Greetings, and welcome to The Hershey Company's Second Quarter 2024 Earnings Question-and-Answer Session. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anoori Naughton, Senior Director of Investor Relations. Thank you, Ms. Naughton, you may begin.

Good morning, everyone. Thank you for joining us today for The Hershey Company's second quarter 2024 earnings Q&A session. I hope everyone has had the chance to read our press release and listen to our prerecorded management remarks, both of which are available on our website. In addition, we have posted a transcript of the 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 [including] (ph) expectations and assumptions regarding the company's future operations and financial performance. Actual results could differ materially from those projected. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. Finally, please note that we may refer to certain non-GAAP financial measures that we believe provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations to the GAAP results are included in this morning's press release. Joining me today are Hershey's Chairman and CEO, Michele Buck, and Hershey's Senior Vice President and CFO, Steve Voskuil. With that, I will turn it over to the operator for the first question.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Hi. Thank you. And Melissa Poole, I think you're probably somewhere in the call. I think you're still there. Thank you for all your help over the years. And Anoori, congrats on your new increased role. I wanted to ask within North American Confectionery this quarter, as you mentioned, there was 6% impact from lower retail inventory and around 2% to 3% from the Halloween shift. You seem confident that these impacts will have no real material effect on the year, which I understand. But my question is, is it unfair for investors to ask if there isn't at least a small red flag underlying this news? And I'm just asking because historically in food, destockings, delayed orders haven't always been for benign reasons. Sometimes they're, I guess, outgrowths of softer end user demand. So, just curious what gives you confidence there's not a relationship between the delays and demand, which seems to be implied by your commentary.

Steve, you want to take that?

Yeah, I'd be happy to. I mean, as we've seen in the last few years, there's been actually quite a bit of volatility around inventory levels, partly based on the COVID era and supply chain challenges. And so, I think what we're seeing now is a more reversion to the way it's been more traditionally, which is [handling ships] (ph) more in the third quarter than in the second quarter. So, the change from prior year -- but we had good visibility into our seasonal orders already. Most of those orders are in hand. We've got strong expectations for the seasons, a lot of retailer collaboration. And so, I think as we look at it, we don't see it as a red flag. We see it as a more reversion to a traditional order pattern.

Okay, thank you for that. And then, quickly, I wanted to ask about your recently announced pricing. Can you perhaps give us a sense of which products it covers, the magnitude of the increase? And can you walk us through the degree to which you're comfortable taking this pricing right now, given some elasticity and that you're one of the few categories to be doing so? Thank you.

Absolutely. So, as you all know, we have experienced historic cocoa prices for some period of time now. And while we believe the current cocoa price is not sustainable, we do believe that the future prices will be higher levels than we've seen before this kind of recent historic pricing cycle. Our approach on the pricing has been to take a measured approach. We've absorbed a lot of inflation already, but we do believe we need to pass some of it on. And we're seeing the category hold up fairly well in this tougher environment. We think it's historically been very rational. We think it will continue to be. So, overall, we are not going to price the entire portfolio. We do have a robust internal process where we take a lot of factors into consideration to determine what our approach will be, but that's what gives us confidence. We will be getting about 6 points to 7 points of net price realization. At this point, we don't want to go into a lot of the specifics around the pricing. It was very recently announced, and so it is still out there being sold into customers. And we think from a competitive perspective at this point, we shouldn't go into too much more detail. We are assuming that we'll see historic elasticities, which is a little bit worse than we have seen in our recent price increases. So, we think that that's the right approach as we plan for this on the business going forward.

Great. Thank you.

Thanks, Ken.

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

Great. Thanks so much. Good morning, everybody.

Good morning.

Michele, I wanted to dig in a little bit more on market share trends in core chocolate. I know share trends have been weaker I think than expected particularly in everyday items even though Hershey is lapping some share losses in core chocolate last year. And I know last year there was more of a focus on capacity additions, but I guess I was -- I thought this year would mark a return to more innovation, more normal levels of sort of in-store commercial activity and such. So, I'm just trying to get a better understanding of what you think is driving those share losses and maybe when you'd expect to start to see those trends start to inflect, particularly in light of your intent to take some incremental pricing, albeit justified pricing?

