Hershey Company (HSY) — Q3 2020 Earnings Call Transcript

Thank you. Good morning, everyone. Thank you for joining us today for The Hershey Company's third quarter 2020 earnings Q&A session. I hope everyone has had the chance to read our press release and looked into our prerecorded management presentation, 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, 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 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.

Great, thanks so much. Good morning, everybody.

Good morning, Andrew.

Good morning.

Hi. I'm curious, for the past several years, Michele, the majority, if not all, of the company's organic sales growth has come really from pricing, as opposed to volume or consumption growth, and much of this is obviously due to the success of the company's new pricing model and the associated volume elasticity that comes with it. I guess, that said, as you look forward into '21 and beyond I'm curious if there is a sort of focus internally on maybe regaining some better balance between the two drivers, and if so, would you expect to see some of that maybe develop more fully next year? Thanks so much.

Yes, Andrew, absolutely. I think we've shared before that we do view pricing as an important part of our growth algorithm, but we are very focused and would like to drive to greater balance between price and volume. We have good visibility into Q4 and 2021, and we do expect volume trends to improve. Part of that will be us lapping some of our pricing elasticity from last year and also a continuation of some of the strong share gains that we've seen to date that will carry into the first part of next year. I think you can definitely count on seeing volume being a more important part of the algorithm next year, and we feel good that the calendar of programming we have, the innovation, the media is really going to help to drive some of that.

Great, thanks very much.

Thank you.

Hi, thank you. Along the same lines of 2021, if I can, Michele, you pulled back a little bit on advertising this quarter. It's been a little up and down this year for understandable reasons. I'm just curious what your thoughts are in general on what the company's plan is for advertising and marketing in general as you get into what hopefully will be a more normal year in 2021.

Sure. So we definitely believe in investing in our brand. That is a critical piece of our growth model and the business. So clearly, as we mentioned to you, we had pulled back on some spend in areas where we just thought, given the pandemic, it didn't make sense. For example, in refreshment, where we knew consumer usage was down significantly, but as we look to 2021, and as we've started to see the momentum that we're seeing and some of the recovery, we definitely plan on taking our investment levels to where we would like them to be, and more in line with where they have been historically. So you'll see us really gleaning in to drive the consumer and to leverage some of the behaviors that we're seeing.

Thank you. For a follow-up, I noticed there were no share repurchases this quarter, which I believe is the first time in two years. The last time was just before you acquired Pirate's Booty. I'm curious if the absence of repurchases suggests a potential deal is on the horizon. Additionally, how would you characterize the current landscape for potential transactions? Are targets possibly more inclined to sell now that they have higher sales figures than usual, or are they hesitant, wanting to benefit from the ongoing demand as long as possible?

Steve, do you want to take that one?

Yes, I'd be happy to. Regarding the share repurchase, I want to emphasize that there's no specific implication to draw from that. This year, we've taken a more cautious approach to liquidity, especially considering the beginning of the year and the COVID situation. We're planning to reassess this as we move into next year, but overall, our priorities for capital allocation remain unchanged. Concerning M&A, the scenario is somewhat different. Many targets are still holding onto their valuation expectations as they did before COVID, if not higher. However, we are actively pursuing several opportunities and will keep the market updated as necessary.

Great, thank you both.

Hi, thank you. I think the recovery expected in 2021 in International and Other is facing a 2% headwind this year in 2020, but can you provide some insight into the state of your business in Mexico, India, and China? Is it reasonable to expect things to return to normal, or has the pandemic affected your commercial abilities or the willingness of retailers to sell confectionary products in those markets?

Yes, so first of all, I'd start by saying certainly there's a lot of uncertainty and volatility with the pandemic. We all know that we're seeing the ups and downs of occasional increases and spikes in markets around the globe. That said, I would say that we were pleasantly surprised by our performance in International. Our team did a great job executing in this very challenging environment, and I think that we've seen, while each market is a little different and the use of the category is a little bit different, consumers are really looking during this time for brands they trust, and we've done a great job over the past couple of years building the Hershey equity. So we were pleased with the rebound we saw in many of our markets. I think I mentioned in India our business was up 6% versus it had been doing. We gained market share across almost every market on our core chocolate category. So, I wouldn't say that we believe our ability to drive the business has been impaired in any market on a permanent basis. Just as we are pivoting in the U.S., I think we've pivoted to where the opportunities are in international, and we feel good about the recovery, and plan to deliver against that.

