Hershey Company (HSY) — Q1 2020 Earnings Call Transcript

Thank you, everyone, for joining us for The Hershey Company's first quarter 2020 earnings conference call and webcast. We'll begin with remarks from Michele Buck, Chairman, President, and CEO; and Steve Voskuil, Senior Vice President and CFO, followed by a Q&A session. During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties. These 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 that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. The presentation of this information does not intend 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. It is now my pleasure to turn the discussion over to Michele.

Thank you, Melissa. Good morning everyone and thank you for joining us today. I hope, first of all, that you and your loved ones are safe and healthy. We are all experiencing an unparalleled and rapidly evolving global pandemic. Our thoughts go out to those that have been impacted and we'd like to extend our sincere thank you to all of the heroes working to keep people safe during this difficult time. As you all know, food companies play an important role during this crisis, helping to ensure a steady food supply and supporting the local economy. We recognize that Hershey is not only a food manufacturer, but also an important link in the broader food supply chain, particularly with farmers and other raw material suppliers that rely on us. I could not be more proud of The Hershey team and how they are responding to this situation, first and foremost, with the care and support they are showing for each other, their families, partners, and communities. But also with their relentless energy and passion to continue to safely operate with excellence. I'd like to extend a heartfelt thank you to all of them, especially to those in our manufacturing plants and those working at retail to make moments of goodness for our consumers during these difficult times. The situation continues to evolve so rapidly that it's difficult to predict the future with much certainty. While comparisons can certainly be drawn to weather-related disruptions or natural disasters or recessions, the reality is that we have never seen so many factors at play at the same time on such a global scale. But we are committed to being transparent about what we are seeing in the marketplace and what we are doing to respond. We will continue to be forthcoming as we navigate this uncharted territory and we believe we will have more visibility in the coming months as the situation stabilizes. Let me start by saying pre-COVID-19, our business was on track versus our expectations, both in Q1 and our outlook for the full year. Now, let me share some details around what we are doing from an operations perspective, before I discuss what we are seeing in terms of consumer behavior. The health and safety of our Hershey team remains paramount in our decision-making and action. Food safety has always been at the center of our day-to-day operations, and that will continue. As the pandemic spreads, we are monitoring the changing environment daily and we are adapting as the situation evolves. We've put in place more stringent operating procedures and safety protocols to help ensure the well-being of our employees, their families, and everyone with whom they interact. We are doing our best to enable social distancing and other safety and cleaning protocols across all functions and meet our commitments to support consistent community food supplies and the needs of our retail partners. As you would expect, all of our corporate and commercial employees who are able to, are working remotely. A big thank you to our IT team who have done an outstanding job making the transition to virtual work as seamless as possible. And also to our HR team for the wealth of resources, they continue to provide our employees to effectively manage work remotely. Currently, all of our manufacturing plants remain open and we continue to operate our supply chain with limited disruption. As the situation began to unfold, we built inventory in both raw materials and finished goods to mitigate risks and to help us continue meeting demand. This proactive approach, coupled with our experienced and dedicated team has enabled us to consistently deliver strong customer service levels. Our first quarter case fill rate was over 98.5% with a 99% case fill rate in March. And despite incremental marketplace challenges in April, our case fill rates remain close to 98%. Utilizing flexible scheduling, the majority of our sales reps remain in stores, partnering with our retailers to provide much-needed support. This continued in-store presence, combined with our strong customer service, has driven confectionery share gains of almost 300 basis points during the past month. Our manufacturing and retail employees have shown amazing dedication and resilience and we have implemented incentives to recognize these contributions for employees who can safely work to keep our operations running. We have closed our own retail locations, including our Chocolate World Store in Hershey, Pennsylvania; Times Square, New York; and Las Vegas for most of Q2. While sales in our retail locations are relatively small in proportion to our total business, we do expect several months of closures to have an effect. In addition to our retail stores, several other parts of our business are seeing an outsized impact, including our food service business and our travel retail business, both of which are seeing a channel decline of 75% to 80%. And we saw a meaningful category decline in China during a key seasonal gifting window in the first quarter. Combined, these businesses represent approximately 6% of our sales. Now, let me share a little bit about what we're seeing with the consumer as it relates to our core business in the U.S. Pre-COVID-19, our business was tracking in line with expectations with retail takeaway up a little over 2% and confectionery share gains of about 20 basis points. Easter and NCAA March Madness were sold in and merchandised in stores. Our key innovation was largely in markets, including Reese's Take 5 and KitKat Duo and many of our key customers began selling our new thins items before any retail disruption occurred. Similar to many other food manufacturers, we saw a benefit from consumer stock up in March, though to a lesser degree than meal-oriented categories. This was consistent with our expectations and what we typically see with weather-related pantry loading. Total Hershey retail sales growth accelerated to 10% in March. This growth was across all classes of trade, with particular strength in food, mass, and dollar channels. We were in a great position to support this increase in foot traffic and demand as we had strong merchandising and ample inventory in stores as we geared up for Easter and our NCAA promotion. We delivered a solid Easter season despite the significant disruptions we saw in both the retail environment and in consumers' lives. Recall we did expect the season to decline versus last year, given Easter was a week earlier this year. Overall, our selling was in line with expectations. Retail takeaway got off to a strong start and sell-through was pacing ahead of expectations heading into the final week. We did, however, see large changes in the macro environment during that final week. This impacted consumer trips and overall category performance and sell-through. Throughout the season, including a difficult final week, our teams executed well. We delivered retail takeaway and sell-through ahead of competition. While our sell-through came in slightly below expectations, we expect minimal impact to the P&L or to retail takeaway in the coming weeks. As a reminder, confectionery retail takeaway for the beginning of April is elevated due to the earlier Easter. We anticipate takeaway in the second half of April to be pressured as a result of this shift. Please keep this in mind when you're evaluating retail trends in the next few weeks, particularly as it relates to quantifying any COVID-19 related impacts. Now, let me spend a few minutes discussing some of the changes we are seeing in our everyday performance. As I mentioned, we experienced the lift in March due to consumer stock up. Our grocery and snacks businesses in particular saw increases in both household penetration and basket size. Hershey syrup, baking chips, and cocoa all grew approximately 30% during March, and trends have remained strong as families are spending more time together at home baking. Our Skinny Pop and Pirate's Booty businesses grew approximately 20% and gained share. While March trends were strong, the situation has evolved rapidly in April. As a result, we've seen shifting consumer behavior. More regions have enacted