take it. Thank you. Next question comes from the line of Ken Goldman with JP Morgan. Please proceed with your question. Hi. Just a very quick clarification first. Michele, I think in response to Andrew's question, if I heard correctly, you said that pricing in- 2023 will be similar to 2021. I assume you meant similar to 2022 unless I heard you wrong. Yes. Sorry about that. That's okay. Time has lost all meaning to me post-COVID. I understand. Then really just a quick summary of next year and to make sure I heard you correctly there. You're talking about, you know, sales growth being very strong. You don't have an EBIT algorithm, I think. But is it fair to assume, just to summarize, that you're expecting very strong sales growth, maybe a little bit higher than EBIT growth, which in turn is a little bit higher than EPS growth, but EPS growth still closer to maybe that 8% organic range with, I guess, a small haircut from FX. Am I kinda summarizing that correctly? Yeah, I think you're in the right ZIP code. Yep. Perfect. That's all I have. Thank you. All right. Thanks. The next question is from the line of Alexia Howard with Bernstein. Please proceed with your question. Good morning, everyone. Good morning. Morning. Can I ask about the high single-digit increase in costs in 2023? I think generally we've been expecting that things might get a little bit easier. Obviously, that is easier than what we've seen in 2022, but it's still a pretty big hurdle to get over. Specifically, where are the pain points? What's continuing to go up? How much of it is locked in? Do you have good visibility into that? Is it likely to moderate through the course of the year, so maybe higher in the first half versus the second half? Thank you, and I'll pass it on. Sure. Yeah, as you said, it's high. It's not as high as this year. To that extent, you know, I like to be in a position when we give more guidance for next year to say we're sort of stabilizing gross margins overall, but nonetheless still expecting high single digit inflation. Where is it coming from? Yeah, on the commodity side, you know, we still have some commodity pressure in some commodities where we don't have complete hedging coverage, packaging costs, logistics. Still seeing inflation in people costs, some energy costs. I would also say technology is probably another one that's starting to be a bigger component. Across that basket, we're still seeing, you know, high single digit inflation. I would hope by the time we get to the back half of next year, you know, you're again starting to see more moderation as we start to lap more of those inflationary costs, but still expecting a pretty significant lift next year. Our, you know, our visibility is pretty good, you know, with our hedging and, longer term contracts, I think we do have pretty good perspective on that number today. Great. Thank you very much. I'll pass it on. Our next question is from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your questions. Good morning. Good morning. Morning. Can you discuss the shipment timing dynamics that impacted Q3 results? You pointed to earlier seasonal shipments and inventory replenishment benefiting top line in the quarter. Where are retailer inventory levels now? Are there any additional timing shifts that we should be aware of over the coming quarters? Just on the Q4 implied guidance, which points to deceleration to low single digit growth, is that largely a reflection of the inventory dynamics, or are there other factors contributing to the outlook? Sure. On the inventory timing for Q3, you know, the two big factors that we talked about were, one, some inventory build, as you mentioned. You know, we didn't expect as much inventory build as we saw in Q3. Again, what we did see wasn't as big as we saw earlier in the year, but it was a factor, about a point. We also saw some seasonal pull forward, and this continues a little bit of a trend of retailers pulling seasons in earlier and earlier. We saw about a two-point benefit in the third quarter from that. As we look to the fourth quarter, we also expect we'll see some seasonal pull forward with Valentine's and Easter. That will have some impact potentially on Q4. Probably the biggest factor in the Q4 guide is really just the assumptions around elasticity. Again, being a little bit prudent as we think about, you know, what's happening with the consumer and not being quite as aggressive as maybe the more recent elasticities we've seen. Great. Can you comment on current promotional levels? You indicated that they're back to more normalized levels. Can you address what types of promotions you're implementing and how you're balancing higher promotions with the capacity constraints? Do you expect promotions to continue to step up next year? Yep. Our promotions are, you know, pretty much in line with historical. When we do promotion in this category, it's always our first objective to get display because this category can drive a lot of impulse. A focus on feature and display where possible. And as usual, we always put a big focus on our core brands. We may use news to create some excitement on a display, but we know that our core brands are the strongest mover, and that's really where the bulk of the focus will be. It's about where we are on promotion. If we think about next year, we think we'll be at about the same level as we've been. There might be some shifts across the quarters, but pretty much in line. Great. Thanks. I'll pass it on. The next question is from the line of Nik Modi with RBC. Please proceed with your questions. Yeah, thank you. Good morning, everyone. Hi, Nik. Hi, Michele. I was just wondering, in terms of growth drivers, you know, we've been getting a lot of good feedback on the pantry pack, especially in the online channel. I was just