Good morning, everyone, and welcome to the prerecorded 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, Michele Buck, and Hershey’s Senior Vice President and CFO, Steve Voskuil. 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 23. 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 discussions, 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 GAAP. Reconciliations to the GAAP results are included in this morning’s press release. It is now my pleasure to introduce our Chairman and CEO, Michele 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 believe 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 a 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 evolves. 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…

Thanks, Michele, and good morning, everyone. Before reviewing the detailed results for the second quarter, I want to build on Michele’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 line, 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 Michele mentioned, these declines were driven by COVID-19-related pressures to our international and other segment, 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…

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…

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 would 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 look into our pre-recorded management presentation both of which are available on our website. In addition, we have posted the transcript of the pre-recorded remarks. At the conclusion of today's live Q&A session we will also post the 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 risk 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 on 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 does not intend to be considered in isolation, or as a substitute for the financial information presented in accordance with GAAP. Reconciliations to the GAAP results are included in this morning's press release. Joining me today are Hershey's Chairman and CEO, Michele Buck and Hershey's Senior Vice President and CFO, Steve Voskuil. With that I will turn it over to the operator for the first question.

Thank you. [Operator Instructions] Our first question comes from the line of Chris Growe with Stifel. Please proceed with your question.

Hi Chris.

Mr. Growe your line is live. Perhaps you are muted.

I was muted there. I am so sorry. Thank you. Good morning.

Good morning.

Good morning. I hope you're all well. I just wanted to 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 they have could have an effect on Q3 sales? Then, 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 into the market sooner? How could that play into your overall seasonal sales in Q3?

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 that by the end of May and we have already shipped some product. The way the season unrolls, we continue to ship product from 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 products for Halloween is purchase for self-consumption. So that's really candy ball. It's a celebratory kind of treat for the family and then, that about 40% of it 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 is 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 a consumer feedback, but if trick-or-treat tends to be a little lower than expectation, clearly, we will focus even more on to treat for me and the candy ball occasion. So you already know that we shifted some of our portfolio to more everyday packaging to protect the downside should Halloween sales be a little bit later 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 the 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 will 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 under-ship demand in the quarter. There is an expectation for an increase at the second half of the year. And I just want to kind of tie into that seasonal discussion. Is that a component of the expectation for higher inventories in the second half of the year? Thank you.

Yes. So inventory was about 1.5 point to 2 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 lap 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 foodservice, 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 -- so the Halloween piece is not really a factor in that inventory piece. It is much more around the everyday businesses on the non-measured channel.

Okay. Thank you very much.

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

Hey good morning.

Good morning.

Good morning. Congratulations to you and your organization for navigating everything so smoothly 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. Said differently, it's suggested 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 behind Smores, Twizzlers, our Reese's In and Out lever 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.

So yes, I -- here we're going to -- we look at revenue management all the time. And so, driving trade efficiency is part of the base plan, but as Michele said, the outsized impact that we saw in the second quarter was really more data issue. We were out in stores, Smores were out; Twizzlers were out, so we had quite a bit of promotion.

Interesting, I heard that. Thank you. That's good context. Sticking on the same theme of pricing book flashing forward, as you mentioned, you're on the brink of cycling last year's price increases. Pricing has been part of your growth algorithm in North America for the last couple of years. I don't think you've announced anything new and you are about to cycle these. As we think beyond this year, should we expect pricing to exit part of the -- you don't want to 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 price 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, 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 line of Robert Moskow 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. It's 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 increased 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. Is -- 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 in portfolio that wasn't priced in those actions, but we did not change our plans throughout the year on pricing. So we just continue to look across and decide when and what and Halloween was the right time. Relative to Mexico, we certainly have seen big disruptions in that market. And 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 shutdown that impacted our business in Mexico.

Okay. Can I sneak one more in? Your outlook is very robust for third quarter and -- based on the strong exit rate and the visibility at 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, that's probably going to show up more toward Q4 than Q3 as it will be at that -- 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. 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. So 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, where do 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.

Steve you want to hit that one?

Yes. 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. 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, PPE and cleaning costs, that will continue. So we kind of take Q2 and look to the future, obviously the incentives based on everything we know today are about returning. Productivity, we expect to continue along with our full-year plan. PP&E is not a big cost in the quarter, so I think $3 million, $4 million a quarter as a benchmark. We will continue to drive SG&A 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 brands as we get to the back half of the year, so -- and a little bit less pricing benefit as well. We've 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. That's the reason, again not giving specific guidance, but expecting some margin acceleration in the back half.

