Hershey / PA. (thc) The Hershey Company, a global leader in confection, announced sales and earnings for the fourth quarter ended December 31, 2015. Consolidated net sales were 1’909.2 million USD compared with 2’010.0 million USD for the fourth quarter of 2014. Reported net income for the fourth quarter of 2015 was 213.4 million USD or 0.98 USD per share-diluted, compared with 202.5 million USD or 0.91 USD per share-diluted for the comparable period of 2014.
«We made progress against our strategic initiatives in 2015, generated solid gross margin expansion in North America and largely maintained our overall U.S. candy, mint and gum (CMG) market share as retail takeaway on our U.S. core brands increased», said John P. Bilbrey, Chairman, President and Chief Executive Officer, The Hershey Company. «The Krave meat snacks business and integration is on plan and the Reese’s Snack Mix, Hershey’s Snack Bites and Brookside dark chocolate fruit and nut bar launches are in line with expectations. We are listening to consumers and their changing preferences with respect to simple ingredients and transparency. During the fourth-quarter holiday season we nationally debuted Holiday Hershey’s Kisses Milk Chocolates and Hershey’s Milk Chocolate Bars, made with simple ingredients and no artificial flavors. These are some of the first products from Hershey to transition to simpler ingredients, a commitment announced last year. Holiday Hershey’s Kisses Milk Chocolates packages were also the first to pilot the SmartLabel, which allows consumers to scan a QR code and instantly access detailed product information, from ingredient and nutrition facts to allergens. Our solid balance sheet and continued strong cash flow generation enabled us to return nearly 900 million USD to shareholders through a 9 percent dividend increase and meaningful share repurchase activity. Additionally, earlier today we announced that the Board of Directors has approved a new 500 million USD stock repurchase authorization».
As described in the Note below, for the fourth quarter of 2015, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included net pre-tax charges of 38.9 million USD, or 0.10 USD per share-diluted. Reported gross margin of 44.7 percent represented an increase of 60 basis points versus the fourth quarter of 2014, while reported operating profit declined 0.1 percent to 343.1 million USD. For the fourth quarter of 2014, reported results included net pre-tax charges of 32.5 million USD, or 0.13 USD per share-diluted. The following table presents a summary of the charges in each period:
| – All numbers in USD – | Pre-Tax in millions | EPS Diluted | ||||||
| Q4/2015 | Q4/2014 | Q4/2015 | Q4/2014 | |||||
| 2015 Productivity Initiative | 15.4 | – | 0.05 | – | ||||
| Other Business Realignment Charges | 4.1 | 4.7 | 0.01 | 0.02 | ||||
| Acquisition + Integration Costs | 8.3 | 3.4 | 0.01 | 0.01 | ||||
| Non-Service Related Pension Expense (Income) | 11.1 | (0.4) | 0.03 | – | ||||
| Goodwill / Intangible Asset Impairment | – | 15.9 | – | 0.06 | ||||
| Loss on Mauna Loa Divestiture | – | 8.9 | – | 0.04 | ||||
| 38.9 | 32.5 | 0.10 | 0.13 | |||||
For the full year ended December 31, 2015, consolidated net sales were 7’386.6 million USD compared with 7’421.8 million USD in 2014. Reported net income for 2015 was 513.0 million USD or 2.32 USD per share-diluted, compared with 846.9 million USD or 3.77 USD per share-diluted in 2014. As described in the Note, for 2015 and 2014, these results, prepared in accordance with GAAP, included net pre-tax charges of 460.7 million USD and 61.6 million USD, or 1.80 USD and 0.21 USD per share-diluted, respectively. The following table presents a summary of the charges in each period:
| – All numbers in USD – | Pre-Tax in millions | EPS Diluted | ||||||
| FY-2015 | FY-2014 | FY-2015 | FY-2014 | |||||
| 2015 Productivity Initiative | 105.8 | – | 0.32 | – | ||||
| Other Business Realignment Charges | 12.6 | 12.0 | 0.04 | 0.03 | ||||
| Acquisition + Integration Costs | 22.4 | 13.3 | 0.05 | 0.05 | ||||
| Non-Service Related Pension Expense (Income) | 18.1 | (1.8) | 0.05 | (0.01) | ||||
| Goodwill / Intangible Asset Impairment | 280.8 | 15.9 | 1.28 | 0.06 | ||||
| Loss on Early Extinguishment of Debt | 28.3 | – | 0.09 | – | ||||
| Loss on Mauna Loa Divestiture | 2.7 | 22.2 | – | 0.08 | ||||
| Gain on Sale of Trademark | (10.0) | – | (0.03) | – | ||||
| 460.7 | 61.6 | 1.80 | 0.21 | |||||
As described in the Note, adjusted net income, which excludes these net charges, was 909.7 million USD, or 4.12 USD per share-diluted, for the full year ended December 31, 2015, compared with 895.9 million USD, or 3.98 USD per share-diluted, for the same period of 2014, an increase of 3.5 percent in adjusted earnings per share-diluted.
