The Hershey Company

Good morning, everyone, and welcome to the pre-recorded discussion of the Hershey Company's second quarter 2020 earnings results. My name is Melissa Poole, and I'm the Vice President of Investor Relations at Hershey. Joining me today are Hershey's Chairman and CEO, Michelle Buck, and Hershey's Senior Vice President and CFO, Steve Voskal. In addition to these remarks, we will host an analyst Q&A only session at 8.30 a.m. Eastern on the morning of July 23rd. A replay of this webcast And our subsequent Q&A session will be available on the investor relations section of our website, along with their corresponding transcripts. During the course of today's discussion, management will 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 during today's discussion, we will 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 GAP. Reconciliations to the GAP results are included in this morning's press release. It is now my pleasure to introduce our Chairman and CEO, Michelle Buck.

Thank you, Melissa, and good morning, everyone. On behalf of the entire company, we hope you, your colleagues, and your loved ones are continuing to stay safe and healthy. We have all experienced significant change and new challenges over these past several months. Things we never predicted are now realities that we are all adapting to. Things we thought would evolve over the course of several years have changed in weeks. I could not be prouder of the Hershey organization for how they have responded. At the center of our culture is the shared belief that Hershey and its people stand for togetherness, integrity, excellence, and making a difference. These values have shined even more brightly over the past several months. Our teams have worked together tirelessly to keep each other safe, our supply chain running, our customers' needs met, and our consumers stocked with snacks that make their lives a little more delicious during these very difficult times. Our teammates have done this with care and compassion for each other and the communities in which they live. And they are energized and inspired to leverage this moment to drive positive change for the future. I want to thank the entire organization from retail to manufacturing and across our corporate, international, and regional offices for the hard work and commitment they bring every day. The marketplace remains volatile as the virus and consumer behavior evolve. We saw significant changes as we progressed through the second quarter, but our teams did a fantastic job of adapting to these changes and continued to execute exceptionally well. The first half of the quarter was particularly challenging as global economic growth contracted and government mandated restrictions and closures impacted consumer mobility and in turn, our performance. We did see an improvement later in the quarter as economies began to reopen and consumers returned to more activities outside the home. We continue to feel good about our long-term strategies and the strength we saw in our core products and channels during the quarter. Despite new challenges and increased complexities, we delivered profitable, category-leading sales growth in North America. These gains We're offset by sales declines in areas heavily impacted by the pandemic and related government restrictions and consumer mobility limitations. Our agile investment mindset enabled us to quickly pivot and mitigate sales declines in areas impacted by consumer mobility restrictions. In addition, our advantaged margin structure and strong cost management helped us to mitigate incremental COVID-19 related costs. to enable us to deliver adjusted earnings per share in line with last year. We expect accelerated sales growth in the second half of the year, based on momentum exiting the quarter, assuming there's no significant disruption to current consumer trends. We also expect pricing and strong cost management to drive margin expansion and earnings growth in the second half of the year. Now let me share some details on our North American business. While we have seen significant channel disruption and changes in consumer behavior, our brands and categories remain an important part of consumers' lives and have performed relatively well. We saw strong performance in the food, math, dollar, and e-commerce classes of trade, consistent with broader channel trends. Our e-commerce sales growth remained significantly higher than our pre-COVID baseline, with year-over-year sales growth accelerating further in the second quarter to 200%. Category trends in drug, convenience, and club channels were more pressured, though all sequentially improved as we progressed through the quarter as consumers returned to more normal activities away from home. While COVID-19 has impacted traffic to some key channels in the short term, we continue to believe our channel diversification is a long-term strategic advantage. Despite some of these pressures, our combined retail takeaway in measured channels was up over 4% in the quarter, and it was up almost 9% in June. Importantly, We are winning share in every channel this year, and our share growth is strongest in the largest channels that are experiencing the most growth. We are leading not only through our portfolio of iconic brands, consumer relevant marketing, and strong execution, but with our thought leadership as well. Within Confection, this has enabled us to drive growth that far exceeds the category. and expand our number one share position in the U.S. Our category share grew 225 basis points in the second quarter, bringing our year-to-date share gain to 150 basis points. The chocolate category is performing well, with growth of approximately 4% in measured channels for the first half of the year, despite a shorter Easter. Everyday chocolate sales have consistently grown 9% since the pandemic began. While take-home products are driving outsized growth, instant consumable products are also growing. Hershey has outperformed the category with sales growth across brands that accelerated as we progressed through the quarter. In June, Hershey's chocolate portfolio grew 13%. with Reese's, Hershey's, and Kit Kat brands each growing 14%. Key brands, such as Payday, York, Almond Joy, Mounds, Heath, and Rolo, also all grew during the month, resulting in a combined growth rate of over 11%. Our key chocolate innovation is also performing well. As we discussed in April, much of our innovation was launched prior to the pandemic hitting the U.S., Despite softening convenience store trends in the quarter, our instant consumable innovation remains on track. Our Reese's Take 5 relaunch is set to double the size of the brand this year to approximately $70 million of retail sales. And our KitKat flavor innovation is doing very well. With KitKat Duos and KitKat Birthday Cake, both driving incremental brand household penetration and frequency. Distribution of our new Thins innovation was delayed slightly by the pandemic at several customers, but it's now in full distribution and velocities are strong. We have secured strong merchandising in-store for our key summer promotions, including S'mores, Twizzlers, and our Reese's Lovers In-N-Out promotions. Our teams have shown great agility to adjust messaging and deliver consumer-relevant content to drive growth of 14% on these programs versus last year. Our Twizzlers and Jolly Rancher brands grew a combined 6% in the second quarter, also ahead of the category. Our strong in-store merchandising on Twizzlers has been amplified by consumer-relevant marketing to drive accelerated growth this summer as consumers enjoy this classic treat while watching movies at home or in the car on their summer road trips. As we mentioned in April, the refreshment category has been negatively impacted by social distancing as the functional need for breath freshening has lessened. While trends have improved since April, the category continued to decline 20 to 25% in June. Our business has trended relatively in line with the category. We expect category trends to remain challenged until social distancing guidelines relax. Sales for our baking items are performing exceptionally well, with growth of over 40% in the second quarter. This growth was across products, including syrup, baking chips, toppings, and cocoa, as consumers spend more time at home together in the kitchen. We have capitalized on this trend to sustain momentum, increasing marketing spend, and generating more content and recipes for our consumers. This is important for the second half of the year when baking takes on an even bigger role in U.S. households. Finally, let me touch on our Better For You Snack portfolio. Our salty snack brands have shown solid growth this year. As we shared on our call in April, we did experience some softness early in the second quarter as our in-store presence and supply was negatively impacted by COVID-19. We worked quickly to improve our execution and in-store distribution and merchandising, resulting in accelerated performance in late May and June. In the month of June, our Skinny Pop and Pirate's Booty brands grew 8.4% and 3.7% respectively in measured channels. And total sales growth outpaced these levels, bolstered by strong growth in club and e-commerce. While we saw strong sales growth in measured channels, as expected, This was partially offset by significant declines in our food service and specialty retail businesses. Trends improved as we progressed through the quarter as many locations reopened. However, traffic and sales remained below prior year levels in June. While we expect the second half headwind in these channels to be less severe than the second quarter impact, uncertainty remains as consumer behaviors continue to evolve COVID-19 cases rise and regions consider mitigating actions to control the spread of the virus. Before I discuss our international segment, let me spend a few minutes providing an update on Halloween. As many of you know, Halloween is our largest season and it represents approximately 10% of our annual sales. We begin manufacturing product in the second quarter. and primarily ship product to stores in the third quarter. Halloween celebrations are likely to be different this year, with an earlier start to the season and more geographic differences than in prior years. We expect that there will be more at-home activities with families sharing timeless traditions and new ways for people to celebrate with neighbors. It is important to note that nearly 50% of Halloween candy spent is on Treat for Me and Candy Bowl occasions, which start early in the season. Trick-or-treating represents the other 50% of the season, with sales concentrated in the last two weeks of October. While research indicates trick-or-treating participation will likely be low prior year levels due to COVID-19 concerns, The expectation of this holiday tradition has been consistently improving over the past several weeks. We expect to outperform the category given our iconic brand, strong innovation and merchandising, and great execution. While we have visibility to orders and current consumer intentions, we expect the virus and consumer sentiment to evolve in the months leading up to the season. which could present some risk to sell through. We will continue to monitor consumer behavior and local guidelines and partner with our retailers to help consumers celebrate the season of Halloween during this uncertain time. Now let me shift gears and discuss our international and other segments. As anticipated, second quarter results were significantly impacted by COVID-19, As we shared in April, our owned retail Chocolate World locations were closed during the second quarter, and we saw a meaningful impact on our travel retail business as air travel declined. While our locations have begun to reopen and air travel is beginning to improve, traffic remains well below historic levels, and we anticipate a slower recovery in these channels. In several of our key international markets, notably Mexico, India, and Brazil, we have seen a significant increase in coronavirus cases over the past several months. While measures to stem the spread of the virus have varied by country, we have consistently seen these measures and their associated economic impact pressure chocolate category sales. In many of these markets, Chocolate consumption is not as embedded in the culture as it is in the United States, and it is premium priced versus other food and snacking options. Category trends did improve as the quarter progressed, but they remain below prior year levels. While we saw strength in some of our other items in key markets, such as cocoa powder, syrup, and spreads, it wasn't enough to offset the chocolate declines. We have responded to these recent trends and scaled back investments accordingly to help mitigate the COVID-19 impact on our business. We remain committed to our international strategy over the long term, and we will maintain an appropriate level of investment to capture opportunities as the macroeconomic environment and pandemic improve. Now, let me turn it over to Steve to provide some more details of our financial results as well as our outlook for the rest of the year.