Yeah, absolutely. So, first of all, I'd say we are encouraged that we continue to see category growth in that roughly 2% range. All along as we planned the year, we had expected our second half to be stronger, better than the first half due both to lapse as well as the timing of programming. And we had also anticipated Q2 to be a weaker takeaway quarter for us than Q1, given the timing of season, Reese's Caramel and then also some programming shifts where we had some programming that prior year was in Q2 that we shifted to Q3. That said, Q2 was a bit lighter than we anticipated both from a category perspective in terms of where consumers were shopping and what they were buying and certainly also from a share perspective. If I look at the areas of pressure in share that we saw in the quarter, sweet is an area that continued to be strong and certainly we under-indexed on sweets. As we look at the back half, we have significant incremental innovation with the Shaq launch, with new forms, et cetera, that we think is really going to help offset that. We saw pressure, particular pressure that hit us in C-store, given some of the weakening of those C-store channel trends, as well as an uptick in take home in club where we're less developed. And then finally, of course, the biggest factor that we had spoken about in the past, kind of the reduction -- continued reduction in key retailer merch, which reverses in the back half. So, as we look at the back half, we feel good about the progress that we'll have on sweets. Certainly, the strength of our programming from an innovation perspective, lapping that merch reduction at the big retailer, we have visibility into resets and we know that we're going to have advantaged position in resets in several key retailers, that's going to be a plus for us. And also, as we look season second half to first half, we are a big share player at seasons. First half had the weekend Easter with a short season and we have strong visibility to seasons in the back half. So, we know that that will drive share as well.

Great. And then, just a quick follow-up on the reduction in retailer merch that's kind of impacted the last couple of quarters that you'll be lapping, I guess, what was like the sort of post-mortem on that, if you will? Typically, some of these things kind of -- the pendulum swings too far maybe in one direction and then key retailers sort of figure out that it does make sense to put -- to have lots of different points of interruption, if you will, across the store because it's such an impulse item. So, I'm just curious like any lingering effects that you expect from that or not so much? Thanks.

I would say, I think that we're seeing things I would say neutralize. I would say that sometimes those things do go to more extremes and I think they -- while they don't revert back to where they were, I do think that there's more neutralization down the middle a bit more.

Thank you.

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

Good morning, everyone.

Good morning.

Hello.

So, can I just start with the question on the incentive comp being down? Does that imply that this quarter was something of a disappointment relative to plan maybe because the timing of the shipments for Halloween or the retailer inventories were run down? And what should we expect to have happen on those incentive payments going forward?

Yeah. The biggest driver on the incentive side is just tracking with what our expectations are from a full year standpoint. And so, we -- at any quarter, we true-up where we're at year-to-date and the outlook for the full year. And that's the benefit that we're -- say, benefit that's flowing through into the incentive comp right now.

Okay. And -- but the full year is the same or ish, I mean, there's only minor reduction in guidance this year. Obviously, this quarter was a disappointment relative to expectations. So, I was just trying to -- does that mean that the comp sort of bounces back next quarter and normalizes?

No. We wouldn't expect it to bounce back. We are -- incentives are structured as more than just, say, the headline numbers. There are things other goals and objectives underneath there. There's different parts of the portfolio that have different goals. So, even though the headline numbers may not change that much, some of the underlying incentive calculations can change. And so, as I say, we trued-up every quarter. We're not expecting it to come back. I would look at it as a step down for the second quarter that will continue to pull through the back half.

And that's [full-year] (ph) reduction in guidance does have an impact, I mean, a meaningful impact on the comp.

Got it. Okay, perfect. And then, on the gross margin, you mentioned that this quarter, obviously, you're still expecting 200 basis points decline for the full year. This quarter, you talked about input cost timing favorability. Which input cost was that on? Presumably, it wasn't cocoa, because I thought you had that locked in at the end of last year. So, just curious about the dynamics on input costs.

Yeah. There are a couple of things inside there for the second quarter. One is that we did have some movement in mark to market of derivatives for our hedging. And so, it's not a change from the past. We always have for current periods some mark to market that flows through the segment reporting. In this case, because of the volatility in commodities plus the business performance, and as always, the mix of instruments and tools that we use to hedge, we had some favorability there that came through relative to input costs. That's hard to predict. It varies quarter to quarter, but that was one of the pieces. We also made some small changes to -- as part of our ERP system in the way we match cost to products, that didn't have a big impact on the quarter, but slightly positive as well. As we look at those pieces, we look at them all as timing based and so we expect to see those come back in the back half.