shelter-in-place guidelines. Retailers have limited the number of consumers in stores as well as operating hours. And the medical community is recommending individuals wear masks in public and limit grocery store trips unless essential. A significant number of American households are not working and experiencing meaningful financial pressures. All of this has impacted traffic into stores, length of time in stores, and the amount of discretionary goods people are purchasing. While many consumers have shared how our categories are helping them cope during this time and bond with their families, they’ve also shared how their shopping priorities have changed. Within salty snacks, private label brands have begun to outperform due to stronger in-stock and merchandising levels. In addition, we've seen a shift to lower price per ounce offerings as many consumers experience financial constraints. As a result, Skinny Pop and Pirate's Booty have experienced share declines and softening performance over the past three to four weeks. For our confectionery business, we've seen declining sales in the convenience class of trade as trips have slowed. This represents approximately 15% of our North American sales. While we still have an opportunity to capture impulse purchases at checkout in other classes of trade, the significant changes we've seen in overall trips and basket size over the past several weeks have limited the amount of flow back we've seen to other classes. In addition, the government category has been significantly impacted by social distancing. These categories are much more functional than emotional and they've experienced declines of 40% to 50% over the past several weeks. One of the trends that I've just discussed has softened, growth in other areas of our portfolio remains strong. E-commerce growth has accelerated meaningfully, as many of you would expect and have likely observed yourselves, the number of consumers purchasing groceries online has increased significantly over the past several years. Our research indicates that 45% of consumers have used one or more online grocery options in the past four weeks, 23% of which used these services for the first time. We’ve seen similar trends for confectionery with household penetration also doubling over the past month. Consistent with these broader trends, our overall e-commerce growth rate has accelerated significantly, with growth over 120% in March versus 60% in January and February. We are seeing growth across fulfillment models and across occasions, including in our Candy Dish offering, seasonal items, and our single-serve items. At one retailer, 80% of the full year digital sales plan was achieved in the month of March alone. In the week leading up to Easter, 43% of Easter sales at this retailer were purchased online. And at another retailer, we were able to make more Easter items available online and shift inventory to maximize sell-through as consumer behaviors changed mid-season. As we've shared in the past, profitability in this key e-commerce segment is relatively in line with total company average margins and that continues to be the case as trends have recently evolved. We believe we are well-positioned to capitalize on these trends given the strong investment and enhanced capabilities we have implemented over the past several years. Our take-home confection business, such as our bags of Kisses and miniatures, are growing nicely. Baking chips, cocoa, and syrup are also seeing elevated growth as families spend more time together in the kitchen. Throughout this pandemic, our proactive approach with our supply chain is paying dividends. Strong customer service has enabled us to partner with our retailers to consistently capture these consumer opportunities and maintain a strong presence in store. As I mentioned earlier, our case fill rate for the first quarter was very strong and has continued into April, despite the increasingly difficult operating environment. This tremendous work by our manufacturing and sales teams is evident in our recent market share performance. Hershey confectionery category share gains were up over two points in March and are up over three points to date in April. Now, let me spend a few minutes discussing our international markets. As you all know, these markets represent a smaller percentage of our overall sales, but they're an important growth driver for our business. While specifics vary by country, we've consistently seen more COVID-19 related pressure in these markets than in the United States. This is driven by several factors, including more restrictions on manufacturing and retail in some countries, as well as less discretionary income, which impacts consumers' ability to afford non-essential goods like chocolate. Parts of our business continue to perform well, including non-confectionery products like syrup, spreads, and milk. And we're winning confectionery share in the modern trade and e-commerce channel. However, some of our 2020 growth initiatives that focused on increasing geographic and traditional trade distribution have been delayed by the COVID-19 pandemic. We believe there's still tremendous long-term opportunity for us in our international markets, and we're maintaining an appropriate level of investment to capture these opportunities once the situation stabilizes. In both our U.S. and international markets, we are actively reevaluating priorities and resourcing to adjust as the situation evolves. Like many companies, we are partnering with our retailers to make sure we have the right level of promotional support during these unique times. Our best-in-class retail sales force is a tremendous asset to help continue executing important promotional programs such as Seasons, S'mores, and Reese's Lovers. We are evaluating our media plan and adjusting both levels of support, messaging, and channel when appropriate. For example, we've adjusted our S'mores copy to emphasize family consumption at home versus larger community and friend gatherings. We have taken savings from events like NCAA March Madness and the Olympics and reallocated some to digital and our Reese's Lover promotion this summer, while leveraging some of that to cover incremental COVID-19 manufacturing and selling costs. We are proactively planning for Halloween and partnering with our retailers to be prepared for a strong recovery while also making smart choices to mitigate risk if consumer behavior remains impacted. This includes optimizing our portfolio and price point mix and activation timing, as well as amplifying our e-commerce plan. Our ability to quickly pivot and adapt to the changes, along with our strong balance sheet and cash flow gives us confidence in our ability to manage through these disruptions and emerge stronger. While we are highly focused on managing the pandemic, we are also continuing to advance strategic imperatives that will be critical levers for us to drive the business going forward. We are however, taking a prudent approach and moderating the pace of some of these work streams so that teams can adequately focus on the situation at hand. Specifically, we've chosen to selectively pause aspects of our ERP project until all of our functional experts are able to focus on the critical design phase. We will continue to advance the finance and data work stream efforts of our ERP project, while we delay supply chain and order to cash efforts. We expect this to delay our overall implementation by about one year. Given the current demands on our supply chain team, as well as a desire for cash flow flexibility, we've also altered the pacing on our recently announced supply chain project. We do not expect any of these delays to have a material impact on our future growth ambitions, including those we have planned for 2021. Now, before I turn it over to Steve to share details on our Q1 performance, I wanted to take a minute to update you on some strategic choices we are making unrelated to the COVID-19 pandemic. In order to better prioritize resources against assets that fit our business model and scale capabilities, we are working to divest our snacks and global brands. We will share more information regarding these divestitures in the future. It's important to note that our learnings from recent acquisitions have underscored the importance of assets' scale and margin profile. We are obsessed with scale assets closer to $100 million, with high margins that enable brand investment to drive growth. These are great brands that continue to resonate with consumers, but they require a different go-to-market model that we believe is better supported by other owners. These actions will enable us to prioritize our recently acquired scale assets within salty snacks and nutrition bars. Now, let me turn it over to Steve.

