Hershey / PA. (thc) The Hershey Company announced sales and earnings for the fourth quarter ended December 31, 2014. Consolidated net sales were 2’010’027’000 USD compared with 1’956’253’000 USD for the fourth quarter of 2013. Reported net income for the fourth quarter of 2014 was 202’508’000 USD or 0.91 USD per share-diluted, compared with 186’075’000 USD or 0.82 USD per share-diluted for the comparable period of 2013. Overview:
- Fourth-quarter and full-year net sales increase 2.7 percent and 3.9 percent, respectively, including the impact of acquisitions and foreign currency exchange rates
- Shanghai Golden Monkey acquisition a 2.7 point and 0.75 point benefit in the fourth quarter and full year
- Unfavorable foreign currency exchange rates a 0.8 point and 0.7 point headwind in the fourth quarter and full year
- Fourth-quarter earnings per share-diluted of 0.91 USD as reported and 1.04 USD adjusted
- Full-year 2014 earnings per share-diluted of 3.77 USD as reported and 3.98 USD adjusted
- Outlook for 2015 updated:
- Full-year net sales expected to increase 5.5 percent to 7.5 percent, including a net benefit from acquisitions and divestitures of about 2.5 points and unfavorable foreign currency exchange of about one point
- Reported earnings per share-diluted expected to be in the 4.14 USD to 4.25 USD range
- Adjusted earnings per share-diluted expected to increase eight percent to ten percent, including dilution from acquisitions and divestitures of 0.03 USD to 0.05 USD per share, and be in the 4.30 USD to 4.38 USD range
«In 2014 Hershey made progress against its strategic initiatives as the U.S. business increased its overall candy, mint and gum (CMG) market share to 31.4 percent, we acquired Shanghai Golden Monkey, more than doubling the company´s presence in China, we expanded into snacks and adjacencies with the launch of Hershey´s Spreads Snacksters Graham Dippers and we sourced 30 percent of our cocoa needs from certified and sustainable cocoa farms, putting us in solid position to deliver on our goal to source 100 percent certified cocoa by 2020», said John P. Bilbrey, President and Chief Executive Officer, The Hershey Company. «Building on our snacks and adjacency strategy, we entered into an agreement to acquire Krave Jerky which enables us to enter the rapidly growing meat snacks category. As expected, U.S. marketplace performance sequentially improved throughout the year. Fourth quarter U.S. CMG retail takeaway increased 3.8 percent, driven by solid Halloween and Holiday gains with market share increases across all segments; chocolate, non-chocolate candy, mint and gum. For the full year 2014, Hershey U.S. CMG retail takeaway increased 2.7 percent, about one full percentage point greater than the category growth rate. However, throughout the year, retail store traffic and consumer trips were irregular. Additionally, increased levels of distribution and in-store activity of items such as salty, bakery and meat snacks, by both mainstream and newer contemporary niche manufacturers, were prevalent throughout the year and drove broader snacking category growth in 2014. This adversely impacted purchases of non-seasonal candy products resulting in net sales and operating profit that were below our expectations. In 2015, we expect marketing and selling efforts to be more precision based as they are focused on specific consumers and retail channels which should help mitigate the impact of volume elasticity related to the previously announced price increase and enable us to deliver upon our objectives».
For the fourth quarter of 2014, the results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included net pre-tax charges of 32.5 million USD or 0.13 USD per share-diluted. These charges included 4.5 million USD, or 0.02 USD per share-diluted, related to international business realignment charges, net acquisition and integration costs related to Shanghai Golden Monkey of 3.4 million USD, or 0.01 USD per share-diluted, Project Next Century program costs of 0.2 million USD, non-service-related pension income (NSRPI) of 0.4 million USD, and a 15.9 million USD, or 0.06 USD per share-diluted, non-cash impairment charge related to our business in India. In addition, on December 30, 2014, the company entered into an agreement to divest the Mauna Loa macadamia nut business. Consequently, fourth quarter 2014 results also included an additional write-down of 8.9 million USD, or 0.04 USD per share-diluted, on the anticipated disposal. Mauna Loa net sales in 2014 were approximately 68 million USD. Despite the aforementioned charges, reported gross margin of 44.1 percent increased 30 basis points versus last year. For the fourth quarter of 2013, results included pre-tax charges of 10.9 million USD or 0.04 USD per share-diluted. These charges included 5.5 million USD, or 0.02 USD per share-diluted, related to the Project Next Century program, acquisition and integration costs of 3.0 million USD, or 0.02 USD per share-diluted, and non-service-related pension expense (NSRPE) of 2.4 million USD. Adjusted net income, which excludes these net items, was 231’751’000 USD or 1.04 USD per share-diluted in the fourth quarter of 2014, compared with 195’627’000 USD or 0.86 USD per share-diluted in the fourth quarter of 2013, an increase of 20.9 percent in adjusted earnings per share-diluted. For the full year 2014, consolidated net sales were 7’421’768’000 USD compared with 7’146’079’000 USD in 2013, an increase of 3.9 percent. Reported net income for 2014 was 846’912’000 USD or 3.77 USD per share-diluted, compared with 820’470’000 USD or 3.61 USD per share-diluted for 2013. For the full years 2014 and 2013, these results, prepared in accordance with GAAP, included net pre-tax charges of 61.6 million USD and 34.0 million USD, or 0.21 USD and 0.11 USD per share-diluted, respectively. Charges associated with the Project Next Century program for 2014 and 2013 were 7.5 million USD and 19.1 million USD, or 0.02 USD and 0.05 USD per share-diluted, respectively. Acquisition and integration costs for 2014 and 2013 were 13.3 million USD and 4.1 million USD, or 0.05 USD and 0.03 USD per share-diluted, respectively. NSRPI for 2014 was 1.8 million USD, compared with NSRPE of 10.9 million USD, or 0.01 USD and 0.03 USD per share-diluted, respectively. International business realignment charges were 4.5 million USD, or 0.01 USD per share-diluted in 2014. Additionally, in 2014 the company recorded a non-cash impairment charge on its business in India of 15.9 million USD, or 0.06 USD per share-diluted, and a write-down totalling 22.2 million USD, or 0.08 USD per share-diluted, related to the anticipated Mauna Loa divestiture. Adjusted net income, which excludes these items, was 895’903’000 USD or 3.98 USD per share-diluted in 2014, compared with 844’320’000 USD or 3.72 USD per share-diluted in 2013, an increase of seven percent in adjusted earnings per share-diluted.