Thanks. Can I dive a little bit deeper into Mexico, are there any packaging requirements that the government is making on nutritional values or any concerns about the category, how that might impact the category?

Yes, absolutely. So the government did put in place front-of-pack labeling changes in Mexico, and that new packaging is now in the market, and we are beginning to monitor the trend. We believe consumers know our category is a treat, they know it has sugar, and so, we expect that we'll see less impact from that than perhaps other categories will, but we will, of course, keep a close eye on that, and I would say Mexico has been one of the harder-hit developing markets relative to COVID. So, we feel good about the progress we're seeing, but it's a little slower than some of the other markets.

Okay, very good. Thank you.

Thanks. Good morning. A question on your share gains in the U.S., and particularly in chocolate. You really, and in your prepared remarks, you touched on this how adaptive you were by market, by channel, by need state and then in terms of S'mores, and some of that is related or might be related to supply chain. Could you talk about that part of it? And then I think the reason I'm asking is because if there is a supply chain breakdown or lack of adaptability by a competitor maybe that will represent share gains that they can reverse somewhat in '21, and I have a follow-up.

Yes, I truly believe our share gains reflect our strong brands, understanding of consumers, effective programming, and successful supply chain and retail execution, which are fundamental strengths for us. Our categories and brands are clearly resonating with consumers. Early on, we recognized the shift in consumer behavior and adapted our focus towards S'mores, Twizzlers for movie nights, and our baking products. For Halloween, we decided to fully embrace the season and prepare early to attract consumers before Trick-or-Treat. We ensured our product offerings were smartly balanced and worked hard on messaging safe ways to celebrate the holiday. We increased our ecommerce presence to meet the shift in consumer behavior, leveraging our investments in capabilities. Over the years, we've also made significant investments in understanding consumer trends, enhancing our forecasting, improving targeted media, and upgrading our plants to quickly adapt to safety protocols. We kept our retail sales team actively engaged in retail. Looking ahead, we expect to continue gaining market share, especially through the spring of 2021, with a projection of moderation afterward. We plan to maintain our market share while continuing to deliver exceptional programming and execute our supply chain effectively.

That's helpful. Thank you. Regarding any one-time expenses from this year that we should consider from a modeling perspective, I'm thinking about COVID-related friction costs this year. Additionally, you might include some SG&A in parts and other one-time comparisons that we should keep in mind. Thanks.

Yes, we discussed this in the prepared remarks. On the top line, we experienced about a two-point impact. This indicates a corresponding decrease in profitability. However, when we consider the net costs associated with COVID, such as protective equipment and employee incentives from earlier this year, and offset those against the DME and BD optimizations we implemented, along with travel and entertainment savings, it results in a slight positive on those aspects. We expect most of that to diminish over time. There will be some residual costs next year, likely fewer one-off expenses each quarter related to COVID, PPE, and similar items that persist, but overall, it was just a minor positive aside from the two-point drag on the top line.

Thank you.

Hi, good morning.

Good morning.

Hi. I had a question for you. If I look back at Halloween, I'm curious if you slipped this season apart, and you had given some information on this last quarter, sort of the early season part and the Trick-or-Treat season part, kind of how each piece performed, if you can give a little color on that? We have some information from IRI, but I'm curious if you have better information than we have, and then, I'm also curious, as I think about that early part, if that's more indicative of what you expect for the holiday season as you move into Christmas and that kind of time where you don't have a Trick-or-Treat event. Can that early season, if you start that season early in particular in stores, be more like what we saw in the early part of Halloween, if that makes sense?

Yes. So, clearly, we saw that within the season, the early part of the season performed more strongly, and the later part that's more Trick-or-Treat focused performed a little bit softer. Now, we had anticipated that. So, overall, the season performed exactly in line with our expectations. As we look at the total season, we were quite pleased that our sales were actually up versus a year ago as was our sell-through up versus a year ago. So, during a time of the global pandemic I think it speaks to the resiliency of the category, and the consumers' desire to really hold on to and continue to celebrate the traditions, and fun occasions like this in their family lives. As we look at holiday, holiday has some different consumer dynamics than Halloween, and so, we believe it will behave a little differently. I don't think we're going to have some of the pressure that we anticipated coming into Halloween. The category should be quite strong. Consumers use the product in different ways. It's much more about family occasions. We aren't as big in gifting some of the areas of the category that might be a little bit more hard-hit. So, we expect solid results given that skew to at-home consumption.