Thank you, Michele, and good morning, everyone. I hope you, your families, and colleagues are safe and well. I plan to start with highlights from our first quarter results, including the impact from COVID-19 and then pivot to expectations for financial performance moving forward in light of the evolving pandemic. During the first quarter, recorded net sales increased 1% versus the same period last year, with organic constant currency sales growth of 0.5%. This was in line with expectations with only a modest impact from COVID-19. North America organic constant currency sales growth of 1.2% versus the prior year was driven by net price realization as expected, a shorter Easter offset solid everyday sales growth by approximately one point in Q1. We did see a larger increase in consumer demand from stock-up trips at the end of the quarter with total Hershey U.S. retail takeaway up over 10% in March. However, this did not materially contribute to net sales growth in the quarter as retailer inventory was depleted to satisfy much of this demand. As we look to the balance of the year, we do not expect COVID-19 to permanently change our base inventory level assumptions, though we expect continued volatility and trends over the coming months due to the virus disruptions. The International and other segments reported an organic constant currency sales decline of 5.8% versus the prior year quarter. This was largely attributable to COVID-19 related softness, particularly in China, also included in this segment are our own retail location and our travel retail business that Michele mentioned earlier. While these businesses saw minimal COVID-19 impact during Q1, we expect a more significant impact in the second quarter, given the shelter in place restrictions that were implemented in late March and early April. Now, turning to profitability for the quarter, our levers for gross margin expansion continue to be effective, with a 90 basis point improvement in the first quarter, increasing adjusted gross margin to 46.6%. Net price realization drove the majority of these gains and in addition to some benefits from productivity, as we proactively built inventory to mitigate risks related to COVID-19. Recall, we expect Q1 to be our strongest pricing quarter of the year as we benefited from both the final phase of our July 2018 price increase and the implementation of our July 2019 price increase. Pricing in Q1 was in line with expectations and remains on track for the year. These gross margin gains enabled strong investment in our brands and capabilities, selling, marketing, and administrative expense increased 4.8% versus prior year, driven by planned elevated advertising levels and investments in strategic growth capabilities. Operating expenses for capabilities, including our ERP and supply chain program, were slightly ahead of expectations for the quarter due to timing; however, they remain on track for the year. Recall, we also increased our incentive program for key levels in our organization in Q4 of 2019. For the full year, there's minimal impact from these changes versus 2019. However, due to the timing of the decision last year, the related incentive expense will be unfavorable in Q1, Q2, and Q3 and favorable in Q4. Adjusted operating profit increased by 0.2% in the first quarter versus the prior period, and adjusted operating profit margin came in at 23.1%, reflecting a 20 basis point decline versus the same period last year. Gross margin gains were more than offset by operating expense timing. Adjusted earnings per share diluted were $1.63 for the quarter, an increase of 2.5% versus the same period last year. Continued gross margin strength and favorable tax enabled additional business investment and offset the Easter sales headwind and the International COVID-19 pressures to deliver solid overall earnings growth. Note the favorable tax in Q1 was driven by the tightening of tax credit, and we did not expect material changes to the full year tax outlook we provided in January. Given our strong cash flow and balance sheet, we are confident we will be able to manage through the current crisis, including maintaining strong liquidity. We believe we have adequate liquidity to meet our operating, investing, and financing needs through operating cash flow, further supported by access to bank lines and commercial paper. At the end of the first quarter, we had approximately $1.1 billion in cash and cash equivalents on our balance sheet with $261 million in operating cash flow from the first quarter. We will continue to evaluate the situation moving forward and plan to prioritize cash utilization to meet our liquidity needs. Our strong free cash flow and healthy balance sheet continue to remain a core strength and competitive advantage in these uncertain times. Recall in January, we announced two significant investments for 2020 and 2021, including the ERP transformation and the supply chain capacity and capability initiative. We plan to continue to move these projects forward, as both investments are strategically important for long-term growth. That said, as Michele mentioned, we did pause certain aspects of these projects and reprioritize other