Great. Thank you very much. I'll pass it on.

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

Hi. Thanks, operator. Good morning, everyone.

Good morning, Bryan.

Hey. So, Michele, I guess, a question I think you're going to get or we're all going to be asking over the balance of the year is just consumer receptivity of a price increase and maybe why normal elasticity. And I say that in the context of if you look at your own results, right, it's clearly a value shift, right? Dollar stores, club stores doing well, convenience stores not doing as well. Pepsi is cutting prices, right, on Frito, because they priced too high. There was -- the lift on merchandising wasn't very good. Mondelez is trying to get a $3 price point instead of a $4 price point in front of people's eyes. So, it just seems like a lot of the other snacking peers are adjusting down maybe to start stimulating demand. So, just how you think about that in the context of trying to take another price increase?

So, certainly -- as we put together the pricing, certainly we're experiencing outsized inflation versus I'd say some other peers. That said, we do really focus on the consumer. As we look at historic price elasticities, our recent pricing increases, we have been better than historical elasticity levels. So, we are putting in place a more conservative assumption on elasticity than we've seen in the past. That said, we also really take a surgical approach across the portfolio, with a lot of analysis to look at the key price points we need to be at, to offer the right range of opportunities for consumers. We've got a pretty significant amount of our portfolio that's under the $3 price point, and we've made choices across the portfolio about where we think those price increases will benefit and work and some places that we've chosen not to lean in on price. We also continue to optimize reinvestment and look at the total bundle of value because we know value includes both price points, but also seasons provides value, innovation provides value, and then reinvestment in the right precise price points from a promotional perspective as well. So, kind of that holistic approach is what makes us feel good about it.

Okay. And then, Steve, if I could just one quick follow-up, I think you mentioned it might have been in the prepared remarks, cocoa and beginning to start laying in a little bit for '25. If we think about the gross margin expectation for this year for '24, should we assume that you've got visibility or you're pretty much locked in on cocoa? So, if it moves around, it's more of a '25 versus '24 factor we should think about?

Yeah. For '24 itself, I'd say we're pretty well locked in on cocoa. And the only caveat I would say is like we saw this quarter, there's still some potential for some mark to -- some in-quarter mark-to-market movements that could go through this year, but cocoa supply and largest part of the cocoa cost lapped for this year. As we get to next year, of course, as we get further into the year, we'll share more about expectations for next year. I mean, it's no surprise, current cocoa prices still significantly up versus where they have been in the past. That's, of course, necessitating the price increase that we're talking about. So, more to come on '25, but for this year we feel pretty confident about where we're sitting from a commodity basket standpoint.

Okay. Thanks for that, Steve. Thanks, Michele.

You bet.

Thank you.

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

Great. Good morning. Just a quick follow-up on the previous question on pricing. You mentioned the 6% to 7% price increase. Is that consistent with what you would expect for North America Confection in your reported results for '25, or is -- are there timing issues there? Just wanted to check on that. And then separately, your commentary and guidance seems to imply stabilization or at least some acceleration into the second half in North America Confection. I just wanted to get your temperature. What of the stuff that you've talked about, Shaq, the new Reese's, the channel expansion that you talked about maybe with club and then the restoration of merchandising with that key retailer, what about that is the most important to that acceleration?

Sure. On the -- let me take. On the pricing side, you can't take the 6%, 7% net for the full year for Confection. This price increase is going to be phased in. Some parts will be phased in later this year. Some parts will be -- have impact next year. So, don't take that all the way. But we look overall mid single-digits in 2025 is the way to think about it.

Yeah. I guess, if I was going to zero-in on some of the biggest second half driver, certainly the lap on the large retailer, merch and resets is significant. So, I would put that first and foremost, and we have really good visibility into what that should look like. Secondly, the impact of season, that differential, also large and strong visibility into the sell-in for those seasons and then the sweets innovation is also one of the big drivers. And then lastly, I'd say the continued salty -- we really haven't talked much about salty, but the continued salty acceleration, we have seen the momentum shift on that business. Certainly, Dot's has remained strong, but SkinnyPop is seeing a regaining momentum and we expect to continue to see that in the back half.