hoping you could talk a little bit about that and what your insights are saying and maybe where you can take that strategy going forward. The second thing would be just on alternate channels. I mean, obviously FDM has been a very strong area for Hershey, but there seems to be a lot of pockets of opportunity in other channels, you know, not measured, and I just wanted to get your thoughts on that strategy as you move forward. Yeah, absolutely. As we approach innovation, you know, we've really evolved our strategy over time to continue to provide product news, but also really to look at packaging as a big unlock because packaging enables us to provide consumers with our core brands, which they love, but in a different packaging format that tends to open up a new occasion. That can be very powerful and very sustainable, and that's really what the pantry pack did. As consumers are spending more time at home, it's almost the ability to have their own, you know, single-serve dispenser, in their pantry or in their refrigerator if they so desire. We're really pleased with how it's doing to date. You know, we still have some distribution upside opportunity to further capture. It's done what we were hoping to, and we'll continue to focus on packaging for new occasions. Relative to non-measured and alternate channels, yeah, this has always been a focus for us. I would say as capacity got tight, we pulled back a little bit, deprioritized a little bit during COVID, but we're really leaning back in now, and the team is aggressively focused on really trying to get our products everywhere that they possibly can. Thank you. I'll pass it on. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your questions. Hey, folks. Good morning. Thanks for slotting me in. Good morning. A couple questions. First, in prepared remarks, I think you noted that you're expecting growth trends on everyday products to moderate. Can you elaborate on what you're seeing? Also comment on how this influences your view of, I guess, how much more capacity you have to push price on everyday and whether or not you should be looking to layer on a bit more promotion to counter whatever trend you're seeing. We've been pretty happy with the strong trends that we have seen on retail takeaway. Certainly throughout the year, we've been trying to balance the seasonal sell-through with everyday business and really look at, you know, the two somewhat holistically. I think we've been held back a little bit, as you mentioned, through capacity. We're excited that next year we open up a bit more capacity, which then allows us to reinstate some of the spending that we had pulled back on, which we think will also provide some momentum for us going forward. Okay. Switching gears, M&A, your track record of late has been pretty successful. Your balance sheet certainly suggests you have capacity for more. Do you have organizational bandwidth to do more anytime soon, or is all eyes of attention focused on integrating Dot's and also it sounds like not just integrating Dot's, but addressing the whole structure of salty snacks as you look to combine those businesses and leverage the synergies you discussed? I mean, certainly I would say job one for us is the integration and continued growth and acceleration of the entire salty portfolio. We do really have scale there now and a lot of opportunity ahead of us, great top-line momentum and then opportunity to leverage that scale to improve the margin structure. That's clearly job one. That said, we are always looking and evaluating the marketplace. Given the health of our balance sheet, we certainly would consider something that made sense for us, that we believe- Understood. We could execute well. Yeah. Understood. Thank you. I'll pass it on. The next question comes from the line of Chris Growe with Stifel. Please proceed with your question. Hi, good morning. Good morning. Hi. I just wanted to ask a little more of a near-term question around the fourth quarter. It sounds like you're gonna have some further pull forward of next year's season or next, yeah, 2023 seasons. I also think you have an easy shipping comparison with the previous year. We had less shipping days in the fourth quarter of 2021. I just wanna get a sense of what that means for volume in the fourth quarter with a little extra seasons and then a little extra benefit from the shipping day factor. Yeah. On the season side, it's not a net benefit because we pulled some of the Q4 into Q3. We sort of got a little bit of a deficit that will be potentially partly made up by pull forward of 2023 seasons. That's probably the biggest piece. In terms of calendar days, really not a big factor for shipping days. You had two less shipping days, though, in the fourth quarter of 2021. Does that not compare beneficially to this year or no? Not- I think the calendar only shifts by maybe one day this year, so it shouldn't have a material impact. Okay. Gotcha. I just have a quick question around the gross margin. As I look at the gross margin decline year-over-year and look at the margins by division, I'm just curious, is there more of a gross margin kinda lag or shortfall, basically a pricing versus cost inflation shortfall, in salty snacks versus confectionery? I'm just trying to get a sense of the pricing coming through in confectionery. Should that benefit the margin? Would that therefore benefit the overall gross margin more so? Or is it salty snacks that needs more pricing here to offset the inflation? Yeah. There's a lot in there. I think, obviously, the pricing on confection- Yeah. It's great. It's in the plan. You know, we'll see the full effect of that in the fourth quarter, and it'll be a big factor in the 2023 outlook. On salty, we have taken price. It probably hasn't come to the market quite as fast. As