capital projects to enable our teams to focus on the current crisis. This is anticipated to delay our ERP implementation by approximately one year. As a result, we now expect capital spending in 2020 to be approximately $400 million to $450 million, rather than the $500 million we communicated in January. In addition to investing for growth, returning cash to our shareholders remains a key priority now and over our 126-year history. This morning, we announced the second-quarter dividend, which is our 362nd consecutive quarterly dividend on the common stock. Additionally, the company repurchased $150 million of common stock in the first quarter under the $500 million authorization approved by the Board in July 2018; $260 million remains available for repurchases under this program. We also repurchased $19 million of common stock in connection with the exercise of stock options. We remain confident that our capital stewardship and allocation priorities will allow for continued strong and sustainable shareholder return. Let's move now to a discussion of our financial outlook and expectations for the balance of the year. Due to the rapidly evolving situation and the high degree of uncertainty, we do not believe we are able to estimate the full year financial impact with reasonable accuracy, and therefore, believe it is prudent to withdraw our fiscal 2020 full year guidance at this time. As we navigate this dynamic situation, we understand transparency is more important now than ever before. The uncertainty around a few key variables and the subsequent impact these could have on our outlook influenced our decision to withdraw guidance. These variables include the length and severity of the pandemic, the shape and timeline for recovery; the associated impact on retail restrictions both in the U.S. and internationally; the changing consumer behavior from shelter-at-home restrictions, including potential impacts to participation in key seasons; and the ability of our supply chain to execute and meet customer and consumer needs. Each of these variables could have significant implications for our growth and profitability. Michele shared with you the trends that are impacting the retail environment and consumer behavior. Some of these sales risks and opportunities also have impacts on profitability, namely risks related to our high-margin, instant consumable products, particularly in the convenience class of trade, and our refreshment brands could dilute profitability. The announced compensation program for the manufacturing team, along with increased plant sanitation and personal protective equipment, will add approximately $25 million to $30 million of incremental costs. However, we are seeing some efficiencies in the plant from running our largest, most efficient SKUs, which is helping to partially offset some of these expenses. Let me now spend a minute on our supply chain productivity initiatives. We had a strong start to productivity in Q1 with over $20 million of savings. However, to enable our teams to focus on COVID-19 priorities, we have deprioritized some planned productivity initiatives worth approximately $5 million to $10 million in Q2. We remain confident in our ability to deliver against our long-term productivity goals. While commodity prices for some of our key ingredients have recently declined, given our hedging program, we expect minimal benefits to 2020. These declines do, however, improve the profile for 2021 versus our outlook in January. Operating expenses are expected to increase approximately $10 million to $15 million as a result of a new incentive program for sales representatives and increased sanitation and personal protective equipment. We anticipate savings related to travel and entertainment, given travel restrictions and social distancing practices to at least partly mitigate these impacts. While we feel there is too much uncertainty at this point to provide a reasonable estimate of the full year financial impact related to COVID-19, we want to provide reassurance that we are being both proactive and agile in managing our performance as the pandemic unfolds. We built inventory in the first quarter to anticipate demand and limit disruptions. We've taken a hard look at capital spending and reprioritized to ensure adequate resources to address both COVID-19 related projects and those critical for strategic growth. We are dynamically adjusting our trade and advertising plan. We are actively monitoring the commodity and financial markets for long-term opportunities. All of these decisions are being made with the priority of ensuring the safety of our employees and communities, while being fully prepared for the recovery. Michele and I could not be prouder of our team for bringing their best every day. This forward-leaning, agile mindset and high-performance culture will help us persevere through this crisis and seize opportunities in the recovery. We are confident the uncertainty we face is temporary and that our decisions and adaptive operating model will help us forge relationships with customers and consumers, allowing for sustained long-term growth. Now, let me turn it back to Michele for some closing remarks.

