Hershey: Announces Q1/2016 Results, Updates Outlook

Hershey / PA. (thc) The Hershey Company, a global leader in confection, announced sales and earnings for the first quarter ended April 03, 2016. Consolidated net sales were 1’828.8 million USD compared with 1’937.8 million USD for the first quarter of 2015. Reported net income for the first quarter of 2016 was 229.8 million USD or 1.06 USD per share-diluted, compared with 244.7 million USD or 1.10 USD per share-diluted for the comparable period of 2015.

«Our first-quarter efforts were focused on ensuring successful sell-in and sell through of Easter candy and making progress against strategic initiatives that are expected to benefit net sales and earnings growth over the remainder of the year», said John P. Bilbrey, Chairman, President and Chief Executive Officer, The Hershey Company. «First-quarter net sales were relatively in line with our overall forecast and operating income was slightly ahead, driven by greater than expected productivity and cost savings. Easter performance was solid versus our forecast but non-seasonal candy, mint and gum (CMG) shipments were below plan. However, the non-seasonal softness was more than offset by the timing of some merchandising program net sales that occurred in the first quarter that were initially expected to ship in the second quarter. Our updated outlook for the full year reflects the modest non-seasonal CMG category and Hershey trends through the April year-to-date period. North America CMG investments, including new products, advertising, and increased levels of merchandising and display, are expected to accelerate in the second quarter and over the remainder of the year. Given the quality and level of these investments, there could be upside to our outlook if non-seasonal CMG marketplace performance is better than the first quarter trends. Building on our snacks strategy, today we announced that we purchased Ripple Brand Collective, LLC, a privately held company that owns the barkTHINS mass premium chocolate snacking brand. Since its launch in 2013, barkTHINS has quickly become a favorite snack brand due to its commitment to using simple ingredients, fair trade cocoa and non-GMO certification. barkTHINS is a very attractive and uniquely crafted brand that essentially created the chocolate ‘thins’ category, a new form of chocolate snacking. We look forward to building barkTHINS by leveraging Hershey’s scale at retail».

Beginning in 2017, the company has increased its annual savings target from continuous improvement and productivity programs (CIP) from about 50 million USD to 70 million USD per year to about 100 million USD per year through 2019. CIP savings will be generated from cost optimization across all segments of the business and should enable the company to continue to invest in its brands while also delivering on its earnings objectives. Similar to prior years, the company expects that approximately two-thirds of the CIP savings will be generated by supply chain initiatives. Additionally, in 2016, the company expects to achieve incremental CIP savings of 10 million USD to 15 million USD.

As described in the Note below, for the first quarter of 2016, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included pre-tax charges of 54.4 million USD, or 0.16 USD per share-diluted. This was partially offset by a favorable settlement of the Shanghai Golden Monkey (SGM) liability related to the acquisition of 26.6 million USD, or 0.12 USD per share-diluted. Reported gross margin of 44.7 percent represented a decrease of 180 basis points versus the first quarter of 2015, due primarily to commodity derivative mark-to-market losses, while reported operating profit declined 13.9 percent to 339.5 million USD. For the first quarter of 2015, reported results included net pre-tax charges of 9.7 million USD, or 0.02 USD per share-diluted, which was more than offset by a gain on the sale of a trademark of 10.0 million USD, or 0.03 USD per share-diluted.

As previously communicated in the company’s fourth quarter earnings release, 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.

As described in the Note, adjusted net income, which excludes these net charges, was 238.9 million USD, or 1.10 USD per share-diluted, for the first quarter ended April 3, 2016, compared with 243.5 million USD, or 1.09 USD per share-diluted, for the same period of 2015, an increase of 0.9 percent in adjusted earnings per share-diluted.

In 2016, the company expects reported earnings per share-diluted of 4.16 USD to 4.23 USD, including net pre-tax GAAP charges of approximately 0.05 USD to 0.08 USD per share-diluted. This projection, prepared in accordance with GAAP, assumes business realignment charges of 0.08 USD to 0.09 USD per share-diluted, non-service related pension expense (NSRPE) of 0.06 USD to 0.07 USD per share-diluted, net acquisition integration costs of 0.03 USD to 0.04 USD per share-diluted and a favorable settlement of the SGM liability of 0.12 USDper share-diluted.

First-Quarter Performance

Consolidated net sales were 1’828.8 million USD in the first quarter of 2016, a decline of 5.6 percent versus the first quarter of 2015. Excluding the effect of foreign currency translation, which was slightly greater than estimates and a 1.2 point headwind, net sales declined 4.4 percent versus the year ago period. Price realization on seasonal CMG products was more than offset by increased levels of direct trade resulting in a net price realization headwind of 0.5 points. Volume was off 4.3 points due to a shorter Easter season and anticipated lower sales in China. Net acquisitions and divestitures were a 0.4 point benefit.

Adjusted gross margin was 46.8 percent in the first quarter of 2016, compared to 46.6 percent in the first quarter of 2015. The 20 basis point increase was driven by greater than expected supply chain productivity and cost savings initiatives and slightly favorable commodity costs, partially offset by other supply chain costs.