Thank you. To follow up on that, are you shipping holiday products early, and has this had an additional benefit? Do we see some of that in the third quarter compared to what we typically see?

Yes, we did start shipping holiday products a bit early, similar to what we did with Halloween. This timing results in some pick-up in the third quarter, which may slightly affect the fourth quarter. We are looking at around 50 basis points. Our aim is to encourage consumer behavior early, just as we did with Halloween, ensuring that while Halloween was still available, holiday products were also on the shelves, allowing consumers to quickly shift their attention to holiday items.

Yes, we started shipping for the holiday season a bit earlier, similar to what we did for Halloween. This resulted in some pick-up in the third quarter, which will affect the fourth quarter slightly. We're looking at around 50 basis points in that order, and we aim to encourage consumer behavior early, just as we did with Halloween. While Halloween products were still available, we also introduced holiday items to encourage consumers to shift towards the holiday offerings quickly.

Yes, strong Halloween sell-through really helps us because it helps us get that fast start to holidays because it clears the space to be able to put holiday on the floor.

Okay. Thanks so much for the color there.

Absolutely.

Hey, good morning folks. Congratulations on a good quarter first of all.

Thank you.

I want to pick up on the back of Chris' questions and tease out little bit more of the outlook on holidays going forward. The Halloween early part selling was phenomenally smarter much than I think any of us expected. I think a big part of that is due to the merchandizing programs that retailers had. Think they started bigger and earlier than they usually do. Has that you think influenced how they are going to approach other seasons going forward? Said more directly, you expect retailers to provide more merchandising power behind the category into holiday, into Easter than they otherwise would coming out of the success we saw in Halloween?

So, we've always had pretty strong merchandizing support at every season, and one thing we always think about with season is when we get it on the floor because we know that consumers will buy that holiday or seasonal product whether it's Easter wherever early for in-home consumption. If you get it out there, it kind of sparks the trigger of fun moments earlier. So, I don't know that I could say specifically that we can anticipate that retailers are going to merchandize it even more than they ever have. I do think that they will be focused on making sure that they definitely get it out early to capture the early part of the season since that is the piece that is a bit more stable. There were a few retailers as you can imagine with the uncertainty of Halloween and the fact that all these decisions about what to do with Halloween really had to be made in early May when things were quite uncertain and schools were closed and bars and restaurants and all of that. So, there are few retailers who had pulled back on Halloween, and based on the results of the season this year, they will likely have more confidence going forward which should help to make even stronger Halloween next year and probably also build confidence for the other seasons like Easter.

That makes a lot of sense. I have one more question following up on Chris' solid questions. The early part of the season was exceptionally strong, while the later part was somewhat weaker. However, I believe you mentioned that overall for the holiday, both the early and late parts finished in the mid-single digits for the category. I think to see the category drop into single digits, we will need to observe some significant declines in retail sales data in the upcoming weeks as we assess the later part of the season. Am I thinking about this correctly? Am I interpreting your comments right?

Yes. Yes, you are interpreting them correctly. So, category was down mid single digit overall as much as our business was actually up, and, we will see some of those declines.

Okay, thank you very much.

One other thing that to just keep in mind, there is a little bit of a timing impact from the Nielsen and IRI data given the season was on the Saturday versus on Thursday and based on retail reported days. So, you'll probably even see it's down even more, and you'll have to wait till kind of mid November till you see some of those last couple of days being reported. So, some of it when you see will be just the timing shift of the day of the week, and some of it will certainly be the declines in Trick-or-Treat at the end.

Understood. Thank you.

Great, thank you. Good morning and congratulations on the great execution in the quarter.

Thanks David.

I have two questions. The first one is regarding the other expense commentary. I noticed that the year-to-date other expense is a small amount, but your full-year projection of $100 to $110 million indicates that it will be a significant number in the fourth quarter. Am I understanding this correctly? Also, in relation to your volume expectations for the fourth quarter, you mentioned in your prepared remarks that North American organic growth is expected to be similar to the third quarter with pricing only half a point. Does that suggest that volume will be approximately five percentage points positive in the fourth quarter? Am I correct on both points? Any additional insights you can provide on these topics would be appreciated.