Thanks, Steve. As we look ahead, we expect the environment to remain volatile as the COVID-19 pandemic and consumers' financial security both evolve. But we remain confident in the strength and resiliency of our category and brands over the long-term, and our remarkable leaders and employees who are executing against our strategies, reacting to current changes, and capitalizing on the opportunities that this change presents. The Hershey Company has more than 125 years of experience managing through tough, fast-moving, and unprecedented moments in time; two World Wars, economic depressions and recessions, and other momentous events. Each time we planned, we took action, we learned, and adapted. We kept our focus on making the best decisions for our employees, our partners, our stockholders, our communities, and the consumers that we serve. This moment in time is no different. It calls for us to be our best working together with compassion and understanding to do what's best for our global society. We believe that this resilience will only make us stronger in the days and years ahead. Steve, Melissa, and I are now available to take any of your questions.

Good morning, everybody, and hope everyone is doing well. And thanks for a lot of granularity in the prepared remarks.

Thanks, Andrew. Good morning.

I want to start by noting that things are still very unpredictable and will likely remain that way for a while. None of us know for sure how or if consumers will change their approach to celebrating major seasons. You mentioned some actions to reduce risk or make smart decisions about adapting quickly to any changes. Three of the actions you mentioned were optimizing the portfolio, potentially adjusting net price realization, and timing of activations. I would appreciate it if you could briefly comment on each of those, as I'd like to understand the levers you could pull if there are changes in how we all view and celebrate key holidays.

Yes, absolutely. Regarding Halloween, I want to discuss several key components. First, we are assessing our portfolio because we have seasonal items specifically for Halloween and a range of everyday assortment bags that are essential. One focus is on how to manage potential risks associated with uncertain consumer behavior by optimizing the right mix of seasonal and everyday items. We’re also evaluating pricing strategies, understanding that some consumers may be facing financial challenges. It's important to ensure we have a range of price points, including affordable options, to accommodate consumers experiencing financial pressures. Timing is another consideration; we know that we can influence these seasons based on when we introduce products. Consumers tend to buy seasonal items ahead of celebrations, such as Trick or Treat, so we are exploring the possibility of starting our promotion a bit earlier to capture more of the celebration period beyond just the event itself. Lastly, we have noted an increase in e-commerce activity during Easter, which is prompting us to ramp up our investments and efforts to establish a strong presence for Halloween, ensuring we have the right portfolio and bundled solutions for our consumers' needs. These are the primary actions we are focusing on.

That's very helpful. And then just follow-up, I think you mentioned the number of 6% of sales was for food service, and I wasn't clear, does that include also China or was China separate from that number?

Yes. No, that includes China and also our world travel retail business, which includes the product we sell in duty-free stores in airports.

Hi. Thank you for the question. I appreciate it. There is a lot to cover here. Let me ask about the second quarter. Is your visibility for the second quarter better than it is for the rest of the year? And can you provide us with some insights? Regarding the gross margin benefit you experienced in the first quarter, will that carry over to the second quarter? Additionally, the retail sales growth measured by Nielsen was significantly higher than your shipments. Is there any timing impact for the second quarter, or is that simply due to Easter being a week earlier? Thanks.

Hey, Rob, let me start by addressing some of that. So, first of all, I would say we do have greater visibility to Q2 because we're already halfway into the quarter. So, we do have stronger visibility there. As you may recall, we had planned for a difficult Q2 prior to COVID as a result of some of our year-on-year lapses. And then our decision to close our retail locations for most of the second quarter, that's a known that's within our control. Certainly, the impacts that we're seeing with restaurants closed in the second quarter, that's a known that we can see the known impact on food service, the reduction in flights, we can see that that's a known relative to travel retail, and then we also had some elements of cost that are known, which include manufacturing and retail incentives, one-time costs on PPE and safety protocols. So, we do have a lot of visibility around those things. Relative to the kind of the gap or the disconnect in Q1 between retail and shipment, let me address that and then I'm going to let Steve make some other comments about Q2. If you look at Q1, you can really break up that differential with about half the differential with retail being ahead of shipments was driven by Easter. As you know, we always have Easter in Q1, but the amount of Easter that gets consumed in Q1 is all dependent on the timing of the Easter holiday. This year, Easter was a bit earlier than last year and therefore, much more of the season was actually consumed, taken away in Q1 versus last year. The other half of the differential in the retail sales to shipments, part of it is innovation. We shipped Take 5 and Kit Kat Duos in December to set up for strong merchandising in Q1. So, you got shipments in December, you got the takeaway in Q1, and then the other component is some inventory.

Yes, and I want to add to a good complete answer. We have good visibility into the costs, I think for Q2 and Michele went through most of the things like the incentives and the sanitation are well-known and we talked about those in the prepared remarks. The productivity piece, the 20 that we saved in Q1 doesn't come or doesn't go away in Q2, but we would have expected to add to that, and you need to grow and that's the piece that won't happen that we had in the plan. And then maybe the third piece that we touched on a little bit sort of implied as we talked about the top line is there is probably going to be some negative mix impact coming through, again, thinking about refreshment in convenience store impacts in the total mix. And that's probably a $5 million to $10 million gross profit impact for the year.

Okay. I do have a follow-up. You mentioned your in-store execution and your sales incentives as a way to maybe mitigate some of the category declines and take share. But are some of your retail partners, limiting the amount of people that will allow in the stores, just for social distancing reasons, and does that impact your execution at all?

So, some of course are, but as we've worked out with our retail sales reps and partnered closely with retailers, even before that we had worked with them with a lot of our partners to have our team go in during off hours to try and bring our product and set displays when there are either work consumers in the store or at the very lowest periods of time. So, I would say, while there is some impact, I would say, largely we've partnered really closely with retailers to work around that, both in terms of the safety and social distancing of our employees as well as helping the retailers to manage the number of people in their store. But largely, they've been really supportive and appreciative of the extra help which they desperately need obviously as consumers are purchasing a lot.

Great. Thank you and good morning.

Hey David. Good to hear from you.

Good morning.