Steve? Thanks, Michelle, and good morning, everyone. Before reviewing the detailed results for the second quarter, I want to build on Michelle's remarks and commend our team's ability to adapt, execute, and make smart decisions quickly during this unprecedented time. While our top line was challenged due to COVID-19-related softness in certain areas of the business, And we incurred incremental costs related to the pandemic, strong price realization in North America, and proactive cost management allowed us to sustain profitability and deliver earnings in line with last year. As we look to the balance of the year, we anticipate incremental improvement to our top lines. and feel good about the plans we have in place to continue to adapt and manage the opportunities and challenges that may arise in this dynamic operating environment. During the second quarter, reported net sales decreased by 3.4% versus the same period a year ago, with an organic constant currency decline of 3.5%. As Michelle mentioned, These declines were driven by COVID-19 related pressures to our international and other segments, as well as non-traditional channels in the U.S., such as food service and specialty retail. These declines were partially offset by strength in our confection business in measured channels, which benefited from elevated at-home demand and strong price realization. Despite these top line challenges and incremental COVID-19 related manufacturing costs, price realization and productivity savings enabled us to maintain our peer leading adjusted gross margin of 46.4% in the second quarter, relatively in line with prior year. Adjusted operating profit increased 4.4% in the second quarter, resulting in a 170 basis point improvement to operating profit margin versus the prior year period. Incremental incentives, cleaning and PPE costs were more than offset by travel and meeting expense favorability as well as marketing spend optimization to align with consumer demand changes in the quarter. In North America, organic constant currency sales growth of 0.4% was driven by pricing and elevated at-home consumption of our chocolate and baking items. This was partially offset by sales declines in food service, specialty retail, and our refreshment brands due to COVID-19. Price realization contributed 4.2 points in the quarter, which was slightly ahead of expectations due to incremental trade efficiencies realized from revenue management and selective programming choices related to COVID-19. We continue to expect second half price realization to be approximately 1.5 to 2 points, driven primarily by our July 2019 price increase. Food service, specialty retail, and refreshment were each down approximately 40% during the second quarter. We continue to expect these businesses to be negatively impacted by COVID-19 during the balance of the year, but improve incrementally as the economy and consumer mobility continue to recover. In measured channels, retail takeaway for Hershey was 4.1% for the second quarter. driven by strength in demand for our take-home confection and baking business and strong execution by our supply chain to ensure product was available and on-shelf. We did not see this fully flow through to net sales as retailer inventory levels continue to be depleted to satisfy a portion of this demand. As a result, we expect these inventory levels to be replenished in the coming months contributing approximately one to two points of growth in the second half of the year. Adjusted growth margin for the North America segment expanded 20 basis points to 47.5% for the second quarter, driven by strong price realization, which more than offset a challenging 2019 lap of favorable mix and incremental COVID-19 related costs for incentives, cleaning, and PPE. Mix was a slight headwind for the quarter, driven primarily by lapping the significant mixed benefit from Q2 of 2019 versus the COVID-19-driven mixed shifts this year. As Michelle mentioned, our instant consumable business has continued to grow, which has helped to maintain our margin strength. As a result, we do not anticipate mix being a material driver of earnings in the second half. North America advertising and related consumer marketing spend decreased 10.8% in the second quarter, driven by media cost efficiencies and selective programming optimization related to COVID-19. Approximately half of our spend reduction was driven by favorable digital media costs in the marketplace, a portion of which we expect to sustain in the second half. The remaining declines were driven by reduced investment in brands negatively impacted by COVID-19 trends, including icebreakers and select chocolate brands that are disproportionately sold in a convenience store class of trade. As consumer trends improved in May and June, we began reinvesting in these businesses. These actions are a testament to our capabilities and willingness to adapt quickly to changes in the marketplace. As we look to the balance of the year, we will continue to be mindful of the evolving operating environment, but plan to invest more in advertising and consumer marketing as sales trends improve. In our international and other segment, organic constant currency sales declined 33.4% in the second quarter. driven by COVID-19-related softness in our owned Chocolate World retail locations, large declines in air travel, and performance in key international markets. Combined constant currency net sales in Mexico, Brazil, India, and China declined 31.8% versus the second quarter in 2019. As Michelle mentioned, We expect our international business to be slower to recover and likely challenged for the balance of year because of both COVID-19-related restrictions and economic conditions impacting consumer participation in the chocolate category. Our owned retail businesses were closed for nearly the entire second quarter, though all have reopened on a limited basis with appropriate COVID-19-related precautions. While our stores have reopened, we do expect significantly decreased foot traffic during the second half of the year and therefore expect sales to remain below prior year levels. Given these declines to the top line, we have taken a disciplined look at our variable cost base and optimized where feasible while still maintaining the appropriate level of brand investment. This resulted in savings in advertising and related consumer marketing, along with travel expenses of approximately $15 million. The segment reported a slightly negative operating income of $4 million for the second quarter. We continue to expect gradual recovery throughout the second half of the year, but do not expect the segment to return to the same level as last year. While this segment has borne the greatest impact from COVID-19, we remain committed to the right balance of investment and support to ensure acceleration post-COVID-19. Shifting to items below operating profit, interest expense was $38 million for the second quarter, an increase of $4.3 million versus the same period a year ago due to higher debt balances from debt issuances in October 2019. Other expense of $11.2 million represented a decline of $1.9 million due to the purchase of fewer tax credits and lower non-service-related pension expense. The adjusted tax rate in the second quarter increased by 4.6% to 19.4%. This increase was due to the lapping of a prior period benefit related to the release of valuation allowances in select international markets. At this time, we do not anticipate any material changes to the tax and other income expense outlook that we shared with you in January. We do, however, expect interest expense to marginally increase over the prior year due to the bond issuance in October 2019 and May 2020. Despite any short-term challenges posed by COVID-19, we remain confident in our strong cash flow and healthy balance sheet to manage through the current crisis and beyond. At the end of the second quarter, We had approximately $1.2 billion in cash and cash equivalents on our balance sheet, an increase of $800 million versus last year, and $614 million in operating cash flow. To further mitigate potential risk and to take advantage of favorable rates in the capital markets, we issued $1 billion of bonds in the second quarter. with staggered maturities while paying long-term debt of $350 million that came due in May. We continue to have a peer-leading capital structure, providing ability and agility to adapt to the dynamic environment we are operating in. Given our strong free cash flow and liquidity, we remain committed to our long-term capital priorities with a balanced approach to investing in the business and returning cash to our stockholders. all while managing through this volatile environment. First, let's discuss our commitment to reinvestment. In the second quarter, total capital additions, including software, were approximately $87 million, bringing our year-to-date investment to $186 million. As discussed in April, our revised capital spending full-year outlook of $400 to $450 million reflects selectively pausing portions of our ERP transformation and supply chain capacity and capability initiative. Both ERP and our supply chain initiative, while rephased, remain on track in our critical capabilities to deliver our long-term strategic initiatives. Now, shifting to returning cash to our stockholders, which remains a steadfast priority in our capital allocation strategy. Earlier this morning, we announced our third quarter dividend reflecting a 4% increase. While the company did not repurchase any shares in the second quarter against the July 2018 $500 million authorization, we did repurchase $42 million of common stock in connection with replenishment of stock options. We remain confident that our balanced approach to business investment and returning cash to stockholders will continue to provide sustained stockholder returns now and in the future. As you saw in the press release, we are not providing new 2020 fiscal guidance at this time. While the company's performance improved over the course of the second quarter, the impact of recent spikes in coronavirus cases on consumer mobility, retail operations, government regulations and the macroeconomic environment remains unclear. With that being said, we do want to provide some visibility into our latest thinking for the balance of the year, which is based on our current understanding of the operating environment. In the North America segment, the company expects accelerated sales growth in the second half of the year, driven by elevated at-home consumption, price realization, and the replenishment of retailer and distributor inventory levels. These gains are anticipated to offset improving but still pressure sales in the food service and specialty retail channel. The company does not currently expect seasonal performance to have a material impact on second half financial results, though the impact of a resurgence of COVID-19 cases on consumer participation in seasonal activities remains uncertain. In the international and other segment, the company expects demand to slowly rebound in the second half of the year, but remain below prior year levels as owned stores, travel retail, and developing markets recover more slowly. Finally, as it relates to sales, during the second quarter, we completed the planned investitures of our Crave, Dagoba, and Scharfenberger brands. These divestitures are expected to have a relatively small 20 basis point impact to sale in the second half and an immaterial impact to earnings per share. Solid price realization and strong cost management are anticipated to offset some of the incremental COVID-19 costs we are facing. COVID-19 costs are expected to be less in the second half of the year, mainly for increased plant sanitation and personal protective equipment for manufacturing and sales teams. We anticipate that price realization will continue to drive gross margin gains, though to a lesser extent than the first half of the year, as we begin to lap the announcement of the 2019 price increase. Selling, general, and administrative expenses should continue to show favorability in the back half of the year behind lower travel and meeting expenses and favorable incentive compensation versus prior year. And finally, as it relates to brand investment, we intend to continue investing in North America and further optimize spend in the international and other segments in accordance with expected sales trends. While we have not issued new guidance today, We hope this additional perspective is helpful to understand our approach to managing through the crisis and our high-level expectations for the next several months, pending the continued evolution of the pandemic. We remain confident in our team, our plan, and our agile operating model to deliver solid shareholder returns this year and in the future. Now, I will turn it back to Michelle.