In 2015, the company expects reported gross margin to increase 135 to 145 basis points versus last year and reported earnings per share-diluted of 4.14 USD to 4.25 USD, including net pre-tax GAAP charges of approximately 45 million USD to 55 million USD, or 0.13 USD to 0.16 USD per share-diluted. This projection, prepared in accordance with GAAP, assumes net business realignment charges and other supply chain program costs of 0.04 USD to 0.05 USD per share-diluted, NSRPE of 0.04 USD to 0.05 USD per share-diluted, and net acquisition, integration and transaction costs of 0.05 USD to 0.06 USD per share-diluted.
Fourth-Quarter Performance
Fourth-quarter net sales increased 2.7 percent. Net price realization, primarily in the U.S., was a 3.1 point benefit. Excluding Shanghai Golden Monkey, volume was off 2.3 points due to price elasticity associated with the price increase announced in July and lower than expected non-seasonal sales. The Shanghai Golden Monkey acquisition was a 2.7 point benefit and foreign currency exchange rates were a 0.8 point headwind.
North America seasonal net sales were in line with expectations and Hershey increased its leading U.S. market share position in the key Halloween and Holiday periods. U.S. non-seasonal net sales were below expectations given previously mentioned retail store trip declines. Additionally, as stated last quarter, the company estimates that due to the buy-in related to the price increase, about one point of North America net sales occurred in the third quarter that would have normally occurred in the fourth quarter. International net sales, excluding the Shanghai Golden Monkey acquisition, increased eight percent, less than estimates due to macroeconomic headwinds in select markets and foreign currency exchange rates that were greater than anticipated. China continues to drive international net sales growth and increased about 37 percent in the fourth quarter, excluding Shanghai Golden Monkey.
Hershey´s U.S. candy, mint and gum (CMG) retail takeaway for the twelve weeks and year ended December 27, 2014, 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 3.8 percent and 2.7 percent, respectively, resulting in market share gains of 0.5 points and 0.3 points, respectively. For the year-to-date period ended December 27, 2014, Hershey´s U.S. CMG market share was an industry leading 31.4 percent.
Fourth-quarter adjusted gross margin increased 30 basis points, less than expectations. This increase was driven by net price realization, slightly favorable input costs and supply chain productivity, partially offset by unfavorable sales mix and other supply chain costs. Total selling, marketing and administrative expenses declined about five percent in the fourth quarter due primarily to lower employee related costs.
Outlook
«In 2015, the company has many exciting new products that will bring variety, news and excitement to the category. In addition to the fourth-quarter carryover benefit of Brookside Crunchy Clusters and Reese´s Spreads take home jar, the company is also launching Kit Kat White Minis, Hershey´s Caramels, Ice Breakers Cool Blasts Chews, Reese´s Spreads Snacksters Graham Dippers and some other yet to be announced new candy and snacking products. These launches will be supported with higher levels of advertising and in-store merchandising and programming that should enable us to mitigate the impact of volume elasticity related to the price increase and compete effectively across the CMG and broader snack categories. Additionally, we expect advertising, including a greater shift to digital and mobile communication, to increase at a rate greater than net sales growth», Bilbrey concluded. The company estimates full-year 2015 net sales to increase 5.5 percent to 7.5 percent, including a net benefit from acquisitions and divestitures1 of about 2.5 points and unfavorable foreign currency exchange. Excluding the net benefit of acquisitions and divestitures, full-year net sales are expected to increase three percent to five percent, including unfavorable foreign currency exchange. The company expects foreign exchange translation to be greater than its previous estimates and to have an unfavorable impact of approximately one percentage point on full-year net sales growth.
The company continues to focus on growth initiatives and margin-enhancing opportunities in addition to normal productivity gains. With the conclusion of the Project Next Century program, in 2015 the company will begin to focus on the opportunities that exist for future incremental increases in productivity and costs savings. A portion of any potential savings from this assessment would be reinvested in initiatives to accelerate revenue growth. As stated in October, gross margin is expected to increase in 2015 driven by pricing and productivity. The company expects that 2015 adjusted gross margin expansion of 135 to 145 basis points will contribute to an increase in adjusted earnings per share-diluted of eight percent to ten percent, including dilution from acquisitions and divestitures of 0.03 USD to 0.05 USD per share.