Yes, I would be happy to do. So, on the tax side and other expense, you're exactly right. We will have a large other expense in the fourth quarter. Now that's consistent with what we have been seeing even in the early guidance earlier in the year, and then along with that, a lower tax rate in the fourth quarter to do the math on the tax rate you also have to solve for a lower tax rate, so that's how those two lines will play out, and yes, on the volume up in the fourth quarter, you're thinking about it the right way. We do have some inventory replenishment that will happen in the fourth quarter. We saw that in the third. We'll see some more of that or that continue into the fourth. We're also lapping some elasticity after the price increase last year and in this continued strong share gains. Those three things are part of driving that fourth quarter volume.

Michele, like bigger picture question, first, you took pricing in most of the portfolio outside of seasonal candies in 2018 and then in 2019. Given the negative impacts to Halloween for the entire category, would you agree that now is probably not the time for seasonal price increase actions, maybe this gets delayed to 2022 or sometime later until we get a normal consumer environment? Essentially, I'm just asking you to assess your ability to pass through cost increases through pricing actions. It's a weird environment, and I don't know how it's altered that calculus. Thank you.

I can't discuss any specifics about upcoming pricing actions. However, our pricing strategy remains focused on smaller, more frequent increases. This doesn't mean we'll have the same pricing every year or always announce pricing at the same time. For instance, we had a small price increase in our food service business last year during the third quarter. Over time, we have managed to adjust our pricing in accordance with different economic conditions. While pricing is a key aspect of our strategy, we aim for balanced growth across various factors such as distribution, velocity, innovation, and price. Currently, we have not announced a price increase, and it's reasonable to expect that the magnitude of pricing in 2021 will be less than previous years at this point. We are pleased with our conversion rates this year, even amid a challenging economic environment, which reflects the resilience of the category and the strength of our brands. Our continued investment in our brands enhances our pricing power.

Really helpful. Thank you so much.

Yes. Hi, thanks. Good morning, I guess building somewhat on earlier questions, I'd love a little bit more color around your general mindset heading into 2021 as you work through your planning process. Clearly there are parts of your business that have been under pressure this year, international, movie theaters, vending specialty, et cetera, and hopefully all those set up for at least directional recovery in the year ahead, but at the same time you've been gaining a lot of share, you've had great success in at-home categories like baking and with initiatives like S'mores, all of which is fantastic momentum, but again could set up for difficult year-over-year comparisons. So, as you size it all together, I guess, is there a way to frame your thinking at a summary level to what degree those various puts and takes sort of just met each other out in your mind? Or are you approaching 2021 planning thinking we've got either a net easier or a net harder set up versus what one like it sort of typical? Thanks.

Yes, so, we're pleased with the momentums that we are seeing, and I would say, your call-outs in what you shared about some of the ups and downs on the business, I think, are very accurate. We believe we're seeing that our category and our brands really resonate with consumers and especially at a time like this, where they're looking for some of those moments of goodness, moments of happiness. We're really pleased with how we've been able to pivot with the consumer and also pivot with our capabilities to be able to execute within this environment, and we feel good about that momentum and our ability to continue pivoting. So, this year, obviously, it was consumer shifted to take home, and so, we dialed up S'mores and we dialed up Twizzlers and we dialed up baking, and we leaned in to create the season to make sure that we could capture that opportunity giving consumers new ways to participate in Halloween that frankly we believe those things like candy slides and candy graveyards, and all the creative things people did, will probably become a part of their ongoing traditions, and they have just evolved. As I mentioned, we were able to dial in and accelerate e-commerce, and I think as we look to next year, we're prepared if the consumer pivots yet again to be able to pivot with them, I think we've built and we've demonstrated ability to execute well during this environment, and also to pivot from an executional perspective, whether it's at retail, or in our manufacturing facility. So we're very focused on that, we've captured as well some cultural, positive effects, I think capabilities we've built in terms of operating in this environment that perhaps allow us to make decisions more quickly, and we think that is an enabler for us going forward. So we feel good about that as we look to the future.