Thanks, Steve. During a time of extraordinary changes and challenges this quarter, our teams responded with agility and executed well against factors within our control. We have balanced delivering today with making calculated investments that we believe will enable us to emerge even stronger after the pandemic. In times of risk and crisis, cultures are either strengthened or weakened. Hershey has come together and thrived as a team committed to serving our consumers and our communities. Our purpose and commitment to operating sustainably and responsibly continues to move us forward. Last month, we released our 2019 Sustainability Report that highlights some of the great progress we have made in this space, as well as some of our key priorities for the future. I encourage you to go to our website and take a look. In addition to the sustainability report, you will also find information on some of our more recent actions and pledges. Let me take a minute to discuss two that are top of mind related to recent events. We have long supported our communities, and given the unprecedented need many are facing right now, we have amplified these efforts. In addition to increasing our product and monetary donations, we have invested in our own mask production line to service our employees, their families, and our communities. Second, for many years, we have pursued a vision of building a more diverse and inclusive company. We have been recognized for our progress, including being named the top food company for diversity by Diversity, Inc. Recently, we initiated a company-wide dialogue to listen, learn, and grow together. Through that dialogue, we have seen the very best of our Hershey culture and a genuine desire to do more in the fight against systemic racism. We announced a set of initiatives to support Black and Brown communities and accelerate increasing Black and Brown representation and internal development at Hershey and amongst our key partners. to promote social and economic progress. We believe these initiatives will help address the need for meaningful, long-term change in our society and include evolving our approach to recruiting, talent development, training, and reporting, as well as pledging monetary donations to organizations to actively fight systemic racism. To close, we believe Hershey is well positioned to adapt and succeed over the long term. We have scale brands in growing categories that consumers love and trust. We have a highly efficient yet agile supply chain that we are investing in for the future. And we have advantaged capabilities in analytics, media, category management, and sales. that we believe position us well to drive profitable growth in the future. And we have a team that is dedicated to our purpose of making more moments of goodness. We remain confident and committed to our long-term strategies and financial targets. With that, we conclude our prepared remarks for this morning. Thank you for your time this morning. I invite you to listen to our live question and answer webcast, which will begin today at 8.30 a.m. Eastern Time and will be available at thehersheycompany.com. Thank you.

Greetings and welcome to the Hershey Company second quarter 2020 Q&A session. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. I'd now like to turn the call over to your host, Ms. Melissa Poole, Vice President of Investor Relations for the Hershey Company. Thank you. You may begin.

Good morning, everyone. Thank you for joining us today for the Hershey Company's second quarter 2020 earnings Q&A session. I hope everyone has had the chance to read our press release and listen to our pre-recorded management presentation, both of which are available on our website. In addition, we have posted a transcript of the pre-recorded 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, Michelle Buck, and Hershey's Senior Vice President and CFO, Steve Boskell. With that, I will turn it over to the operator for the first question.

Thank you. If you'd like to ask a question this morning, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Chris Grohe with Stiefel. Please proceed with your question.