Great. That's helpful. I'll pass it on. Thank you.

Thank you.

Thank you. Our next question comes from the line of Max Gumport with BNP Paribas. Please proceed with your question.

Hey, thanks for the question. In the prepared remarks, you discussed consumers pulling back on discretionary spending and C-store weakness. So, I was hoping to get a bit more color on what you're seeing there, particularly around the remark about seeing it really pick up over the last two months. And then, also a bit more color on how long you expect this dynamic could persist? Thank you.

Yeah. I mean, I think in times where consumers are forced to make choices and pull back on some of their discretionary spending, they're even more focused on getting the best value that they can. And so, shifting where they are making some of their purchases, where normally they may not go out of their way to do that, I think during those times, this is something they're doing, and I think that's why we're seeing some of the shift away from convenience store into more mass dollar, et cetera. And I think we've started to see that the first part of this year. I think I would expect to see that as we continue through the year. We do have confidence that we can continue to shift and offer the right offerings across all those channels. One of the strengths in our business is our ability to do that. And certainly, as we lap that, we will see that stabilize and/or grow.

Thanks. And then, with regard to the commentary of historic elasticity expected with the price increase on the North America Confection business, is that historic elasticity right around 1 or a 0.9? And just a bit more color on what's giving you the confidence that it will be right around that level? Thank you.

Yeah, you're right. It is right around 1. And based on the models that we use and what data points we have, we would say that we feel pretty good that that's our -- a good estimate for now. We are building in some of that conservatism versus where we've been in the past. And that's really for price in isolation. There are other levers that can help to offset that relative to things like increased innovation, seasons, improvements in activity at customers, et cetera, et cetera.

Thanks. I'll pass it on.

Thank you. Our next question comes from the line of Tom Palmer with Citi. Please proceed with your question.

Good morning, and thanks for the question. You mentioned your view that current cocoa prices are not sustainable. And I just wanted to understand in the context of the round of pricing that you announced, how you're thinking about covering longer-term pricing, so -- sorry, longer-term inflation. So, does this round of pricing kind of cover your view of where cocoa prices might migrate longer term?

So, our strategy regarding pricing to cover commodities hasn't changed, that remains in place. But as we've discussed before, we don't view that as totally linear, as in when the price goes up there's an automatic coverage. So, I'd start by saying, if we look at where prices have already been in terms of -- and the fact that we've mentioned that we have some coverage for '25, it would be a fair assumption to assume that this pricing will not fully cover inflation. Steve, anything you want to add to that?

Yeah. No, that's right. We continue to manage pricing as one of many levers. And so, we're also looking at cost reduction productivity, we're looking at formulation, we're looking at all kinds of levers that we've talked about in the past to manage cocoa price, still very volatile. And as I said before, given even where it is today, and it's down from where it was earlier this year, if we kind of took current prices and flash ahead to the future, it's pretty still a very significant year-over-year inflation piece. And so, this pricing action will help. It's not by itself going to mean that we're already at long term covering the total cost, but it's a good first step, and you can expect we'll take other steps across all the levers that we have in the basket to address.

And we'll continue to monitor cocoa pricing. Certainly, we know there's been some positive news recently, but we also believe there won't be any significant impact in pricing until there's much greater visibility in the fall harvest, which is a bit of time from now.

Okay. Thanks for that detail. And then, just any help kind of thinking about the puts and takes as we think about the third quarter versus the fourth quarter in terms of maybe some of the earnings cadence? Obviously, shipment timing is a big factor, but maybe any other help on kind of the progression of gross margin or underlying sales trends?

Yeah. On the -- it's a little more tricky to probably go quarter by quarter, but maybe if I just say, hey, as we look across the back half versus the front half, as we look at the back half, we're going to expect to see more AAA savings. We've been saying most of that's back-half loaded. We'll see some of that come through and some of that does impact gross profit. We'll have our regular CI productivity that I think we said on the earlier calls about $140 million target for the full year. We're right on track for that, but there's more of that to come in the back half than we saw in the first half. We'll also be lapping some incremental costs that we had in the back half of last year. Some of that was that for related warehousing and so forth. Most of the timing items, we would expect to reverse in Q3. So, I think we'll see more of those benefits reverse in Q3, but the others will continue over the back half. On the other side, as I think about back half gross margin, we'll have more commodity inflation, we'll have more seasons mix naturally coming in, and that seasons mix is slightly dilutive to margin. We'll have a little bit more sweets growth and sweets growth also a little bit dilutive from a margin standpoint and the reversal of some of the mark-to-market and other timing items that we talked about, again, mostly in Q3.