What a pleasure, thank you. Let me follow up on Rob's points because I think you provided a good overview of things in the second quarter. However, I feel some numbers you mentioned seemed annual, like the personal protective equipment expense, and I’m a bit unclear about the specific expenses allocated to the second quarter versus sales. Can I also follow up on this? You've mentioned it a couple of times, but I still find it unclear. It seems there’s at least one positive regarding the retailer inventories at the end of the first quarter, and I believe you indicated in your remarks that there haven’t been any changes to your retailer inventory assumptions. This suggests there may be a recovery in those inventories during the second quarter, which could positively impact sales. Could you clarify if Q2 sales are potentially a bit better than you initially expected, though the expenses are expected to be significantly more negative due to PPE costs and incentive costs? Additionally, I believe there were a couple of other items you wanted to mention regarding the mix in the second quarter that are impacting the business. Thank you.

Yes, David. The large majority of the cost increases really do hit in Q2. If you think about the biggest pieces of that the manufacturing and retail incentives, one-time costs around PPE, the pull back on productivity was around Q2; there is some mix impact with the pressure around refreshment and C-store. And so if you look at that, by far the biggest impact is in Q2. Some of the PPE and safety will continue throughout the year. And then there are some potential offsets, less travel that will have the benefit of throughout the year. We continue to kind of look at trade and DME optimization. There could be commodities, but not a large number. And as it relates to the inventory, I think my gut would be that at some point, we get a little bit of that back, but we don't know for sure and we definitely don't know that it will be in Q2. In fact, if I was just looking at what's going on in the world right now and at retail, my gut would be that likely wouldn't be in Q2, but instead would be at some point later in the year.

Thanks so much. Hope everyone stays well.

Thank you. Thank you.

Thank you.

Hey. Good morning, everyone.

Hi.

Good morning.

Good morning. Thank you. My first question is, is there anything you can do to protect yourself right now, whether it's buying product ahead of time or potentially considering diversifying your geographic sourcing? Because there is obviously Western Africa has not been hit very hard by COVID yet. There have been some suggestions that maybe it will get hit harder later in this year. What are your concerns about that? Just given how much cocoa you source from one region and, again, what can you do to maybe mitigate some of those concerns, potentially?

Yes, right now our supply chain team has done a fantastic job and so aside from cocoa some of our more specialty small ingredients even certainly in the first quarter as COVID starting to get traction they bought some of those ahead to get ahead of it. Right now, I think we feel pretty strong about our cocoa supply, I can tell you our procurement team is very deep into that market on a good day, and they are even deeper here in looking at alternative suppliers and so. So far harvest looks strong and we don't see anything in the medium term, that causes a lot of concern on cocoa supply.

Yes, what we need for the year, like those quantities are already here. So, they're out of that region. So, as we look at this year, we're in good shape and that gives us time and we're working closely with those governments as well. Obviously, this is important crop for that geography and we're working closely with them to make sure that they are set up to handle it.

Okay. Thank you for that. And then one quick follow-up. Thank you for the color on what's in the 6% number in terms of branded stores and World Travel locations and so forth. One question that I was asked, I wasn't sure how to answer was, how big our movie theaters, sporting events, things that maybe are not captured in Nielsen, first of all, is that in that 6% number as well and second, can you give us any kind of rough size for what you would think those types of channels might be? I know I'm being vague with the question there.

No, that's okay. Some of that falls into our broader specialty business, and that might be another 2% to 3% of sales again some impact.

Good morning, everyone.

Good morning.

Good morning.

Hi. So, again focusing on the trends that you're seeing in Q2 now that the doctor settled on the panic-buying phase. Could you give us by channel, how things are looking? So for example, how big are you overall in e-commerce, and how quickly is that growing right now and it's not different from the past? The C-store channel I think you mentioned that was about 15% of sale how soft is that right now? And we assume that the food service in China that 6% of the business as well down at the moment. And then also taking a look at it by product type, if you think about import versus seasonal versus every day, how fast are each of those growing or shrinking if I imagine some of the maybe relative to what you would normally expect? Thank you.

Okay. Let me do my best on that one to try a great set out. So, C-store is about 15% of our sales. It's declining about 10%. E-commerce is about 2% of our sales and we're seeing the growth rate double there. Now, of course, that's just what we've seen recently. So, all of these are the recent trends. So, of course, I can't predict exactly how that will play forward. Walmart and mass channels and dollar stores, grocery have had pretty good trends as people are really shopping there. They are frequenting those places and also all of those places tend to have or many of them an e-commerce leg that's being leveraged. I'd tell you the other place we are seeing some softness is around drug. So, drug and C-store are the two channels that I think we've seen the biggest softness, plus there were initial huge stock-ups of the initial stock up behavior with huge at clubs, that's moderated a bit. Melissa might have to come back and give you maybe more of the details around the specifics on each piece of trade. But I would say, C-store is 15% and drug in that probably 8% range of our total business, and those are the places that are most pressured and then, of course, the rest kind of fall in the middle. If we look at take impulse, take-home and seasonal clearly the softness on impulse is a little bit less than you see in terms of the 10% decline in C-store, because we do still have business coming through, food, drug, and mass, so less than that 10%. Take-home obviously driving our growth and seasons we had a really good Easter. So, at this point, what we're gearing up to do is to we met our expectations, our sell-in, our net sales shipments, we fell just short on takeaway. So, seasons, I call kind of a wash and then take-home is where we're seeing the strength. But Melissa can give you more details I think offline on that.

Perfect. And then a super quick follow-up. I think you said that Easter was down as expected because of the shorter season, but it was also a bit weaker than expected, presumably because of the pandemic. Is that the way that we should be thinking about it?