Hi, Chris.

Mr. Grower, your line is live. Perhaps you're muted.

I was muted there. I'm so sorry. Thank you. Good morning.

Good morning.

Good morning. I hope you're all well. I just want to ask a question, if I could, first of all, on, as we're looking ahead to the second half of the year, you did call the seasons to be less of a, not a material effect on the performance of the business over that time. I'm curious, and you did have some discussion on your call this morning about Halloween overall. Can you tell, based on orders, how Halloween is shaping up at this point in time and the degree to which that could have an effect on Q3 sales? And you also talked last quarter about having some early seasonal sort of fall product coming out. How is that? Is that in the market already or going in the market soon? And how could that play into your overall seasonal sales in Q3? Sure.

Sure. So for Halloween, we do have orders from retailers. We start to get those orders way back in May. In fact, we try and finalize the orders by the end of May, and we have already shipped some product. The way the season unrolls, we continue to ship product from, you know, really June through early October. So we have pretty good visibility to those orders. Now, it's always possible that orders could change in the coming months, but that is not a very common occurrence. I'd also remind you, as we listed in our comments, about half of our product for Halloween is purchased for self-consumption. So that's really candy bowl. It's a celebratory kind of treat for the family. And then that, you know, about 40% of it, you know, then falls into the back part of October, which are the trick-or-treat sales. So we feel good based on what we've seen. We've been partnering closely with our retailers. We feel good about many retailers wanting to kind of lean in. We also think that consumers will find creative and safe ways to trick or treat. It is an outdoor event and it's an event where a lot of masks are already worn. There's no evidence of the virus being passed through packaging or food. So we feel pretty good based on what we're seeing so far from consumer feedback. But if trick or treat tends to be a little lower than expectation, clearly we'll focus even more on the treat for me and the candy bowl occasion. So you already know that we shifted some of our portfolio to more everyday packaging to protect the downside, you know, should Halloween sales be a little bit lighter to really manage that liability. So at this point in time, Based on what we're seeing, we feel pretty good. From a holiday perspective, we do have an early read on holiday. We have started producing product. At this time, we don't really see seasonal participation being significantly impacted, and a lot of that is due to the fact that many holiday occasions and consumption is actually at home. So we think that'll be less likely to be disrupted, but obviously we will continue to monitor that closely, to work closely with our retailers as we have with Halloween.

That's great. Thank you. And just one quick follow-up, if I could, which is in relation to retailer inventory levels. As you ended the quarter, I just want to get a sense of where they were. Obviously, you did undership demand in the quarter. There's an expectation for an increase throughout the second half of the year, and I just want to kind of tie it into that seasonal discussion, is that a component of the expectation for higher inventories in the second half of the year? Thank you.

Yep. So inventory was about a one and a half to two point headwind on our first half growth. And there were really a couple of factors that drove that. Part of it is, as you recall, last year, we had a build of inventory as retailers were perhaps anticipating a price increase. So the lack from that creates part of that. Secondly, we were depleting inventory as a result of consumer stock-ups and the acceleration that we saw in takeaway across our portfolio. So we've been working really hard and had very strong customer service levels versus the industry, but yet we've still been continuing to replenish to kind of catch up with that accelerated demand. And then the third factor that really falls into that equation is non-measured channel softness. We've talked to you about owned retail locations, world travel retail, the food service. Some of those businesses that don't show up in measured happen to be the same ones where we have some of the greatest softness. So the Halloween piece is not really a factor in that inventory piece. It is much more around the everyday businesses and the non-measured channel.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

Hey, good morning, folks.

Good morning. Good morning. Congratulations to you and your organization for navigating everything so slowly right now. But looking at the forward, I'm kind of curious of the pricing outlook. You guys mentioned that you expect pricing in North America to moderate to 1.5% to 2%. which I believe is pretty much singularly the effect of last year's price increases. So said differently, it suggests you're not expecting some of this trade efficiency and benefits of lower promotions to sustain. If so, why not? Because it looks like the promotional environment for both you and your competitors remains pretty subdued in July. Why would it come back so quickly?

So first of all, as we look at the promotional pricing that you see as you look at some of the retail scanner data, we do not believe that data is correct. There is a lot less auditing going on during this time than previously. So the biggest issue we think there is we think simply the data is just not correct. We are continuing to see the kind of promotional activity that we had planned in the second quarter. You know, behind s'mores, Twizzlers, our Reese's In-N-Out lover promotion. And going forward, we feel good about the promotional plans that we have in the back half of the year with our retail partners.

Yeah, I agree. You know, we look at revenue management all the time. And so, you know, driving trade efficiency is part of the base plan. But as Michelle said, the outsized impact that we saw in the second quarter was really more a data issue. We were out in stores, S'mores were out, Twizzlers were out, so we had quite a bit of promotion.

Interesting. I hadn't heard that. Thank you. That's good context. Sticking on the same theme of pricing but flashing forward, as you mentioned, you're on the brink of cycling last year's price increases. Pricing has been part of your growth over in North America for the last couple of years. I don't think you've announced anything new, and you're about to cycle these. As we think beyond this year, should we expect pricing to exit, to no longer be part of the algorithm for the foreseeable future? And if not, why not?

No, I mean, we remain committed to the pricing strategy that we've discussed with all of you before, and that's really behind smaller, more frequent price increases. While we have priced each of the last two years, that certainly doesn't mean within our strategy that we have plans to price every single year. We really take a strategic approach where we look at opportunities across the portfolio. Right now, all of our pricing initiatives remain on track, and we continue to think that we're going to see price realization in the second half. But as you know, we have several different levers that we rely on to drive the business. Pricing is one of those, but brand investment, key retailer initiatives, innovation, merchandising, and new capabilities, you know, that balanced portfolio levers to drive growth is something we really believe in, and we think that that's very important. So we take a lot of variables into consideration when we decide what to price, when to price, how to price. and we will be consistent with the stated strategy going forward.

Understood. Thank you so much.

Thank you. Our next question comes from the line of Robert Moscow with Credit Suisse. Please proceed with your question.

Hi. Thanks for the question. I guess two smaller ones. A follow-up to Jason's. My understanding is over the past couple of years, you had taken pricing on about two-thirds of the portfolio, which left another third likely to be raised as well. I mean, has something changed since the start of the year with how you're looking at your list price increase plan? I guess that's the key thing. Has something changed? And then just a quick follow-up on Mexico. I was surprised to see Mexico down so much. Do you put that in the category of countries where chocolate is just not part of the overall embedded culture of the country? Because I thought Mexico had been pretty resilient in the past. Thanks.

Yes, so relative to pricing, our plans were not impacted or changed for the year. It is correct that we have a third of the portfolio that wasn't priced in those actions, but we did not change our plans throughout the year on pricing. So, we just continued to look across and decide when and what and how were the right times. Relative to Mexico, we certainly have seen big disruptions in that market. I would say I wouldn't put it as much, certainly, there are certainly pockets of Mexico where there are economic issues, but the biggest factor in Mexico has really been the trade, the spread of the virus, and then the shutdown of key elements of the trade, specifically the wholesaler network, distributor network, where we have about 50% of our business. And so it was really the trade shutdowns that impacted our business in Mexico.

Okay. Can I sneak one more in? Your outlook is very robust for third quarter, and it's based on the strong exit rate and the visibility at the Halloween. Is your assumption that the other 40%, like the element that's based on sell-through, is your assumption that that part will be down year over year. Have you been appropriately conservative on that element in your outlook?