In 2016, the company expects reported earnings per share-diluted of 4.18 USD to 4.23 USD, including net pre-tax GAAP charges of approximately 0.15 USD to 0.18 USD per share-diluted. This projection, prepared in accordance with GAAP, assumes business productivity initiatives of 0.07 USD to 0.08 USD per share-diluted, non-service related pension expense (NSRPE) of 0.06 USD to 0.07 USD per share-diluted and net acquisition and integration costs of 0.02 USD to 0.03 USD per share-diluted.
Effective January 1, 2016, we are no longer electing to qualify commodity derivatives for hedge accounting treatment. Additionally, we have revised our definition of segment income and redefined non-GAAP income and earnings per share measures to exclude gains and losses on commodity derivatives until the related inventory is sold. We believe this change to our definition of segment income and non-GAAP income and non-GAAP earnings per share will continue to reflect the derivative gains and losses with the underlying exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income as well as non-GAAP income and non-GAAP earnings per share.
Fourth-Quarter Performance
Consolidated net sales were 1’909.2 million USD in the fourth quarter, a decline of 5.0 percent versus the fourth quarter of 2014. Excluding the effect of foreign currency translation, which was slightly greater than estimates and a 1.9 point headwind, net sales declined 3.1 percent versus the same period last year. Price realization, primarily in the U.S., was a 1.0 point benefit. Volume was off 4.5 points due to sales declines in China and slightly lower sales in North America versus estimates. Net acquisitions and divestitures were a 0.4 point benefit.
Adjusted gross margin was 45.0 percent in the fourth quarter of 2015, compared to 44.2 percent in the fourth quarter of 2014. The 80 basis point increase was driven by net price realization, supply chain productivity and costs savings initiatives, partially offset by obsolescence, other supply chain costs and slightly higher commodity costs.
Total advertising and related consumer marketing expense declined about 7 percent versus the fourth quarter of 2014 driven by planned reductions in international spending. North America on-air and digital media was higher in the fourth quarter, although advertising and related consumer marketing expense was in line with the year ago period as production costs were less than anticipated. For the full year North America advertising and related consumer marketing expense increased 3.1 percent. Selling, marketing and administrative (SM+A) expenses, excluding advertising and related consumer marketing, declined about 5.9 percent in the quarter, driven by implementation of the business productivity initiative announced in June and the company’s continued focus on non-essential SM+A spending. In the fourth quarter, savings from these initiatives were greater than expectations. As a result, consolidated adjusted operating profit increased 1.3 percent to 380.4 million USD in the fourth quarter of 2015, compared to 375.3 million USD in the fourth quarter of 2014.
Outlook
«Over the long term we expect constant currency net sales growth of 3 percent to 5 percent», Bilbrey continued. «This reflects challenges related to changing U.S. shopping habits and volatile international markets. We remain focused on growth and will continue to invest in our core brands in the U.S. and key international markets and build on the strategies we have established as we believe they will benefit the company over the long term. We will also make incremental investments in our existing snacks platform as it will provide us with another lever of growth. Over time, these initiatives should enable us to achieve consistent sales and earnings growth. Given the scale advantages of our North America business and a balanced approach to international investments, the company expects to generate long-term adjusted earnings per share-diluted growth of 6 percent to 8 percent».