The sell-in met our expectations, but the sell-through was slightly weaker than we had anticipated. We experienced strong sell-through until the final week. During that week, coinciding with Easter, the government began advising consumers to avoid grocery stores unless necessary, and many large retailers started to restrict the number of customers allowed in-store at one time. This had a direct effect on sales during the last week of Easter. However, the softness in sell-through that we experienced at that time should not significantly affect our profit and loss.

Hey. Good morning everyone.

Hi Bryan.

Good morning Bryan.

I have a question about the manufacturing flexibility you have with packaging. Specifically, as we look ahead to a future where e-commerce becomes more prominent, this might require different types of packaging, possibly more geared towards grocery and mass-market products for home use rather than convenience items. Additionally, there may be a need for packaging flexibility to address affordability, such as varying pack sizes or types. Given the investments you've made in recent years, do you believe you have the flexibility to make these adjustments and meet potential changes in demand over the next six to nine months?

Yes, I would say, largely, we have flexibility in our manufacturing. I mean we already have a portfolio of products that we're meeting e-commerce demand and that demand has been across every pack type whether it's candy dish, whether it is instant consumables, etc. We already have a multitude of pack sizes that we've always done. This is a category that lives on many different pack types for many different occasions. And then certainly as we're doing some of our supply chain work going forward, one of our goals is to put in even more automation to hopefully improve margins. But we are well set up to be able to adapt to different packs and sizes right now.

And if I could just one follow-up to that is, we've seen in other categories where retailers are kind of narrowing SKUs, want to be in stock, with the highest-velocity SKUs. Have you seen any of that yet in your categories?

Yes, we are. And we think we're well positioned there. As you know, we had just gone through a big SKU rationalization program to get rid of some of the smaller SKUs and on the normal course of business, as we grow our business, we have all of our SKUs categorized with the very highest movers, there are must-haves that must be protected at all cost and then we kind of go through our portfolio. So, we've always managed our business in that way. So, we've been well set up to serve in that priority environment.

Hey. Good morning. Thank you for sliding me in. I guess I'll pick up on one thread from Mr. Spillane in terms of e-com. As we think about maybe what could be different in 2021 assuming all these issues come to pass. The amount of sales going to e-com sounds like it could be the one durable change. So, quick question, just to get a little more context around it. And I guess what really my angle here is to understand the impact on your impulse oriented sales. I think historically you've said about a 30-year portfolio is impulse and you're saying today 15% of that's going through C-store. How much of that is going through food, drug, and mass?

The other 15% is basically the difference between 33% and 15%. Let me just think about that.

And there is a little bit of lending in there too, I think.

Yes, that's what I was trying to think how much would be in those specialty channels spending would be the biggest piece of that. We have some in Club as well in terms of reseller packs at Sam's. I mean, I guess I would estimate, I'm going to say maybe 15% maybe fundraising Lending Club and specialty are 5%, so I'd say maybe 15% goes through drug and mass.

And how is that 15% tracking today?

It's tracking much better than the C-store. It really varies by channel. The drug piece would be the softest piece because overall drug is just not getting as much traffic. I think a lot of people are using drive-through all options; people are trying to stay away from smaller stores. So, the larger majority of that is really going through mass and grocery. It's still softer than take-home, but it is still growing in some of our retailers. Yes, I think with fewer trips, there is certainly some risk that leads to a mix and sales challenges. However, I would like you to consider that in our e-commerce business, we have strong sales of instant consumables. One of our best-selling products has been instant consumable items, both in singles and in cases of about 24. Since our margins are robust, we don't usually offer discounts on bulk instant consumables. Our goal is to continue to grow this segment, which helps counteract the changes in consumer behavior. Another opportunity for us is to capitalize on the trend of consumers making fewer trips but buying larger baskets, and we are focusing on that as well.

Yes, good morning everyone. Michele, the share gains look really healthy and obviously you indicated they accelerated. So, I'm just wondering, what do you think is driving that? Is it a function of just the fact that your fill rates were so good? We are hearing about one of your major competitors of scaling back on some of the SKU count. So, I'm just curious what you're seeing and what you would attribute some of that market share gain to?

Yes, I would absolutely attribute it to our customer service levels. So we've been able to maintain incredibly high customer service levels at that 98%, 98.5%, 99% depending on the month. I think within that we have had very good availability across our portfolio. So, we've been pretty much able to meet the specific product demands as well. So, huge kudos and credit to our manufacturing team who has just done an outstanding job of being ahead of this, building inventory ahead of this, getting raw materials in ahead of this, working with their teams and all of our manufacturing employees who supported doing this. And then I would also say having our retail sales reps out there building displays, stocking shelves, that has also been a very positive impact. So, yes, I would say a lot of it is about the strength of our company in the past has always been a lot around operational excellence and execution, and I think that's really benefiting us on top of course the fact that we feel great about the brands and programs we've had out there, but I do think that's been a difference maker.

And just going back to the question, any changes in the competitive landscape. We are hearing again, one of your major competitors is looking to do their own SKU rationalization program. So, I'm just curious if you've seen that in the marketplace or if you've heard the same?

I would say that we've heard similar things as you regarding a couple of competitors in the category who may have issues with their supply position.