Total advertising and related consumer marketing expense declined about 10 percent versus the first quarter of 2015 due to timing. North America new product launches, as well as merchandising and display activity, are expected to accelerate over the remainder of 2016 and be supported by advertising and related consumer marketing expense, which should increase at a percentage rate greater than net sales growth. Selling, marketing and administrative (SM+A) expenses, excluding advertising and related consumer marketing, declined about 9 percent in the quarter, driven by the aforementioned increase in our annual productivity and cost savings target as well as the initiative announced in June of 2015. In the first quarter of 2016, the company repurchased 303.9 million USD Dollars of outstanding shares, resulting in diluted shares outstanding of 217.5 million, compared to 222.7 million in the first quarter of 2015.

Outlook

«Non-seasonal CMG results are anticipated to improve over the remainder of the year driven by greater levels of consumer programming and more effective brand support that should result in net sales, retail takeaway and market share growth», Bilbrey continued. «Where we have already made investments, results have been solid. Specifically, Reese’s market share is up 0.4 points in 2016 driven by new and refreshed television and digital marketing campaigns. The company has many new products that will bring variety, news and excitement to the CMG category including, Reese’s Snack Mix, Hershey’s Snack Bites, Cadbury Chocolates targeting the mass premium market, Reese’s white minis, Kit Kat Big Kat, as well as other CMG items that should result in improving trends. Additionally, new advertising campaigns on many of our key brands, including Hershey’s, Kit Kat and Ice Breakers begin in the second quarter».

The company estimates full-year 2016 net sales will increase around 1.5 percent, including a net benefit from acquisitions and divestitures of about 0.5 points. The company expects foreign currency exchange translation to have an unfavorable impact of approximately 1.0 percentage point on full-year net sales growth, resulting in an anticipated net sales increase of 2.5 percent on a constant currency basis. Excluding both unfavorable foreign currency exchange rates and the barkTHINS acquisition, full-year net sales are expected to increase about 2.0 percent. This is less than the previous estimate of about 3.0 percent, primarily due to lower than expected non-seasonal CMG growth over the remainder of the year. The company expects gross margin to be slightly below last year due primarily to unfavorable sales mix. The business productivity initiative announced in June and the incremental CIP savings are on track. As stated earlier, the company will continue to invest in advertising and related consumer marketing, including a greater shift to digital and mobile communications. As a result, the company expects adjusted earnings per share-diluted for 2016 to increase 3.0 percent to 4.0 percent, including barkTHINS dilution of 0.05 USD to 0.06 USD per share, and be in the 4.24 USD to 4.28 USD range.

Business Segment Results

The following are comments about segment performance for the first quarter of 2016 versus the year ago period. 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 1’633.5 million USD in the first quarter of 2016, a decline of 4.3 percent versus the same period last year. Volume was off by approximately 3.7 points due primarily to a shorter Easter season. Price realization on seasonal CMG products was more than offset by increased levels of direct trade resulting in a net price realization headwind of 0.7 points. The combined Allan Candy and Krave acquisitions, as well as the Mauna Loa divestiture, were a 0.5 point benefit. Foreign exchange rates were 0.4 points unfavorable.

Hershey’s U.S. CMG retail takeaway for the 12 weeks ended March 26, 2016, 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 8.2 percent, with market share off 0.1 points. This performance benefited from Easter being one week earlier in 2016. Therefore, April marketplace performance will be less than the year ago period and is expected to result in April year-to-date Hershey CMG retail sales of about the same as last year. In addition, Hershey’s and Reese’s snack mix items are not included in the CMG database as Nielsen captures this within salty snacks.

North America segment income declined 4.5 percent to 529.4 million USD in the first quarter of 2016, compared to 554.3 million USD in the first quarter of 2015. The decline in segment income was primarily driven by lower sales. North America advertising and related consumer marketing expense declined 6.6 percent versus the first quarter of 2015 due to timing.

International and Other

First-quarter net sales for Hershey’s International and Other segment declined 15.4 percent to 195.3 million USD, due primarily to lower net sales in China and the previously stated discontinuance of edible oil products in India. Unfavorable foreign currency exchange rates and the Mauna Loa divestiture were a 7.3 point and 0.7 point headwind, respectively. Net price realization was a 1.0 point benefit and volume was off 8.4 points. Combined first-quarter constant currency net sales in Mexico and Brazil increased nearly 6 percent driven by solid Hershey’s marketplace performance. As expected, China net sales declined about 35 percent in the first quarter of 2016 versus the year ago period as sell-in related to Chinese New Year items was lower than last year reflecting the challenging macroeconomic environment and continued competitive activity. In the first quarter of 2016, China chocolate category retail sales declined about 10 percent.

International and Other segment loss of 13.2 million USD compares to segment loss of 21.6 million USD in the first quarter of 2015. Combined income in Latin America and export markets improved versus last year and was more than offset by lower sales and unfavorable mix in China.

Unallocated Corporate Expense

Hershey’s unallocated adjusted corporate expense in the first quarter of 2016 was 122.2 million USD, a decline of 16.6 million USD versus last year primarily due to the implementation of the aforementioned productivity and cost savings initiatives.

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