Thanks for that, Michele. I don't know if you want to take this one or Steve, but just as a follow-up, sort of unrelated, just any comments you might have on just current levels of promotion, the promotional environment, what you expect to see over the balance of 4Q and into '21? Thanks.

Yes, we don't see any significant change relative to promotional activity. We didn't really see it this year, we didn't execute anything significantly differently, and nor do we expect to see anything in the future.

Okay, perfect. Appreciate it.

Yes, good morning everyone. Michele, I was hoping you could provide some context on the partnership with Google that you utilized during the Halloween period, and do you believe this capability can be leveraged for this holiday season, but also kind of in your everyday business, as you kind of look forward?

We're continuing to leverage different types of data and analytic and insights more and more across the business, and we continue to really try and stay on top of tracking consumer sentiment, and leveraging data and analytics to tailor copy to tailor messaging to tailor media. So, more and more, we're operating at a more sophisticated level relative to using multiple data sources, and also using that to reach consumers at the right places, with the right message at the right time.

And I guess what I'm trying to get at is, is this kind of new way of kind of targeting consumers like the return that you see from what you've done like, can you just give us any kind of understanding, because one thing I'm noticing across the entire CPG landscape is, companies are spending more money, but they're spending more money on the same message, and in fact, new consumers are being recruited, usage occasions are changing, and so it really requires a change in how you talk to those consumers, and so I find this, Google partnership incredibly compelling for you guys. So I'm just trying to get better context on how it's changing the return profile of your spend, if you can provide any context on that?

So we have a continuous focus on optimizing media and the returns on our media, we always have, we've had strong media ROI forever, and our challenges, how do we keep making them better, and then we continuously optimize based on that. So right now, it's a big spend area for us. So it's an area we're very focused on elevating, and it is about you making sure right now, I would say some of the biggest opportunity is that opportunity of even more precise targeting, and then once you have that target, the ability to alter the message so and then we alter our media mix accordingly, and I would say we see significant movement in that mix on a year-to-year basis as we get better at that, I think we've raised some of the opportunities of how we've gone just very deep relative to specific seasons, whether it's the S'mores by zip code, or whether it's specific holidays and looking at sell-through at the store level basis to be able to dial-up media on a zip code level basis. So you'll continue to see more of that, frankly, that's just becoming a way of how we operate now.

Great, and last question, just from an innovation standpoint, can you just provide any context on kind of what's remaining in terms of innovation this year, and how things are going to work in 2021, if there's any clarity you can provide on the launch timing?

Yes, so we feel very good about our innovation. Some of the innovations that we're excited about that are new to the market include the Reese pretzel product, a Reese cup with pretzels in it. We've had a range of Kit Kat flavors. We know on a global basis a big part of the Kit Kat portfolio, our flavors, they tend to do quite well. We are on a very small level launching snack cakes under our Reese's trademark which delivers that Reese experience in a slightly different type of product form, and we feel good on that, based on some of the early test results, and we will have more coming. Some items on our take-home side of our business, that won't get announced till early next year which is typically the time we announce those things just given reset windows. No major change in our innovation strategy. We think it's working very well for us, we think it's right-sized, and we think it's delivering much more sustainable results.

Great, I'll pass it on. Thank you.

Thank you. Good morning.

Good morning.

Good morning.

You've talked about the increase in ecommerce sales, even if it might have decelerated a little bit, but it's up very strongly. You've said in the past that basket and dollar rings are higher online. Is that still holding true with the growth that you're seeing now? And on the margin side, you've mentioned that there's a small gap, but that you were narrowing it and that scale would help that. Is that coming along the way that you would have expected, how does that look now?

Yes, I mean we've generally seen larger basket sizes in general across most channels this year as people are doing fewer trips and more quantity per trip. So I think that's been somewhat of just an underlying dynamic given the pandemic impact in the marketplace. For us, on our ecommerce business, we've seen very significant growth across the board, but particularly in click-and-collect where people actually go and pick up their groceries, and also in the local delivery models as well versus kind of national deliver. The margins that we have are similar to what we see in bricks-and-mortar.

Okay, great. That's helpful.

In those two areas where we have similar products, obviously, that we sell in physical stores.

Right.