I think that we have been appropriately conservative. I think we have partnered with our retailers, so we've utilized that visibility. We've taken into account what we think the category will be, and importantly, we've also taken into account what we believe our market share of the category will be based on recent performance and what's happening in the marketplace right now. So I think if we see pressures in Halloween, it's probably going to show up more towards Q4 than Q3, as it will be at those end periods post the holiday relative to sell through at that point in time. Got it. Okay, thanks.

Thank you. Our next question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Great. Thank you very much. You know, even in 2Q, even with the weaker volume and elevated COVID costs that you incurred, the company was still able to expand operating margin by 170 basis points or so. So just as we think through the second half, some of those, I guess, COVID discrete costs begin to dissipate. volume starts to pick up based on some of the comments you made about exit rate and things of that nature, though perhaps investment spending, I guess, picks up as well. So I guess as we think about margins in the second half, what would be maybe the key points to consider versus, let's say, where Hershey came out in 2Q? In other words, would you expect margins to be up similarly to what you saw in 2Q, or what are some of the discrete factors that could change that one way or the other? Thank you.

Do you want to hit that? Yeah, I'd be happy to take that. You're quite right. Q2 turned out to be more favorable from a margin standpoint than we expected going in. And while we had incentives, some of those incentives were less than what we had expected for the quarter. Insurance costs that we had expected for the second quarter came out more favorably. We talked on the last call about productivity and productivity being a risk for the quarter. And in fact, the productivity goals in manufacturing were still achieved. Probably the lingering piece is PPE and cleaning costs that will continue. So as we kind of take Q2 and look to the future, obviously the incentives based on everything we know today are not returning. Productivity, we expect to continue along with our full year plan. PPE and E is not a big cost in a quarter. So I think, you know, three, $4 million a quarter as a benchmark. We'll continue to drive SG&E savings both at the corporate level with travel and meetings. as well as at the division level. And then, as you said, we're going to spend a little bit more back from a DME standpoint. So while we had an opportunity in Q2 to optimize, probably optimize a little bit more than we had expected, we are going to invest back more behind the brand as we get to the back half of the year, and a little bit less pricing benefit as well. We had a lot of pricing benefit across the first half. As we lap now, that will also start to come off. So those are the big drivers. And that's the reason, you know, again, not getting specific guidance, but expecting some margin acceleration in the back half.

Very helpful there. And then just one last one, Michelle, you know, the market share gains that Hershey's been seeing, right, have been pretty phenomenal and unprecedented in many ways. And certainly a big part of that has been, you know, the company's execution, right, particularly at the point of sale and in store and leveraging the, you know, the advantaged distribution model that you have. I know there's been you know, some issues at competitors, let's say, around, let's say, supply chain resiliency and things like that. So I'm just trying to get a sense as you think through, you know, how market share can sometimes be pretty sticky, you know, both when it's gained and when it's lost. You know, how do you think about the share that Hershey's picked up? You know, would assume that at some point, you know, as things normalize and competitors get back, you know, their whatever supply chain resiliency, there'll be some additional pressure on that front. But I'm trying to get a sense of how much do you think of share can kind of structurally remain or be sticky versus, let's say, some that might be more transitory, if you get what I'm asking.

Yes, no, absolutely. I guess I'd start by saying, you know, even pre-COVID, we had very good momentum in both takeaway and market share starting last year. And we really attribute that to the balanced activation plan and great execution that we had even then, which was a good, I think the right balance across advertising, distribution, pricing, seasons, and innovation, kind of that suite of levers that we have. Obviously, since COVID, as you mentioned, you know, our teams really stepped up relative to execution, keeping product on shelf while there were some struggles amongst some other competitors in the marketplace. And certainly we do know Some competitors also began to rationalize SKUs to simplify their portfolios. So we do believe that the recent share performance is likely to persist for several more months. And while we do think that that huge gain that we're seeing is likely to revert next year as we lap the strength, we do believe that some of the gains will remain in the long term and sustain.

Thanks so much.

Thank you. Our next question comes from the line of Ken Goldman with JP Morgan. Please proceed with your question.

Hi, thank you. I also wanted to follow up on Jason English's question, really just to make sure I understood your response, because you did say in the prepared remarks price realization contributed 4.2 points in the quarter, slightly ahead of expectations. due to incremental trade efficiencies realized from revenue management and selective programming choices related to COVID-19. So sorry for reading all of that, but I did interpret this quote, especially the part about selective programming choices, to mean that you did reduce your reliance on discounting in the second quarter. So, you know, I guess given that you're not changing your guidance for the back half of the year, doesn't that imply that you're going from a period of less discounting to a period of sort of more normal discounting, or what am I missing there? I'm just still not sure I understand exactly, you know, what that quote means maybe.

So we did pull back a little bit in the second quarter, and that was primarily around refreshment, given what was going on with refreshment being so incredibly soft and, you know, the functional demand just not being there as much for that product, especially given its presence in convenience stores, and also a bit on the grocery just because that part of the business was doing so incredibly well on its own. You know, a little bit on s'mores, we had really strong demand on s'mores, but what I would say is the trends are now stabilizing, you know, as the, you know, most severe declines on certain parts or most severe accelerations on parts of the portfolio in Q2, you know, we saw the wildest swings and those tend to be stabilizing a bit now. So we are kind of going back to a a more normalizing approach. It wasn't a huge pullback in Q2. It was very selective against those parts of the portfolio. Does that help?

Yeah, no, that's clear. Thank you. And then for my follow-up, some of your peers in the broader sort of food and beverage industry have talked about making some pretty meaningful reductions to their product portfolios in terms of SKUs. We haven't heard quite as much from Hershey on that. I'm just trying to, or I'm hoping to get an update from you in terms of how you think the breadth of your portfolio is right now in a post-COVID world and whether there are any plans, I guess, to sort of make major reductions or minors to some of the products that you might have.

Yeah, so we had already really embarked upon an SKU rationalization program really over the past two, two and a half years. So we had pretty aggressively taken a look across our portfolio and made a lot of those cuts. So at this point in time, we're feeling pretty good about where we are. I don't see a major program. Obviously, it's always an ongoing focus to optimize and to cut some of the small things. But the biggest steps we had already taken previously.

And meanwhile, some of the new innovations that we brought to market this year have done quite well. So where we brought in new SKUs, whether it was KitKat, Birthday, or State 5.

Great. Thank you.

Thank you. Our next question comes from the line of Nick Modi with RBC Capital Markets. Please proceed with your question.

Yeah, thanks. Good morning, everyone. So just to kind of two-parter on innovation, it's nice to see retailers taking on new products. We've been seeing that trend now. You know, obviously people were a little doubtful of how much new product would actually get into retail, given the focus on A-level SKUs. But, Michelle, I was wondering if you could just opine on, you know, has there been a philosophical difference at retail that you can discern in terms of what products they're actually taking on the shelf? And I'm really trying to get at, you know, our large companies like Hershey advantage from, from this situation in terms of new product, given well-known brands, et cetera. And then on the second piece of that, just, you know, some of the work we've done looking at numerator data would suggest there's a heavy degree of interaction between the Hershey portfolio and the snack cake category. And I know you've dabbled in that area to some degree and,

with mrs freshly but can you just give us some thoughts on how you're thinking about that adjacency kind of opportunity a little bit more broadly yes so starting with your first question um you know we definitely have seen retailers especially during the covid situation dial up their focus on power skus must have skus really because of the huge consumer demand and needing to make sure that they were in stock on the most important items And also just because of labor needs and all of that, just a focus on what's really going to deliver the business. I think that's why you're seeing many of the manufacturers also now start to really rethink their portfolios to do the same. So I would say yes. I think the retail trade is saying, hey, right now this is a time where we need to focus on those biggest, most important items. So I think you're right about that. And then, I'm sorry, to remind me again, your second question, I lost that tree.