Okay. Thank you for that.

Thank you. Our next question comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.

Hi, thanks. Just wanted to know if you could kind of elaborate on your thinking for marketing support. There was a big increase last year and I think the plan was for another increase this year. Where do you stand on your how much marketing is going to increase this year? Has anything changed? And as you get into 2025, because of these incremental costs that you're going to have to take into account, how do you think about marketing relative to sales into '25? Thanks.

Yeah. So, we don't see a significant change in our marketing support versus what we had planned. As we look to this year, still up in line with our sales growth.

And the next year?

Yeah. And as we think about next year...

For next year, I'd expect also to match roughly in line with sales. And we're not far enough down all of our game planning for next year. We'll get more details later in the year, but I think from a planning standpoint, assume that it's going to at least match what we're doing from a sales standpoint.

Okay, great. Thank you.

You bet.

Thank you. Our next question comes from the line of Jim Salera with Stephens. Please proceed with your question.

Hi, good morning, guys. Thanks for taking our question. Michele, in the prepared remarks, you talked about in salty strong trends with Dot's and then kind of improvement for SkinnyPop in the back half of the year, but the salty category as a whole has seen some pressure, and obviously more promotional activity probably coming into the category. So, just maybe walk through puts and takes on what gives you the confidence for Dot's maintaining momentum in the back half of the year and then SkinnyPop reaccelerating?

Yeah, absolutely. So, certainly, we've continued to see tremendous growth on Dot's. I'd start by saying on Dot's, we continue to have a lot of more upside on expanding our depth of distribution. There are still distribution opportunities, whether it's by geography, whether it is depth within a store, space on shelf, given velocities. And we also have continued strong investments in Dot's relative to both marketing support and then also innovation relative to pack types and flavors. One example, recent launch of Parmesan Garlic. So, we continue to just have all the marketing levers still present opportunity on Dot's, because that brand has really still been in the kind of introductory phase. As I think about popcorn, I would say, yes, there's been some pressure on the category. We are seeing some stabilization as we lap some of the consumer concerns in that category and we continue to feel good about the stepped up innovation opportunities on SkinnyPop as well relative to flavor pack size and also marketing investments, which we have dialed up more recently as well in combination with lapping some of the softness from last year.

Okay. That's helpful. And maybe to drill down a little bit on the Ready-to-Eat popcorn, is part of the softness there just consumer preference for like trading out or opting for another substitute good instead of the popcorn, or is there something particular with that cohort, where the consumption trends are a little bit lighter there relative to something like Pretzels or Dot's?

Yeah. I mean, what we uncovered was the satiety factor was impacting total value proposition. And so that's what we started to see some softness on last second quarter. And we're now at a point where we're really starting to lap that and see it stabilize as we head through the back half of the year.

Great. Thanks for the color. I'll hop back in the queue.

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

Thank you. Good morning.

Good morning.

Good morning.

You touched on having some coverage for 2025 for cocoa. I'd imagine you don't want to be too specific, but more than halfway through the year now -- more than halfway through 2024 and with at least sort of an average maybe of kind of typically looking 12 months ahead, would we estimate or assume reasonably that you're kind of half covered for the year? I guess part of the question is, how much are you maybe looking to be patient for better rates, or kind of more focused on securing supply? Maybe just a sense of how kind of that securing product for 2025 is progressing? And related to that, maybe, I know you would ordinarily give an update in February when you report 4Q on the next calendar year. Is there any chance later this fall, when you've got plans put together, you might give a little preview sooner than normal, or should we expect just the typical cycle in terms of that news?