Very helpful there. And then, just one last one, Michele. The market share gains that Hershey has been seeing, right, have been pretty phenomenal and unprecedented in many ways and certainly, a big part of that has been the company's execution, right, particularly at the point of sale and in-store and leveraging the advantaged distribution model that you have. I know there has been some issues that 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 how market share can sometimes be pretty sticky, both when it's gained and when it's lost, how do you think about the share that Hershey has picked up? I would assume that at some point, as things normalize and competitors get back there, whatever supply chain resiliency, there'll be some additional pressure on that front, but I'm trying to get 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. Absolutely. I guess, I'd start by saying, 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, kinds of that suite of levers that we have. Obviously, since COVID, as you mentioned, our team has really stepped up relative to execution keeping product on shelf, while there were some struggles among some other competitors in the marketplace. And certainly, we do know some competitors also begin 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 huge game that we're seeing is likely to revert next year as we lap the strengths, we do believe that some of the gains will remain in the long term and sustain.

Great. Thanks so much.

Thank you. Our next question comes from line of Ken Goldman of JPMorgan. 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 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 sure 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 the functional demand just not being there as much for that product, especially given its presence in convenience stores and also a bit on grocery just because that part of the business was doing so incredibly well on its own. A little bit on Smores, we had really strong demand on Smores, but what I would say is, the trends are now stabilizing as the most severe declines on certain parts or most severe accelerations on parts of the portfolio in Q2. We saw the wildest swings and those tend to be stabilizing a bit now. So we are kind of going back to 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?

Yes, I know that is -- 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, sort of major reductions or miners to some of the products that you might have.

Yes. So we had already really embarked upon SKU rationalization program really over the past two, 2.5 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 that you have done quite well. So where we brought in new SKUs, whether it was Kit Kat Birthday or Take 5.

Great. Thank you.

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

Yes. Thanks. Good morning, everyone. So just kind of two-parter on innovation. It's nice to see retailers picking on new products. We've been seeing that trend now. Obviously, people were a little doubtful of how much new product would actually get into retail, given the focus on A level SKUs, but Michele, I was wondering if you can just opine on. Has there been a philosophical difference at retail that you can discern in terms of what products they are actually taking on the shelf? And I'm really kind of get out our large companies like Hershey advantage from the situation in terms of new product given well-known brands, etc. And then on the second piece of that, just 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 with Mrs. Freshley's, 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, 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 what -- why you're seeing. Many of the manufacturers also now started 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, remind me again, your second question?

Yes. No problem. Snack cake category.

Snack cake. Yes. So we have seen some similarity, some crossover in terms of candy and snack cake consumption. They both have some similar traits in terms of 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 Bryan 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, the -- some of the issues that some of your competitors have had. So I guess, if they're reducing SKUs and 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 and 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 now, I would say we're feeling good about what we continue to see. And market share is pretty consistent though. In terms of our market share performance, I would say we're feeling pretty good in terms of continuation of that trend.

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

Yes. And we certainly -- those are some of the benefits that I think you don't always see immediately because you have planogram timing, etc., 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 trends -- 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.

Good morning.

Great. Good morning. I wanted to ask about a little bit on the seasonal candy and then, a specific question on Halloween with the related. So I know for the full year, roughly a third of the portfolio was seasonal candy. But in just the second half of the year, can you give us the breakdown between your seasonal sales in 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, I -- just to be clear, I think what you're saying is -- 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 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 9%, 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, owned retail, foodservice, air travel, world travel retail, which is airline and 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 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 that -- there is a little adjustment to maybe the everyday 9% that I quoted because of those unmeasured channels and then, seasonal is where the expectation is roughly flattish given what you know today. Obviously, there's plenty of caveats and 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? I'm guessing that the COVID made you do certain things that you normally wouldn't have done, and the results here are, 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 mean, 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 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 have 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.

Yes, 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 ISI. Please proceed with your question.

Thanks. I just want to follow up on that Halloween comment. In your prepared remarks, you mentioned that the seasonal performance would not have a material impact to second half results. That's an interesting comment. I mean, we're not doing the official guidance here. If 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 some of that through, even if it doesn't happen to trick-or-treaters, and I have a follow-up.

Yes. I mean, I think the confidence drivers are orders in hand. Some of the dynamics that exist around the fact that only half of that Halloween volume is trick-or-treat. The fact that the trick-or-treat behavior is outdoor. People do wear masks. So as we get closer, we're feeling good about that. Now obviously -- certainly, we didn't provide official guidance in the back half of the year. And 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, we feel that we've taken an appropriate look at what we think can happen and have really factored that into our outlook as best possible. We've mitigated some of the downside risks with the everyday portfolio versus all the Halloween packaging. Steve, anything you would like --

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't control and probably can't see. And for those reasons, there still is potential variability in the back half, but everything we can see gives us a plenty of confidence.

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 color as 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?

Yes. Just COVID related costs. Yes.