Yeah, no problem. Snack cake category.

Yeah, so we have seen some similarity, some crossover in terms of candy and snack cake consumption. You know, they both have some similar traits in terms of, you know, really hitting the kind of the treat sweet tooth and – filling certain needs for consumers that are similar. So I think we have seen some of that crossover, certainly from consumers.

Great, thanks.

Thank you. Our next question comes from the line of Brian Spillane with Bank of America. Please proceed with your question.

Hey, good morning, everyone. Just two quick ones for me. One, you gave some color in the press release about performance in June, so just curious if July has continued to progress the same way. And then the second question is more around distribution gains. I think you referenced in response to Andrew's question some of the issues that some of your competitors have had. So I guess if they're reducing SKUs and you know, maybe having trouble keeping some things in stock, have you actually gained shelf space or gained distribution in this time period? And if so, kind of, if you could give some color in terms of which channels. Is it more convenience in gas, more in grocery? Just some more color there would be helpful. Thanks.

So we haven't really seen any material changes in July versus our trends. So there are some geographic differences, just given the big differential across geographies as a result of COVID. So no, I would say we're feeling good about what we continue to see. And market share. you know, is pretty consistent, though. In terms of our market share performance, I would say, you know, we're feeling pretty good in terms of a continuation of that trend.

And I think wherever we've had opportunity to take advantage of, you know, getting shelf space or broader distribution, I'd say it's crossed over all classes of trade.

Yeah, and we certainly, you know, those are some of the benefits that I think you don't always see immediately because you have planogram timing, et cetera, to realize those benefits. So some of those benefits I think we started to see in June, and that might be what's driving some of our continued positive trends in July.

Okay, so you have seen some shelf space gains or some distribution gains?

Yes.

Okay, perfect. Thank you.

Thank you. Our next question comes from line of David Driscoll with DD Research. Please proceed with your question.

Great, thank you and good morning. Hi, David. Great, good morning. I wanted to ask about a little bit on the seasonal candy and then a specific question on Halloween, but they're related. So I know for the full year, roughly a third of the portfolio is seasonal candy. But in just the second half of the year, Can you give us the breakdown between your seasonal sales and your everyday sales? What percent of the second half is actual seasonal?

Well, Halloween, we've said previously, is about 10% of our full-year business. Certainly, seasons are higher in the second half than they are in the first half because Valentine's is our smallest holiday, so you really have Easter as a big one. in the first half. We don't really want to get into some of the specifics by quarter, but I would say that the season's impact is definitely bigger in the second half than the first half.

And then just to be clear, I think what you're saying is, and I think you said this in the release, that you don't expect Halloween to have a material impact, so it sounds like it's flat. And if seasons are you know, 40% or something like that of the second half, and the seasonal numbers are expected to be roughly flattish, and your everyday is running up nine. I think that's what you also said in the release. And is that not a decent way to think about how to model North America in the second half?

I think your math is generally correct. I can't argue with the math. The one thing I would say is you're speaking – Specifically to measured channels and you need to remember the impact of non measured channels You know owned retail food service air travel world travel retail which is airline and You know the trends on those businesses as that does that has been as we've shared the biggest hit in our business so while those channels are certainly a not shut down like they were in Q2. They're in the recovery mode, and the recovery mode is definitely going to be a slow uptick.

Okay. So there's a little adjustment to maybe the everyday 9% that I quoted because of those unmeasured channels. And then seasonal is the expectation is roughly flattish, given what you know today. Obviously, there's plenty of caveats on what could change. So I think I'm understanding you. My follow-up question is just on your marketing and your overall expenses. So a tremendous job. I'll give you guys huge kudos on what you did in the second quarter to get your margins where they came out. I'm just curious that is there a learning here that you can actually run a significantly tighter expense budget on a go-forward basis? You know, I'm guessing that the COVID made you do certain things that you normally wouldn't have done. And the results here of market share gains are fantastic. When you think a year forward, two years forward, can some of these cost reductions be very sticky because it's proving that you didn't need to spend some of those monies in order to produce, I think, excellent results at retail?

I think SG&A is clearly an area that we're expecting that how much we need to spend will change permanently over time. So I think that piece, yes. I think on the marketing expenses, it's a little bit different. Certainly, some of our pullbacks were as a result of certain businesses like refreshment that were down 40%. We just didn't think it made sense to be spending into that. Then part of part of what we were able to do was to leverage the fact that a lot of advertisers dropped out of the marketplace, and as a result, the costs of media were less than we had planned them to be, and so we were able to have a nice outcome there. As advertisers come back into the marketplace, some of that pricing benefit is not going to be available anymore. So while there may be some ongoing efficiencies and we are always looking to tighten our data knowledge and capabilities around media since we are big spenders to get more for our money and we're always building capability to take it to the next level. There were some unique circumstances there as well.

Yeah, I agree. Certainly on the pricing for some of the media exposure that came down, that was a big benefit. I think we did benefit from tools and investments we made around marketing efficiencies and driving ROI and optimizing. We haven't talked as much about some of those tools, tools both on trade efficiency but also marketing spend efficiency. And those tools allowed us also to be more agile as things evolved quickly. And so that part is something we'll look to leverage further in the future.

I really appreciate it. Those are helpful comments. Thank you.

Thank you. Our next question comes from the line of David Palmer with Evercore RSI. Please proceed with your question.

Thanks. I just wanted to follow up on that Halloween comment in your prepared remarks. You mentioned that the seasonal performance would not have a material impact to the second half results. That's an interesting comment. I mean, We're not doing the official guidance here. You would think that that would be a big variable. It might be 20% of your second half revenue. So is there something that's giving you confidence there? I know that you wouldn't be making such a comment without perhaps orders in hand or some insights around the ability for you to sell that through even if it doesn't happen to trick-or-treaters. And I have a follow-up.

Yeah. I mean, I think the confidence drivers are orders in hand. Um, some of the dynamics that exist around the fact that only half of that, you know, Halloween volume is trick or treat. The fact that the trick or treat behavior is outdoor people do wear masks. Um, so as we get closer, you know, we're feeling good about that now, obviously, you know, certainly, we didn't provide official guidance in the back half of the year and you know there is uncertainty and volatility overall given the virus but based on everything that we know and the visibility we have and with every day we get closer you know we we feel that we've you know taken an appropriate look at what we think can happen and have really factored that in to Our outlook is best possible. You know, we've mitigated some of the downside risks with the everyday portfolio versus all Halloween packaging. Steve, anything you would add?

No, I agree. I think for the things we can see and certainly the things we can control, we're optimistic. But part of the reason for not providing more specific guidance is there are things we can control and probably can't see. And for those reasons, you know, there still is potential variability in the back half. But everything we can see gives us a point of confidence.