Hi, great. Thank you so much. So, just sort of question on pricing, I mean it seems like you're saying the last week pre-Easter weakness really shouldn't impact the P&L in the near-term. Maybe that suggests that the promotional plans have really been altered, but then I think it also sounded like you said promotional spend could be increasing your price mix sharpened as you go through the year, right, to maybe increased demand overall, but then I also heard that maybe your pricing plans remain on track. So, obviously, there are just a number of comments in there. I just wanted to clarify. Just in general pricing environment and we've heard Easter didn't go so well seasonally let's say in Europe, but obviously because the COVID buying, right, you kind of mask some of that seasonal weakness is there too much product still on the seasonal based on the shelf does that have to be sold through sounds like inventory levels have come down, but pricing sounds to be okay. So, any commentary you can just give kind of around the overall pricing dynamic will be great. Thanks.

We are confident in our pricing strategy for the year and believe our current initiatives are on track with no significant changes expected due to COVID. We anticipated a price increase of two to two and a half points in 2020 and still believe that will hold true. Currently, much of our promotional spending is directed toward driving display, which differs from less impulsive categories that rely on temporary price reductions. Our retail sales team is actively promoting and obtaining display spaces, so we aren’t seeing a major pullback. There may be a small amount, a couple of million dollars, that comes back from trade, but overall we remain focused on driving sales. We are also being mindful of the consumer environment and financial constraints, which is why we think some of our promotional support is justified compared to display efforts. During the holidays, we aim to offer a variety of price points, but I don’t see this as a significant reduction in price. It’s more about offering consumers options for purchasing multiple or larger packs, as opposed to solely focusing on price per pound. Does that address your question?

Yes, that's actually very helpful. It seems like if there's a shift in the mix regarding margins and pack sizes, it might impact pricing. However, it appears that you could mitigate some of that through reduced promotional spending and display, so overall, it seems like we are managing okay. Does that make sense? Back to you.

Yes, I would say net-net, we think we're okay, yes.

Yes, good morning everyone. Michele, the share gains look really healthy and obviously you indicated they accelerated. So, I'm just wondering, what do you think is driving that? Is it a function of just the fact that your fill rates were so good? We are hearing about one of your major competitors of scaling back on some of the SKU count. So, I'm just curious what you're seeing and what you would attribute some of that market share gain to?

Yes, I would absolutely attribute it to our customer service levels. So we've been able to maintain incredibly high customer service levels at that 98%, 98.5%, 99% depending on the month. I think within that we have had very good availability across our portfolio. So, we've been pretty much able to meet the specific product demands as well. So, huge kudos and credit to our manufacturing team who has just done an outstanding job of being ahead of this, building inventory ahead of this, getting raw materials in ahead of this, working with their teams and all of our manufacturing employees who supported doing this. And then I would also say having our retail sales reps out there building displays, stocking shelves, that has also been a very positive impact. So, yes, I would say a lot of it is about the strength of our company in the past has always been a lot around operational excellence and execution, and I think that's really benefiting us on top of course the fact that we feel great about the brands and the programs we've had out there, but I do think that's been a difference maker.

And just going back to the question, any changes in the competitive landscape. We are hearing again, one of your major competitors is looking to do their own SKU rationalization program. So, I'm just curious if you've seen that in the marketplace or if you've heard the same?

No, I would say that we've likely heard similar things as you regarding a couple of competitors in the category, who may have issues with supply and do not have a solid position on it.

Hi, great. Thank you so much. So, just sort of question on pricing, I mean it seems like you're saying the last week pre-Easter weakness really shouldn't impact the P&L in the near-term. Maybe that suggests that the promotional plans have really been altered, but then I think it also sounded like you said promotional spend could be increasing your price mix sharpened as you go through the year, right, to maybe increased demand overall, but then I also heard that maybe your pricing plans remain on track. So, obviously, there are just a number of comments in there. I just wanted to clarify. Just in general pricing environment and we've heard Easter didn't go so well seasonally let's say in Europe, but obviously because the COVID buying, right, you kind of mask some of that seasonal weakness is there too much product still on the seasonal based on the shelf does that have to be sold through sounds like inventory levels have come down, but pricing sounds to be okay. So, any commentary you can just give kind of around the overall pricing dynamic will be great. Thanks.

First, I'd like to say that we are confident in our pricing strategy for the year, and our current initiatives are progressing as planned. We do not anticipate any significant changes due to COVID. We expected a pricing increase of about two to two and a half points in 2020, and we still believe that will hold true. In terms of promotional spending, much of it is currently aimed at driving display in our category. Unlike other categories where price reductions might encourage purchases, our category operates differently. Our retail sales team is actively securing displays, and we are not experiencing a major downturn in that area. There may be a small reduction of a couple of million dollars from trade, but overall, we are continuing to push forward. We are also mindful of the consumer landscape given current financial constraints, which is why we believe some of our promotional support remains beneficial, along with the displays. During the holidays, we aim to ensure a variety of price points are available. It's more about providing options to consumers—whether they want to buy larger or multiple packs or smaller quantities—rather than a direct reduction in price per pack. Does that address your question?

Yes, that’s very helpful. It seems that if there is some mix shift regarding margin and pack size, it could impact pricing. However, it also appears that you might be able to counterbalance some of that with lower promotional spending and display. Overall, it seems like we are in a decent position at this point. Does that make sense? Back to you.

Yes, I would say net-net, we think we're okay, yes. Thank you.

Thank you all for joining us this morning. I'm sure there are still additional questions; I'll be around all day to answer as many of them as I can. Thanks so much. Stay healthy.