Yes, I would say is that, we've said in the past, that overall, ecommerce margins are a little bit dilutive, and it's there, as Michele just said, in click-and-collect and local delivery very similar, not much impact, and that's probably two-thirds of our ecommerce business. The piece that is more dilutive is the ship-to-home, and in particular cold ship, and that's an area where we continue to work with our customers and look at our overall investment with those customers and joint business planning to drive efficiencies over time so that those margins align.

Okay, thanks, and I just want to follow up on S'mores. I thought that your data analysis and insight there to push that the way that you did was interesting. As you're seeing cases rise again now are you replicating that? Are you seeing similar results? Is there a S'mores surge we should expect, and that would be it be right to assume that those Hershey Milk Chocolate Bars are probably some of the highest margin ones that you have?

So we have really expanded S'mores from at one point it was a very focused time of year to really capturing S'mores as a year-round opportunity especially if you think about how different weather is across the entire country. There are lots of opportunities to continue to expand that. So we're very focused on that. We're also very focused on the upcoming baking season, where we know that consumers will be spending time at home. It's already a natural baking season, and so, we'll be looking to really optimize what we're able to drive leveraging insights around that season as well.

Okay, great. Thanks a lot.

Good morning, everyone. I have a question regarding the commentary about inflation in the cost of goods sold. Steve, could you provide an overview of the current situation regarding commodity costs and the inflation of goods? It seems that freight costs are rising and some competitors have mentioned an increase in cocoa prices. I would like to understand the current trend of inflation.

Overall, it's been relatively stable for us regarding commodities. We experienced significant fluctuations in commodities during Q2 and Q3, and we've previously discussed how we’re managing that volatility through our hedging program. Currently, commodities are fairly stable. There have been increases in freight costs, but our team has effectively managed this through longer-term contracting, which has lessened the impact of those increases. This hasn't had a significant material effect on us. We have noticed some increased warehousing costs due to volume growth and share gains. While we mentioned this in our prepared remarks, overall, COGS appears to be stable at this point. We will provide more guidance on 2021 during our fourth-quarter call.

We can infer that stability appears to be something that will likely continue into next year unless there are changes.

Yes, I think that's reasonable. Next year, the crops of cocoa from 2020 and 2021 will start to show effects of the LID. So that's one factor to consider. Additionally, there are other aspects to keep in mind regarding gross margins, as Michele mentioned, which are influenced more by volume than by price. Next year, we'll continue to pursue our productivity goals, and we will provide more details on this during the fourth quarter call.

All right, thanks, Steve. That's very helpful. Have a happy Thanksgiving everyone.

Thank you.

Thank you.

Good morning. Thanks for the question.

Good morning.

Good morning.

Michele, I'd like to follow up on the Reese's snack cake. You mentioned that it's small right now, but Hershey went down this path about 15 years ago, and it didn't really translate into anything material. So, I'm curious what the data tells you in terms of changes in the landscape now. Does this maybe mark a new phase of the snack section evolution? I guess where do you think it slots in? I mean does it compete against the Twinkies or cookies, just where's the target market? Any big picture thoughts would be appreciated.

Yes, definitely. We've taken a very careful and strategic approach to this, opting for a targeted launch instead of a large-scale roll out all at once. This allowed us to learn more about the market. We dedicated significant time to product development to fully understand the factors that drive appeal in the snack cake segment. Our launch is focused primarily on convenience stores, offering a single-serve product. It maintains the distinctive chocolate and peanut butter flavor of Reese's in the snack cake market. We've previously engaged with this category through licensing and recognized the potential for our brands to expand into it. Additionally, with the increasing trend of morning snacking, we see an opportunity to grow in this area, as snack cakes are often consumed at that time. We will ensure our launch remains focused, placing our product in locations where we can increase visibility and align with consumer preferences, starting with convenience stores and potentially expanding to select other venues if performance is strong, with careful monitoring throughout.

Great. Thanks, Michele.

Good morning, everyone.

Hi, Alexia.

Good morning.

Hi, Buck. Can I just talk about the C-store channel specifically? It's obviously been under pressure because of the pandemic, but I imagine that that happens in sequential improvement, and could you maybe just give us some numbers about how that channel is recovering?