Yes, probably on the order of – for the gross margin somewhere between $15 million 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 personal protective equipment, cleaning costs and so, if I take that $15 million to $20 million, 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 had a question on c-store traffic momentum there. We've obviously seen convenience store channel improve throughout the quarter overall. It seems like hopefully that momentum is sustainable as long as people are leaving their homes more and going to the channel, but also the channel is more relevant for using a lot of other companies in this space and usually. I would think there is a little bit more of a margin benefit just given the single-serve product that you're sold there that you saw there, but with remarks, you said that margin mix really didn't have much of a headwind. It doesn't sound like you're really speaking to that as a risk going forward, which is great. I'm just kind of curious where I'd be wrong and thinking that some of that single-serve product that usually have a better price per pound and potentially better margin impact, and why it didn't and why it might not?

Yes. 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 do vacations that are more driving vacation, so I think that's helping as well. So yes, I think certainly instant consumable and that class of trade are helping the business. We're also seeing instant consumable strong and strength 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, right, even though consumers might not be going to movie theaters and buying Hershey products there in a single-serve format as well as traffic of C-stores that maybe like you're seeing in grocery stores a bit, that is still trying to get their fix, right? So they might not be buying the big bag, but they're going to check out. It sounds like what you're saying is maybe some of your checkout momentum in traditional mass in grocery is doing better than maybe it had. I know if we go back to couple of years that at one point in time, that was a focus of yours. Is that fair?

Yes. That 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 it just lastly just to keep it simple and summarize because you did say instant consumer is growing right. So --

Yes.

Because there is -- it has to be doing very well. It has to be doing very well for traditional mass in grocery at checkout, and that's more offsetting the pressure away from home in other channels.

Yes.

Got it. Thank you. I pass it on.

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

Good morning everyone.

Good morning.

Hi, there. So two questions for me. 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 are 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 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 in 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 a 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 is a seasoned take-home and instant consumables. So in the past, we've spoken about e-commerce being roughly 2% of our business, and 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 for a 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 that -- those dollars will stay in digital, but just on other platforms like YouTube, for example.

Great. Very helpful. I will pass 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 investments in those markets as hopefully they begin to improve in the months and quarters ahead? I guess, what I'm thinking through is should we expect 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.

Yes. So we are gaining market share across most of our international markets. So we feel great about that. The weakness that we're seeing is really driven either by the COVID-related shutdowns in most of the markets, government-restricted shutdowns and especially in a lot of those 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 on 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, your core category is exceptionally rational in recent years. So, I guess just given your share gain success and I guess, 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 the near term? I guess, harking back to Jason English's question earlier.

We consider a lot of factors as we're trying to decide how to think about how and when to price. So as it comes to recessionary times, 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 I -- 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 the point 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. Michele, just in light of your general sense of optimism for Halloween, 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? Are you expecting an uptick in retailer support for the season this year and I guess, increased display space for your portfolio broadly?

Yes. I mean, we are expecting based on our partnerships with retailers, very strong in-store support for Halloween with most of our retailers. We partner with every retailer, and each retailer has their own strategy in terms of 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've seen the results of that on the share in the marketplace, we certainly think that 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?

Steve, you want to talk about that?

Our international team does a great job of looking to optimize their P&L and cost structure on an ongoing basis. And certainly, the new opportunity here is that business, I think, curtailed in some markets, has shown even further potential there, but I think to Michele'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 will never waste the 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 at least about seven years, certainly declined sequentially. You called out the travel and meetings' savings. How much of that should we expect to continue as there are 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?

Yes. The progress that we made in the second quarter, we said from the travel and meetings standpoint was actually better than we expected going into the quarter. And given everything we see today, business has not returned 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, we saw probably $20 million, $15 million to $20 million of opportunity across all of those areas. And I would 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 recognized, there is a little bit of uncertainty still on how the consumer sell-through goes. If that disappoints, do you just have to battle 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?

Yes. 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 investment to remind consumers, excite consumers about the holiday. Then post-sell-through, there is 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 one -- 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 has changed 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 have said look, our 150th new innovation, we're not going to do any more. 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 balance levers, innovation is one of five or six levers, if not the lever.

Okay. And then, when I think about the longer term and obviously, the COVID-19 is evolving for sure, but are there certain milestones, 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 been meeting structural changes to your business model, 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, if that makes sense?

Yes. So I guess, I would say there is 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 the 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 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 change -- adapt to ever-changing consumer trend. So I wouldn't really call those out as business model changes. And then, certainly, there will be some changes in terms of how we work in terms of some people working more from home, the ability to have people working remotely, 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 the -- in one of the bigger shifts like that. Steve, is there anything you would...

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

What if, Steve, refreshment like everybody is working from home a little bit more, people don't need to have their meetings and 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 would 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 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 in about doing things, I think, more so. 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 think -- I really think about as a massive business model shift.

Great. I really appreciate it. Stay safe.

Thank you.

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 Michele. 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 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, we'll 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.