Hershey: Announces Third-Quarter Results

Hershey / PA. (thc) The Hershey Company, a global leader in confection, announced sales and earnings for the third quarter ended October 4, 2015. Consolidated net sales were 1’960.8 million USD compared with 1’961.6 million USD for the third quarter of 2014. Reported net income for the third quarter of 2015 was 154.8 million USD or 0.70 USD per share-diluted, compared with 223.7 million USD or 1.00 USD per share-diluted for the comparable period of 2014.

  • Third-quarter net sales in line with last year, including the impact of acquisitions, divestitures and foreign currency exchange rates; organic net sales increase 1.5 percent
    • Net acquisitions and divestitures a 0.5 point benefit
    • Unfavorable foreign currency exchange rates a 2.0 point headwind
  • Third-quarter earnings per share-diluted of 0.70 USD as reported and 1.17 USD adjusted
  • Outlook for 2015 net sales and adjusted earnings per share-diluted updated:
    • Full-year net sales expected to be about the same, to slightly up, versus 2014, including a net benefit from acquisitions and divestitures of about one point and unfavorable foreign currency exchange rates of at least 1.5 points
    • Adjusted earnings per share-diluted expected to increase towards low end of three percent to five percent range

«In the third quarter Hershey’s efforts were focused on ensuring successful execution of our seasonal plans, which are on track and should result in good Halloween and Holiday seasons», said John P. Bilbrey, Chairman, President and Chief Executive Officer, The Hershey Company. «Net sales increased 2.0 percent in the third quarter, excluding unfavorable foreign currency translation. We were very pleased with North America gross margin expansion that resulted in solid operating profit growth. U.S. net sales were below expectations due to lower than expected candy, mint and gum (CMG) retail takeaway in the third quarter. This softness also impacted broader mainstream snacks, where consumption trends during the quarter were less than the June year-to-date increase. It appears that CMG and broader snacks marketplace performance in the quarter was pressured by lower consumer trips and a decline of in-store merchandising and programming at some retailers. However, in October, CMG in-store merchandising and programming has been executed which, while preliminary, should result in Hershey share gains in the important Halloween season».

As described in the Note below, for the third quarter of 2015, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included net pre-tax charges of 140.2 million USD, or 0.47 USD per share-diluted. Reported gross margin of 45.5 percent represented an increase of 170 basis points versus last year, while reported operating profit declined 15.5 percent to 303.0 million USD. For the third quarter of 2014, reported results included net pre-tax charges of 13.8 million USD, or 0.05 USD per share-diluted.

For the first nine months of 2015, consolidated net sales were 5’477.4 million USD compared with 5’411.7 million USD for the first nine months of 2014. Reported net income for the first nine months of 2015 was 299.6 million USD or 1.35 USD per share-diluted, compared with 644.4 million USD or 2.86 USD per share-diluted for the first nine months of 2014. As described in the Note, for the first nine months of 2015 and 2014, these results, prepared in accordance with GAAP, included net pre-tax charges of 421.8 million USD and 29.1 million USD, or 1.69 USD and 0.09 USD per share-diluted, respectively.

Adjusted net income, which excludes these net charges, was 672.7 million USD, or 3.04 USD per share-diluted, for the first nine months of 2015, compared with 664.2 million USD, or 2.95 USD per share-diluted, for the same period of 2014, an increase of 3.1 percent in adjusted earnings per share-diluted.

In 2015, the company expects reported gross margin to increase around 125 basis points versus last year and reported earnings per share-diluted of 2.22 USD to 2.34 USD, including net pre-tax GAAP charges of approximately 1.84 USD to 1.88 USD per share-diluted. This projection, prepared in accordance with GAAP, assumes business productivity initiatives of 0.35 USD per share-diluted, international business realignment and other supply chain program costs of 0.04 USD to 0.05 USD per share-diluted, non-service related pension expense (NSRPE) of 0.04 USD to 0.05 USD per share-diluted, net acquisition, integration and transaction costs of 0.08 USD to 0.10 USD per share-diluted, costs associated with the early extinguishment of debt of 0.08 USD per share-diluted, a gain on the sale of a trademark of 0.03 USD per share-diluted and goodwill impairment charges of 1.28 USD per share-diluted.

Third-Quarter Performance

Consolidated net sales were 1’960.8 million USD in the third quarter, in line with the third quarter of 2014. Excluding the effect of foreign currency translation, which was greater than estimates and a 2.0 point headwind, net sales increased 2.0 percent versus the year ago period. Price realization, primarily in the U.S., was a 5.8 point benefit. Volume was off 4.3 points due primarily to elasticity related to the previously announced price increase and lower sales in China. Net acquisitions and divestitures were a 0.5 point benefit. North America net sales were below expectations due to the aforementioned lower consumer trips and a decline of in-store merchandising and programming at some retailers. International and Other net sales, excluding the benefit of the Shanghai Golden Monkey (SGM) acquisition and unfavorable foreign currency exchange rates, declined versus a year ago due primarily to the underperformance of Hershey’s chocolate business in China.

Adjusted gross margin was 46.0 percent in the third quarter of 2015, compared to 43.8 percent in the third quarter of 2014. The 220 basis point increase was driven by net price realization, supply chain productivity and costs savings initiatives, partially offset by higher commodity costs and unfavorable sales mix.