In 2016, the company estimates full-year reported net sales will increase around 2.0 percent, including unfavorable foreign currency exchange of about 1 percentage point. Excluding unfavorable foreign currency exchange rates, full-year constant currency net sales growth is expected to be around 3.0 percent. North America net sales are expected to be driven by confectionery and snacks growth, including Krave meat snacks distribution gains. The company has many exciting new products that will bring variety, news and excitement to our core brands as well as the confectionery and snack categories, including Reese’s Snack Mix and Hershey’s Snack Bites canisters, Cadbury Chocolates in a stand-up pouch targeting the mass premium market, the introduction of Allan Candy sugar confectionery peg bag items and some other yet to be announced new candy and snacking products. The company expects gross margin to be about the same as last year. The business productivity initiative announced in June is on track and the company is also focused on non-essential SM+A spending as it continues to leverage existing resources. Additionally, the company will continue to invest in advertising and related consumer marketing, including a greater shift to digital and mobile communication. As a result, the company expects adjusted earnings per share-diluted for 2016 to increase about 6.0 percent.
Business Segment Results
The following are comments about segment performance for the fourth quarter of 2015 versus the same period last year. See the attached schedule of supplementary information for additional information on segment net sales and profit.
North America (U.S. + Canada)
Hershey’s North America net sales were 1’627.7 million USD in the fourth quarter of 2015, an increase of 0.2 percent versus the same period last year. Excluding the 1.0 point impact of unfavorable foreign exchange rates in Canada, North America net sales increased 1.2 percent. Net price realization was a 2.3 point benefit and volume was off 1.4 points. On a net basis, the Allan Candy and Krave acquisitions, as well as the Mauna Loa divestiture, were a 0.3 point benefit. Fourth quarter spreads and baking chips sales declined versus the fourth quarter of 2014 due to increased competitive activity. U.S. CMG net sales were impacted by some retailers’ focus on managing inventory levels and slightly lower seasonal sales than anticipated.
Hershey’s U.S. CMG retail takeaway for the 12 weeks ended December 26, 2015, in the expanded all outlet combined plus convenience store channels (xAOC+C-store), which accounts for approximately 90 percent of the company’s U.S. retail business, was up 2.5 percent, with market share slightly off. For the 52 weeks ended December 26, 2015, Hershey’s U.S. market share was an industry leading 31.3 percent.
North America segment income increased 6.2 percent to 512.9 million USD in the fourth quarter of 2015, compared to 482.9 million USD in the fourth quarter of 2014. Segment income growth was driven by 200 basis points of gross margin expansion, primarily due to pricing and supply chain productivity and costs savings initiatives, as well as the productivity program announced in June.
International and Other
Fourth-quarter net sales for Hershey’s International and Other segment declined 26.8 percent to 281.5 million USD, due primarily to lower net sales in China. Unfavorable foreign currency exchange rates were a 5.7 point headwind. Combined fourth-quarter constant currency net sales in Mexico and Brazil declined slightly versus the same period last year due to the challenging macroeconomic environment and competitive activity. Constant currency net sales in India declined, in line with estimates, due to the planned discontinuance of edible oil products. In the fourth quarter of 2015, China chocolate category retail sales declined about 13 percent. This was greater than our expectation and impacted sell-in related to product for the Chinese New Year season. As a result, China chocolate constant currency net sales declined about 34 percent in the fourth quarter.
International and Other segment loss of 18.3 million USD compares to segment income of 18.8 million USD in the fourth quarter of 2014. Performance in China, due to lower sales, more than offset combined income in other geographies and export markets.
Unallocated Corporate Expense
Hershey’s unallocated corporate expense in the fourth quarter of 2015 was 114.2 million USD, a decline of 12.1 million USD versus the same period last year primarily due to the implementation of the productivity initiative announced in June and a focus on non-essential SM+A spending.