And that's helpful. And with regard to COVID-related costs, you mentioned those were a gross margin headwind in the second quarter. Could you give some colors to how much that might have been? And how much of a gross margin headwind do you think it's going to be for the year? Thanks.

In terms of just COVID-related costs?

Just COVID-related costs, yes.

Yeah, probably on the order of, you know, we absorbed in gross margin somewhere between $50 and $20 million of COVID-related costs. Again, we had predicted it might be more than that. In fact, it came out less. As we go forward in the rest of the year, the biggest piece that will stick around is going to be that, you know, personal protective equipment, cleaning costs. And so if I take that $15 to $20, you know, think about maybe a third or a quarter becomes sticky to the back half.

Thank you.

Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Great. Thanks so much. I said a question on C-store traffic and momentum there that we've obviously seen the convenience store cattle improve right throughout the quarter overall. Seems like hopefully that momentum It's sustainable as long as the people are leaving their homes more and going to the channel. But also the channel is more relevant for you than a lot of other companies in the space. And usually I would think there's a little bit more of a margin benefit, you know, just given the single serve product that you're sold there. um that you saw there but you know in the remarks you said that you know margin next really didn't have much of a headwind it doesn't sound like they're really speaking to that as a risk going forward um which is great i'm just kind of curious where where i'd be wrong and thinking that some of that single serve products would you know usually have a better price you know per pound and potentially better margin impact um and why it didn't and why it might not

Yeah, I mean, I think that's generally correct. We are seeing a rebound in convenience stores as people are out and about more. And I think also as some people are choosing not to travel via air, but, you know, do vacations that are more driving vacations. So I think that's helping as well. So, yes, I think certainly instant consumable and that class of trade are helping the businesses. We're also seeing instant consumable strong and strengths in other classes of trade as people have returned more now to grocery stores and trips and shopping. So the strength is not just in convenience stores. So that is helping our margin mix.

So it sounds like even though, if I think about a movie theater, even though consumers might not be going to movie theaters and buying Hershey products there, you know, in a single-serve format, as well as traffic stuff at C-stores and maybe, like you're saying, in grocery stores a bit, that they're still trying to get their fix, right? So they might not be buying the big bag, but as they go through checkout, it sounds like what you're saying is maybe some of your checkout momentum in traditional mass and grocery is doing better than maybe it had. And I know if we go back a couple of years, at one point in time, that was a focus of yours. Is that fair? Yeah.

Yeah, it definitely is fair. It has definitely – we're seeing growth on the instant consumable piece of the business. And, again, I think a lot of that due to more traffic in those channels.

Right. And just lastly, just to keep it simple and summarize, because you did say instant consumable is growing, right? Yes. So the effect there is it has to be doing very well. It has to be doing very well in traditional mass and grocery at checkout.

Yes.

And that's more offsetting the pressure away from home and other channels.

Yes.

Yep. Thank you. Pass it on.

Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

Good morning, everyone. Good morning. Hi there. So two questions for me. Firstly, could you maybe just talk a little bit about what's going on in the e-commerce channels? Other companies have talked about real surges, both in terms of click and collect and in at-home delivery. I'm wondering whether maybe the meltability of chocolate in this hot season means that the delivery option isn't quite as available to you. I'm just curious about what's going on there. And then my second question is more about your marketing mix strategy in the second half. We know that in the TV channels, the production isn't going to be as There's not going to be as much new production in the fall, and therefore the effectiveness of marketing on TV may drop off. But also I know that you've announced that you're pulling back on your Facebook spending in the second half as well. So I'm just wondering where that spend is going to go. Is it going to be into other digital channels, or how are you thinking about the mix? Thank you, and I'll pass it on.

Yes, so we have continued to see our category and our business perform really well in e-commerce and seen that growth accelerate. So in the second quarter, we saw growth of 200% on our e-commerce business, and that was really driven by strengths both in the click and collect kind of pickup and in delivery fulfillment models. So we saw growth across the board there. You're right that we tend to have a little bit of a softer business during the hottest months in the summer, but we're continuing to see that pretty strong growth even throughout June. So I think just the trends are bolstering that. And that growth, importantly, we're seeing across every piece of the business, seasons, take-home, and instant consumables. So in the past, we've spoken about e-commerce being roughly 2% of our business, and we've We believe that this channel by end of year could approximate about 5% of our total company sales. So definitely seeing a lot of strength there. When it comes to marketing mix, certainly we're seeing efficiencies that we're going to realize in the back half in that TV class of trade. So it continues to be a really viable place for us to put money given the very high household penetration on our business. and the sheer number of eyeballs that you can reach on TV is very efficient. And as we look to digital and the pullback on Facebook, we see taking those funds that were in Facebook and redirecting them still back into other digital media venues. So those dollars will stay in digital, but just on other platforms like YouTube, for example.

Great. Very helpful. I'll pop it on. Thank you.

Thank you. Our next question will be Steve Powers with Deutsche Bank. Please proceed with your question.

Great. Thanks, everybody. I guess first, internationally, I appreciate the category itself was under pressure in many of your key markets, as you called out, but can you talk a bit about your market share trends in those markets and maybe a little color as to how you're thinking about relative prioritization of investment in those markets as hopefully they begin to improve in the months and quarters ahead. I guess what I'm thinking through is, you know, should we expect you to exit the crisis with similar levels of strategic emphasis and standing in those emerging markets versus the run rate going in? Or is there a risk that you slip a bit behind as navigating the U.S. landscape takes precedent?

Yeah, so we are gaining market share across most of our international markets. So we feel great about that. You know, the weakness that we're seeing is really driven, you know, either by the COVID related, you know, shutdowns in most of the markets, government restricted shutdowns, and especially in a lot of the developing markets. And in some markets, the economic impact of that. that impacts the category, but we feel great that we're winning share across most of those markets. So I don't think that we will slip relative to our strategic emphasis. We are still committed to what we want to get achieved in those markets. We still believe in the long-term potential in those markets. So we are pulling back on a temporary basis, just consistent with where the business is, but continuing our focus on all of our key initiatives to win long-term in those markets.

Okay, that's helpful. And then I guess if I could, just to clean up back on the forward pricing outlook, you know, your core category is exceptionally rational in recent years. And I guess, you know, just given your share gain success, and I guess some also just the economic pressures that might build in the back half and into 21, how do you size up the tail risk that some of that price rationality might come under challenge or at least make incremental pricing tougher to come by and at least in the near term? I guess harking back to Jason English's question earlier.

You know, we consider a lot of factors as we try and decide how to think about how and when to price. So as it comes to recessionary times, you know, over the past, we've seen that our category tends to have less of the highs and lows that some other categories have because we are an affordable luxury. So at times when people need to cut back on other categories, So we will continue to just evaluate all the different factors for when, how, on what we will take pricing. But we aren't particularly concerned that we can't price in recessionary times. We have done that at points in the past.

Okay. Thank you very much.

Thank you. Our next question comes from the line of John Baumgartner with Wells Fargo. Please proceed with your question.

Good morning. Thanks for the question. Michelle, just in light of your general sense of optimism for Halloween, and I guess sticking with the brand investment plans, it sounds as though there will be some shift of March Madness and Olympic spending into H2, but Could you also talk a little bit about the in-store merchandising activity? I mean, are you expecting an uptick in retailer support for the season this year and, I guess, increased display space for your portfolio broadly?