Sure. Yeah, on the -- specifics on hedging, you're right, I can't really give color around how far out we're hedged for 2025. As I said, our policy hasn't changed. And so, we've got some guardrails. It's fair to assume we've got some level of coverage in 2025, but we're still watching the market and the volatility. And so, we'll continue to, through our normal process, monitor that and take coverage as appropriate. As we get later in the year, as our visibility increases, I would hope to be able to provide a little bit more color. Again, a lot will depend on, as we sit here, for example, on the third quarter call what we see and how much visibility we do have into cocoa and probably some other variables as well. That would be the hope. We'll see how we're sitting when we get there, but we'd love to be able to provide more color once we have the visibility we can give you to rely on.

Okay. That's helpful. And just as far as -- obviously, the cocoa cost pressure is very well known, does that do anything to influence how you might think about portfolio optimization, maybe diversifying a little bit more away from chocolate specifically, or any other way that it might impact how you think about managing the portfolio?

Hey, I mean, we're always looking at the best portfolio to meet consumer needs. We love the categories that we're in. And as you know, we've made decisions to expand and leverage our core capabilities that are so strong in snacking more broadly across snacking with our -- particularly with our launch into salty a few years ago. We also look across our -- even our chocolate portfolio and try and optimize our demand creation. We have certain parts of the portfolio that have more cocoa and chocolate, and certain parts like cookies and cream that may have others, but our goal is always to go where the consumer is.

Okay. That's helpful. Thanks so much.

Thank you.

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

Hey, good morning. Thank you for the question. I just have one follow-up on levers, and then a clarification on the back half. Steve, just regarding the levers, in the prepared remarks, there was a statement that the pricing was the first step to cover inflation. I couldn't tell if the implication was that you're assessing the pricing in market before perhaps taking other pricing, or pricing is just one of your many tools in the toolkit to manage inflation. And then just regarding the toolkit, where is the most effort being put right now as far as levers to offset inflation, whether that's product reformulation, price pack, incremental productivity, maybe even have some tax savings. Doesn't feel like marketing will be a key source of savings. So, just you've had time to kind of prepare for this. Where is a lot of that work going right now? And then -- sorry for the long question, but just in the back half of the year, the 4 points visibility seems about 1 point is seasonal. Is the rest [Technical Difficulty] the innovation, or is there any of the 6-point kind of destock in Q2 coming back in the back half? Thanks for all that.

Sure. On the first part of your question, this is really just our normal strategy. We're always looking at the market. We're looking at cost. We're looking at pricing. And so, this isn't -- the comments weren't intended to say, hey, this is a tripwire pricing, and we're waiting to -- we will always be looking at pricing, and we'll be looking at all the levers. So, just to address that. In terms of levers, I would say we're focused on all of that, but some -- we've talked about in the past, PPA is a big one. We want to make sure that we are, as Michele said earlier, bringing value to consumers going where they are. We've got a lot of initiatives underway, some of which are contemplated in this price increase, but other things that we're working in collaboration with retailers to bring to bear in the next couple of years. So that continues to be a focus. And then things like the transformation program to drive cost savings all through the P&L, also one of the pieces, one of the levers that we can use, and driving production efficiency off the back of some of those technology investments. So, wide span of tools, but those are ones that are getting a lot of attention. And then on the back half, your question was just -- can you -- just ask you to repeat that last piece.

The question is basically there's roughly 4 points in the back half of shipment visibility highlighted in the prepared remarks. I can get to about 1 point of that being seasonal. The rest of that, is that incremental innovation, or just other proactive initiatives you have? Or is any of that this 6-point retail reduction in Q2 -- I couldn't tell because there was a comment about retail inventory should be in line with current levels into the full year. So, I didn't know if you were getting some of that back, or the rest of the shipment visibility and other things. Thanks.

Sure. The back half guidance doesn't require any increase in retailer inventory. So, like I said, we're at a level now that we might have expected to be at. The end of the year would be typical, but we're not expecting any increase in retailer inventory. And as far as some of those drivers we touched on some of them earlier for the back half and you have as well, we will have more innovation relative to the first half season will play a role. We'll have some easier laps in a couple of businesses. We mentioned in the prepared remarks, international will have some easier last salty as well given the ERP implementation there in the fourth quarter of last year. So, those are the things that give us confidence in what we can do from a business standpoint in the back half.