Total advertising and related consumer marketing expense was in line with the year ago period as increases in North America were offset by planned reductions in international spending. Selling, marketing and administrative (SM+A) expenses, excluding advertising and related consumer marketing, increased about 2.8 percent. Excluding the SGM, Krave and Allan Candy acquisitions and the Mauna Loa divestiture, SM+A expenses excluding advertising and related consumer marketing declined 2.8 percent versus the year ago period. Consolidated adjusted operating profit increased 9.1 percent to 414.9 million USD in the third quarter of 2015, compared to 380.4 million USD in the third quarter of 2014.

Outlook
«In the fourth quarter, North America advertising and related consumer marketing is expected to accelerate and our investment in consumer and customer programming should also be up markedly when compared to both the just-completed third quarter and the fourth quarter of 2014», Bilbrey continued. «These initiatives will support the seasonal business as well as our Reese’s NCAA College Game Day promotion and new products such as Hershey’s Kisses Deluxe chocolates and Brookside dark chocolate fruit and nut bars. We believe this activity will lead to a sequential improvement in U.S. marketplace performance in the fourth quarter».

The company estimates full-year net sales will be about the same, to slightly up, versus 2014, including a net benefit from acquisitions and divestitures of about one percentage point and unfavorable foreign currency exchange of at least 1.5 percentage points. Excluding unfavorable foreign currency exchange rates, full-year net sales are expected to increase about 1.5 percent to 2.0 percent. This is less than the previously provided range of 3.0 percent to 4.0 percent due primarily to international macroeconomic challenges and the aforementioned third-quarter CMG marketplace trends. Given year-to-date results and the impact of higher levels of international trade promotion, the company expects the full-year adjusted gross margin increase to be towards the low end of the estimated 135 to 145 basis point range. The company remains focused on non-essential SM+A expenses as it continues to leverage existing resources. Additionally, implementation of the business productivity initiative announced in June is on track and the company expects total project savings to be at the high end of the 65 million USD to 75 million USD range. Savings from the project in 2015 are expected to be about 25 million USD versus the previous estimated range of ten million USD to 15 million USD. Therefore, adjusted earnings per share-diluted is expected to be towards the low end of the previously provided three percent to five percent range, or approximately 4.10 USD per share-diluted. Dilution from acquisitions and divestitures included in the aforementioned adjusted earnings per share-diluted outlook is expected to be about 0.35 USD per share-diluted. This is greater than the previous estimate of about 0.20 USD per share-diluted.

Business Segment Results

The following are comments about segment performance for the third quarter of 2015 versus the year ago period. See the attached schedule of supplementary information for additional information on segment net sales and profit.

North America

Hershey’s North America net sales were 1’733.9 million USD in the third quarter, an increase of 2.4 percent versus last year. Excluding the 1.1 point impact of unfavorable foreign exchange rates in Canada, North America net sales increased 3.5 percent. Net price realization was a 6.9 point benefit and volume was off 3.7 points with elasticity related to the pricing action relatively in line with estimates. On a net basis, the Allan Candy and Krave acquisitions, as well as the Mauna Loa divestiture, were a 0.3 point benefit. Adjusting for the Mauna Loa divestiture, net sales in the U.S. were slightly less than estimates due to lower consumer retail trips and a decline of merchandising and programming at some retailers that impacted many snack categories. As expected, Canada net sales, excluding the Allan Candy acquisition and unfavorable foreign currency exchange rates, increased about ten percent driven by pricing.

Hershey’s U.S. CMG retail takeaway for the twelve weeks ended October 3, 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 0.3 percent, with market share off 0.4 points. For the year-to-date period ended October 3, 2015, Hershey’s U.S. market share was an industry leading 31.2 percent, the same as last year.

North America segment income increased 11.7 percent to 546.1 million USD in the third quarter of 2015, compared to 488.9 million USD in the third quarter of 2014. Segment income growth was driven by 300 basis points of gross margin expansion, primarily due to pricing.

International and Other

Third quarter net sales for Hershey’s International and Other segment declined 15.2 percent to 226.9 million USD, due primarily to lower net sales of chocolate products in China. Unfavorable foreign currency exchange rates were a 7.9 point headwind and incremental sales from the SGM acquisition a 2.3 point benefit. Combined third-quarter constant currency net sales in Mexico and Brazil increased mid-single digits on a percentage basis versus last year. Constant currency net sales in India declined, in line with estimates, due to the planned discontinuance of edible oil products in the third quarter. India core brand sales increased high-single digits on a percentage basis versus last year. In the third quarter, China chocolate category retail sales increased about four percent. This was less than our expectation and the June year-to-date growth rate. Hershey third-quarter chocolate retail takeaway in China was off about 14 percent, resulting in a market share decline of 1.7 points.

International and Other segment loss of 13.5 million USD compares to segment income of 16.1 million USD in the third quarter of 2014. Performance was primarily attributable to lower China chocolate net sales and SGM dilution.

Unallocated Corporate Expense

Hershey’s unallocated adjusted corporate expense in the third quarter of 2015 was 117.7 million USD, a decline of 6.9 million USD versus the year ago period.

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