Yeah, I mean, we are expecting, based on our partnerships with retailers, very strong in-store support for Halloween with most of our retailers. You know, we partner with every retailer, and each retailer has their own strategy in terms of, you know, how much they support the holiday. And so I think in general, most of them are continuing to lean in to anticipate and drive to a very strong Halloween. And we believe that given our ability to execute during this time and some of the, you know, you've seen the results of that on the share in the marketplace, we certainly think that, you know, even our performance within the category for Halloween should be quite strong.

Okay. And then just coming back to international and the sales weakness there, I would guess a presumed review of the cost structure. Given the success you had in right-sizing China, which was sort of a unique animal in its own right, to what extent is COVID stress sort of identifying new opportunities in other geographies where you can use this downturn to maybe further strengthen your global cost structure more sustainably?

Do you want to talk about that? Yeah, our international team does a great job of looking to optimize their P&L and cost structure in an ongoing basis. And certainly the new opportunities here as businesses think are tailed in some markets have shown even further potential there. But I think to Michelle's earlier point, the strategic priority of international hasn't changed. And so we want to continue to appropriately invest behind those businesses to unlock the long-term growth that we believe is there. But to your point, certainly we'll never waste a crisis in terms of looking at every possible way to be efficient with P&L.

Great. Thanks for your time.

Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Good morning. Thank you.

Good morning.

Can you just talk about corporate costs a little bit? It looks like it's the lowest they've been in at least about seven years. certainly declined sequentially. You called out the travel and meeting savings. How much of that should we expect to continue? Is there other savings there that might revert back in the second half we should watch out for? How do we think about looking ahead on how that line might unfold?

Yeah, the progress that we made in the second quarter, we said from a travel and meeting standpoint, was actually better than we expected going into the quarter. And given everything we see today, business is not going to return to whatever normal was. And so we expect in the back half we're going to see those savings continue. As I think about the second quarter, you know, we saw probably $20 million, $15 to $20 million of opportunity across all of those areas. And I'd expect to see something like that, maybe a little bit less, but something like that in the back half as well. And beyond that, that was really the biggest driver from a corporate cost standpoint.

Okay, great. Thanks. And just following up on Halloween again, can you give us a sense of what some of your options may be? I know you recognize there's a little bit of an uncertainty still on how the consumer sell-through goes. If that disappoints, do you just have to buy it all back? Can you buy some down? Does it depend on the magnitude of inventory that may be left? Can you just let us know what the options are and how you might be preparing for any of those?

Yeah, so the first thing we're doing is trying to make sure that we ensure sell-through, which is something we always do, which is having the right merchandising, getting product on the floor as early as possible, and leveraging media investments to remind consumers, excite consumers about the holiday. Then post sell-through, there's always a markdown period that occurs based on how much product actually sells through, both in total as well as you have to get the mix right across each piece of the portfolio. And so every year as we build our plans, we plan for that. And this year is no different. We planned for that. So we tried to mitigate our risk by, as we look at the trick-or-treat portion of the portfolio, pulling back on seasonal packaging, having more every day. So that's another lever we used, and then really working through the markdown plan.

Okay, great. Thank you very much.

Thank you. Our last question this morning comes from the line of Ken Zaslow with Bank of Montreal. Please proceed with your question.

Hey, good morning, everyone. Good morning. I just have two questions. One is, Have you at all had to change your innovation plans for, I don't mean for the next two months or three months, but for the longer term? There's been a lot of companies that have said, look, our 150th new innovation we're not going to do anymore. So has there been a refinement of the innovation program for the next, call it, one to two years?

So I would say we already did that. A few years back we took a look at our innovation strategy and really streamlined and focused on sustainability. And that really did lead to not having that 150th new innovation, but really being very real about a focus on sustainability that would lead to the greatest profitability and top line for us. So we're not really making any changes related to COVID, but I feel really good about the work that we did a couple of years ago, changing our innovation strategy to make sure that we really did have that focus across the balanced levers. Innovation is one of five or six levers. It's not the lever.

Okay. And then when I think about the longer term, and obviously COVID-19 is evolving for sure, but are there certain milestones or are there certain things that would have to happen for you to rethink? It seems like as of now, let me start with this. As of now, it doesn't seem like you've made any structural changes to your business model. You've changed a little bit of investment here and there, but nothing that would be longer term. are there anything that you would see in the COVID-19 implications that cause you to have to do something? And what would that thing be that you would have to do to change your business model? Does that make sense?

Yeah. So I guess I would say, you know, there's nothing that I would say is a big fundamental shift to our business model. There are some changes. So for example, e-commerce, the acceleration in e-commerce is here to stay where consumers are in terms of household penetration of people buying online, is where we thought it would be maybe five years from now. So to some degree, that is a shift because e-commerce is a little more than a channel. It's almost a business model as well. So fortunately, a few years back, we had invested to build capability in e-commerce, and I feel really good that we were set up to be able to take advantage of that. But we are taking some further steps internally now. to develop e-commerce to really now be one of our mainstream channels versus before it was kind of, I'd say, in the growth development phase. There are other consumer trends, things like cocooning and people staying at home, the importance of value on the short term. Some of those trends that we are making some changes to adapt to, but we always adapt to ever-changing consumer trends, so I wouldn't really call those out as business model changes. And then certainly, you know, there will be some changes in terms of how we work, in terms of, you know, some people working more from home, the ability to have people working remotely, you know, potentially a shift to suburban and rural settings, which actually can be a strength for us. But I would say e-commerce is probably what I would put in one of the bigger shifts like that. Steve, is there anything you want to add?

Yeah, if I turn the question around, I would say COVID has also shown us places where we have strength through this and having the Agility in our supply chain, the retail execution capability, as Michelle said, the digital investments, the agile investment approach, I think those are things that we've learned are, you know, even stronger in this kind of environment.

What if, say, refreshment, like everybody's working from home a little bit more, people don't need to have the meetings and, you know, so your refreshment category may change dramatically or maybe the size of Halloween or the size of Easter may kind of contract – Are there thoughts on those two potential outcomes, or at this point you'd say not really something that we'd be worried about? And I'll leave it there, and I appreciate your time.

I mean, first of all, based on seasons, I would say not something that I'd be worried about at this point in time, given the results that we saw on Easter, which was really in a peak season. period of people being told not to go to grocery stores, and we still had a pretty decent Easter. I mean, obviously, we will all learn more as we go through every one of these, but at this point in time, I don't see a major business model shift needing to come from that. And I would say from a refreshment perspective, yes, people will be working from home, but people are also going to be going out, and they're going to be out and about doing things, you know, I think more. So, you know, there could be some, I'm going to say more shifts as there always are in portfolio relative to people baking more, people doing one thing or the other more, but not that I really think about as a massive business model shift.

Great. I really appreciate it. Stay safe.

Thank you.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Ms. Poole for any final comments.

All right. So it's Michelle. I just want to thank you all for joining us this morning. As you know, this was a new format for us, and I hope that you found it helpful. Let me close with some very brief remarks. Over the years, our great brands, our advantaged margin structure, and our consumer-centric strategies have enabled us to navigate volatile environments and consistently deliver strong stockholder returns. We take great pride in our passion to create new ideas, innovation, and and ways to connect consumers to continue to make moments of goodness in their lives. With our relentless focus on the consumer, an adaptive operating model, and our remarkable team of people, we are confident that we can once again respond to the changes in the marketplace to deliver growth and unlock long-term value for our stockholders. Melissa will be available after the call to answer any additional questions you may have Thank you very much. Stay safe and have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.