Okay. Great. 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. Maybe just a quick question for Steve. Just in terms of those levers, right, I mean clearly, you've outlined the $700 million in gross savings. I think it's through '26. So I'm just curious, kind of given the clear elevated cocoa cost situation, like is there a little bit more flex in those savings maybe to help offset some of those costs, or you just kind of preplan that too well, there are reinvestment needs that have already been earmarked, and we'll see what we can do, but not really? That's the first question.

Yeah. I'll say we're very focused on the cost side, absolutely. And so, as we look through the transformation work, as we look through the ongoing productivity work and even now moving past ERP and some of the savings we can leverage off the back of that, so all of those things are helping us focus on costs to help make some impact on what we can do from a cost savings standpoint. And as we said, we're expecting a net $300 million savings over that period. So, if not $300 million, then reinvest portion. We want $300 million net after reinvestment to hit the P&L.

Yeah. I guess I would just say like, could you take the $300 million to like $350 million because maybe the cost situation changed? I mean, it sounds like you're not budgeting...

Sure.

Yeah, okay.

Yeah. Well, I would just say we felt like we went pencils down on cost savings once we put that program in place. We continue to look all the time for cost savings. And believe me, all the pressure is up to find more.

Yeah. Fair enough. Okay. Cool. And then I guess, Michele, just kind of a question around some of this kind of ongoing discretionary spend softness on chocolate, because I kind of ask because, I mean, clearly, we've seen a tremendous and kind of ongoing growth on the sweet side of the business, so which you -- I guess, one could argue it's still somewhat discretionary and clearly still a much smaller piece of the U.S. broader confection market. So I guess, just first, kind of maybe like why do you think consumers have maybe increasingly shifted to kind of non-chocolate confection, one? And then, two, maybe how broad is the Shaq-a-licious launch expected to be as we get through the back half of the year? And then, three, like could there be any acquisition opportunities that you would maybe dream of, you don't have to name names, but yes, it could be an area of interest? That's all. Thanks.

Yeah. So first of all, I'd say chocolate is still growing. And the non-chocolate growth that we're seeing doesn't appear to be sourcing much from chocolate. We do believe that there's growth in that area due to some of the kind of the emotional factors around fun, dress release, and frankly, there's been a lot of news and innovation in that segment. So, in addition to value playing a role, there are many other main drivers, I would say, that do make sweets appealing, and it's one of the reasons that we've really ramped up our innovation in that space with Shaq with the launch of a new form in the back half and continued investment in those brands.

All right, fair enough. Thank you so much.

Thanks.

Thank you.

Thank you. Our next question comes from the line of Stephen Powers with Deutsche Bank. Please proceed with your question.

Good morning. Thank you so much. So, I know we're late in the call. I wanted to ask maybe kind of a wrap-up and longer-term question. A little over a year ago, you obviously outlined a number of initiatives to drive the next phase of long-term growth for the company at your Investor Day. And a lot of news at that time a discussion around upgraded commercial capabilities, digital network and supply chain optimization, workforce planning, et cetera. A lot of that you've touched upon it in bits and pieces today as well. But I guess when you step back, just given all the volatility you've experienced in the time since that day and kind of what you see ahead over the next 12-plus months, how would you assess your ability to keep pace with the cadence of change and improvement that you had envisioned during that Investor Day? Have you been able to largely keep pace amidst all this noise, or are there areas where the honest assessment is you'll have to do some catch up when the demand and cost environment hopefully stabilizes?

Well, I would say we have continued to drive really hard on all of those capabilities around digital workforce planning, et cetera. Steve referenced the transformation program. And that transformation program includes a lot of those components, and we have continued to make progress on that. So, starting with the completion of S/4, which we were able to successfully do, so that is now behind us. That was the foundation. Many of the work streams that enable us to deliver the transformation cost savings that we are on track to deliver involve technology and automation and digital solutions to enable that. So, those things are continuing to move ahead. So, I'd say it's kind of an 'and', which is dealing with the current pressured environment and continuing to drive ahead on all of those initiatives that are part of the transformation.

Okay, great. I appreciate it. Thank you.

There are no further questions at this time. I'd like to turn the floor over to Ms. Naughton for closing comments.

Thank you all so much for joining us this morning. We look forward to catching up with you in the coming days and weeks. Have a great rest of your day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.