Michele said, you know, as we look at strengthening that business and the gross margins and at the same time continuing the rapid growth on the top line, pricing is a lever like it is for all our businesses that we'll continue to look at. What I'm pleased with is we look at, you know, the progression of the salty margins even this year. You know, we started out the first quarter, order of magnitude, I think 1,200 basis points down year-over-year. You know, that's improved sequentially, and we'd expect that to improve again in the fourth quarter. You know, as we get to next year, continuing to drive margin improvement in that business through all levers available is gonna be a high priority. Thank you. The next question is from the line of Cody Ross with UBS. Please proceed with your questions. Good morning. Thank you for taking our questions. Based on the prepared remarks, it sounds like your underlying volume, excluding the seasonal shipments and retailer inventory replenishment, was down. Is that correct? How did that compare to your expectations? Q3. Q3 was roughly flat overall. You know, I would say it was in line with the expectations. Like I said, we probably put a little more in inventory than we expected, but where we landed on base volume was more or less in line with what we expected. Thank you for that. I think you mentioned your chocolate market share was up versus pre-pandemic. I assume that's dollar share. Can you just comment on how that compares from a volume share perspective? Thank you. Yep. That was dollar share, and it is similar from a volume share perspective. Okay, great. I'll pass it on. Thank you. The next question is in the line of Jonathan Feeney with Consumer Edge. Proceed with your question. Good morning. Thank you. Michele, you mentioned in your prepared remarks, what a lot of food industry leaders have mentioned while reporting pretty good numbers in the past couple weeks. A sense of, I think it was concern about where, you know, concern about the stress that inflation was bringing to consumers. I think that's certainly true, and it's certainly an impact on retailers. If I just dived into the data you have, like, where are you seeing that, if anywhere? Is trade-down behavior happening? How would you think about, I don't know, prior periods where, there's nothing quite like this period, but say consumer distress accompanied by rising inflation. I think we had something like that dynamic in 2010. You know, how did consumers behave? You know, as you look forward, how is this go around with the consumer reacting to, you know, a tougher environment driven by, you know, crowding out factors from other costs? How does this compare? Yeah. We remain very focused on the consumer and certainly we're aware of the pressures that are on them. What I would say is, overall, it has not impacted our total performance and overall product performance to a large degree. Yes, there are some shifts in terms of seeing more consumers buying value packs, purchasing in value channels, and then certainly in other categories where private label has really dialed up. I would say overall, you know, we need to continue to be always focused on the consumer and when they could hit a breaking point. To date, as we look at our elasticities, we really aren't seeing signs of that impacting our business. That said, we're gonna be very focused on it going forward because we don't wanna miss a trend. I would say historically, our category has tended to fare pretty well during these times because it is an affordable indulgence when consumers can't afford a lot of other things. Very clear. Thank you. Our next question is from the line of David Palmer with Evercore ISI. Please proceed with your questions. Thanks. Good morning. You mentioned in the prepared remarks that capacity was added for Reese's and gummies in 3Q. How much of a capacity increase was that? And were you in any way constrained on these platforms before this, or is this just simply anticipatory of ongoing growth? Yeah. We're not gonna get into a lot of the specifics around specific brand capacity just for overall competitive reasons. Yes, we were constrained on both, and this capacity did allow us to unlock whether it was broader distribution, you know, reinstating of promotions, upping our marketing spend selectively, et cetera. Yeah. Understood on that. I wanted to ask on convenience channels and single serve packaging. You know, I've heard certain retail measures in food service, like convenience store food service, have gotten stronger lately. I wonder where is your volume in convenience and single serve packaging? If you look at checkout counters too, how does that compare versus pre-COVID? Are you all the way back? Is that ramping more quickly than some of your other packaging? You know, I would say that overall, for convenience stores in total, not specific to our business, you know, some of the trends have moderated, particularly with regard to, unit purchase, though I'd say snacking and confection products continue to outpace the overall store, and they are growing double digits. Certainly we had seen a pretty significant decline when consumers were not mobile. Now that consumers are much more mobile than they were previously, you know, we've seen that business really come back. Is that gonna be a meaningful help to profitability mix, or is it not a big deal? No, not really. I mean, overall, you know, we sell single serve in other units or in other channels as well. No. Thank you. Thank you. At this time, I'll turn the call back to Melissa Poole for closing remarks. Thank you for joining us this morning. We look forward to catching up with you throughout the day to answer any other questions you may have. Have a great day. Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.