Absolutely. So, as you said, we've continued to see strength in food, and mass, and dollar as consumers eat more at home. The c-store class did see a bit of recovery in the third quarter. So, we saw the business grow in the low single digits in the third quarter, which is definitely an improvement versus those early pandemic trends. It did then slow a little bit as summer ended and those summer road trips decreased with kids going back to school. Our business has tracked pretty much in line with the channel, and significantly ahead of the category. So, we have share gains of about 120 basis points in Q3 in that channel. So, I'm seeing some rebounds and some recovery versus where it was in the past as people are out and about a little bit more than they were.

Great, and as a follow-up to Bryan Spillane's question about freight costs, I remember that back in 2018, the spike in freight costs was quite a significant challenge for you. It appears that this time it isn't much of an issue. Could you provide an estimate of what portion of COGS freight constitutes, how much of that is already contracted, and what insights you've gained since 2018 that have made the current situation more manageable? Thank you.

Sure. So, yes, freight costs right now, we don't see as a material impact as it continues to rise, it will have a bigger impact right now again because we're contracted and our teams do a great job of managing those contracts, it's not having as material of an impact. It's roughly 10% of COGS overall. So, it's not in material, but right now, not seeing enough movement there given the contracting to really drive a material dock on overall COGS.

Great, thank you very much. I'll pass it on.

Good morning. Thank you very much, and I hope everyone had a great Halloween. Personally and professionally, my goal has always been to hand out full-sized candy bars, and I was able to do that again this year, so thank you. I have two quick questions. First, I noticed in the data that your pricing in North America is up by 19 on the take-away and 33 as reported. Is that purely mathematical, or is there some reduction or different mix affecting retailer margins? My second question is about velocity; historically, today's velocity tends to predict tomorrow's distribution, and your velocity has been excellent. This year is unusual, as many companies have strong velocity, but do you expect to gain shelf space in everyday items? When looking at baking products and take-home items, the velocity is significantly better, regardless of total sales. Do you foresee substantial share gains, possibly structural ones, in terms of shelf space as retailers reset for the holiday season and beyond? Thank you.

Sure. Your question has two parts. The first is about pricing and some discrepancies, and yes, there is a mix impact. It may be best for Melissa to provide a deeper explanation, as it is somewhat complex; however, the profit and loss statement is definitely accurate. Regarding velocity, I appreciate your comment about today's velocity being tomorrow's distribution, and I believe that's very true. As for the holiday season, we have successfully secured additional distribution and SKUs throughout the year, both in everyday items and seasonal products because we were able to supply them, and they sold well. We feel positive about this. We will maintain a disciplined approach and ensure we don't over-saturate the market. We need to assess the productivity of each SKU, and as long as performance is strong, we will pursue those opportunities. We have indeed gained more distribution, and I expect this trend to continue, possibly extending into the first quarter of next year.

Thanks very much, and I'll follow up with Melissa.

Very good.

Hey, good morning, everyone.

Good morning, Ken.

I just have one quick question. Everything has been asked and answered. You made a reference in the prepared remarks about performance being tracked ahead of your strategic plans. Can you talk about what are the key learnings that you've developed through your years as a CEO that has really helped you kind of make this a better acquisition and implement it? What are your key learnings, and what do you take forward to future acquisitions?

I think there are many lessons we've learned along the way. To begin with, our company excels with a specific business model for brands, particularly those that are significant in scale, ideally around the $100 million mark, and that possess a high growth margin as that's essential for our operations. As a branded company, we invest heavily in marketing, which, along with our high margins, allows us to continually invest and grow. This insight has been crucial in helping us choose the right assets. Additionally, understanding the strengths of each brand and determining which key performance indicators best predict a brand's potential for scaling has been vital. We’ve also focused on improving our scaling practices; we’ve learned from past experiences where we acquired businesses that were too small or had lower margins, and where our execution on scaling wasn't as effective. Now, we are more intentional in our efforts to scale, honing our supply chain and attracting the right talent while maintaining the entrepreneurial spirit and brand knowledge. Ultimately, the key elements for us are scale, the branded nature, and high margins, along with selecting the correct underlying KPIs to ensure sustainability, as this will enable us to grow effectively.

Great, I really appreciate it. Thanks. Stay well.

Thank you.

Thank you all for joining us this morning. I will be available after the call to answer any additional questions you may have. Have a great day.