Hershey: Reports Q2-2018 Results

Hershey / PA. (thc) The Hershey Company announced sales and earnings for the second quarter ended July 1, 2018. The company updated its 2018 reported net sales and earnings outlook to reflect strategic international business divestitures and reaffirmed its organic sales and adjusted earnings outlook.

«We delivered our second quarter results and we remain on track to achieve the financial targets we shared in April,» said Michele Buck, The Hershey Company President and Chief Executive Officer. «We continue to invest in the U.S. with our core brands and build capabilities for growth while taking measured steps to enhance long-term profitability. Amplify’s strong performance in the marketplace continues and the integration is proceeding as planned. I am very pleased with the ongoing transformation of our international business with solid organic growth, meaningful profit improvement, and the successful divestitures of Tyrrells and Golden Monkey.

«Hershey’s Board of Directors has approved a new USD 500 million stock repurchase authorization and a dividend increase of 10 percent,» Buck continued. «Hershey’s solid balance sheet and strong cash flow generation gives the company continued flexibility against its cash priorities, including returning cash to shareholders in the form of dividends and buy backs, while also being able to participate in strategic merger and acquisition activity.»

Second Quarter 2018 Financial Results Summary

  • Consolidated net sales of USD 1,751.6 million, an increase of 5.3 percent.
  • Acquisitions were a 5.9 point benefit to net sales growth and foreign currency exchange rates were negligible.
  • Reported net income of USD 226.9 million, or USD 1.08 per share-diluted.
  • Adjusted earnings per share-diluted of USD 1.14, an increase of 5.6 percent.

All comparisons above are with respect to the second quarter ended July 2, 2017.

2018 Full Year Financial Outlook Summary

  • Full-year reported net sales are expected to increase towards the low end of the updated 3.5 percent to 5.5 percent range. This includes an updated net impact from acquisitions and divestitures of approximately 3.5 points versus the previous estimate of 5.0 points, reflecting recent international business divestitures.
  • The outlook for organic net sales is reaffirmed towards the low end of the slightly up to 2 percent range.
  • The impact of foreign currency exchange rates is expected to be negligible.
  • Full-year reported earnings per share-diluted are now expected to be in the USD 4.76 to USD 4.96 range.
  • The outlook for adjusted earnings per share-diluted of USD 5.33 to USD 5.43, an increase of 14 to 16 percent, is reaffirmed.
  • Quarterly dividend declared on Common Stock and increased 10 percent.

All comparisons above are with respect to the fiscal year ended December 31, 2017.

Second Quarter 2018 Results

Consolidated net sales were USD 1,751.6 million in the second quarter of 2018 versus USD 1,663.0 million in the year ago period, an increase of 5.3 percent. Acquisitions were a 5.9 point benefit, volume was a 1.0 point benefit and net price realization was a 1.6 point headwind. Foreign currency translation impact was negligible.

As outlined in the table below, the company’s second quarter 2018 results, as prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items impacting comparability of USD 22.6 million, or USD 0.06 per share-diluted. For the second quarter of 2017, items impacting comparability totaled USD 24.8 million, or USD 0.13 per share-diluted.

Reported gross margin of 45.3 percent represented a decline of 80 basis points versus the second quarter of 2017. Adjusted gross margin was 44.5 percent in the second quarter of 2018, compared to 47.1 percent in the second quarter of 2017, a decline of 260 basis points. This was in line with expectations, driven by higher freight and logistics costs, incremental investments in trade and packaging, unfavorable mix and additional plant costs related to new production lines.

Advertising and related consumer marketing expense increased on core confection brands in North America but was offset by spend optimization and shifts within emerging brands and international resulting in an overall decline of 7.2 percent in the second quarter of 2018 versus the same period last year. Selling, marketing and administrative expenses, excluding advertising and related consumer marketing, increased 5.6 percent for the second quarter of 2018. The company continued to reduce its foundational cost structure, but that benefit was more than offset by Amplify acquisition costs and investment in the multi-year implementation of its enterprise resource planning (ERP) system.

Second quarter 2018 reported operating profit was USD 315.7 million, resulting in an operating margin of 18.0 percent. Adjusted operating profit of USD 339.5 million declined 2.0 percent versus the second quarter of 2017 and resulted in an adjusted operating margin of 19.4 percent driven by gross margin declines.

The effective tax rate in the second quarter of 2018 was 14.1 percent, including the impact of the U.S. Tax and Jobs Act of 2017. As anticipated, the second-quarter 2018 adjusted tax rate of 16.0 percent declined versus the prior year period due to U.S. tax reform. The following table presents a summary of items impacting comparability in each period:

Pre-Tax (millions) Earnings Per Share-Diluted
Three Months Ended Three Months Ended
July 1, 2018 July 2, 2017 July 1, 2018 July 2, 2017
Derivative Mark-to-Market (Gains) Losses USD (20.8 ) USD 11.6 USD (0.09 ) USD 0.06
Business Realignment Activities 15.3 14.5 0.02 0.04
Acquisition-Related Costs 4.8 0.01
Long-Lived Asset Impairment Charges1 27.2 0.13 0.04
Noncontrolling Interest Share of Business Realignment Charges (1.2 ) (1.3 ) (0.01 )
Gain on Sale of Licensing Rights (2.7 ) (0.01 )
Total USD 22.6 USD 24.8 USD 0.06 USD 0.13

1 There were no pre-tax impairment charges associated with long-lived assets during the three months ended July 2, 2017. However, the long-lived asset impairment charge in the first quarter of 2017 was not treated as a discrete tax item. Therefore, the tax impact was included in the estimated annual effective tax rate resulting in an earnings per share- (EPS) diluted impact for each of the quarters throughout 2017.

The following are comments about segment performance for the second quarter of 2018 versus the year-ago period. See the schedule of supplementary information within this press release for additional information on segment net sales and profit.

North America (U.S. and Canada)

Hershey’s North America net sales were USD 1,560.0 million in the second quarter of 2018, an increase of 5.6 percent versus the same period last year, driven by the Amplify acquisition.
Total Hershey U.S. retail takeaway1 for the 12 weeks ended July 15, 2018, was in line with prior year in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores). Hershey’s U.S. candy, mint, and gum (CMG) retail takeaway for the 12 weeks ended July 15, 2018, in the MULO + C-Stores channels declined (0.4 percent), resulting in a CMG market share loss of 30 basis points.

North America advertising and related consumer marketing increased on core confection brands but was offset by spend optimization and shifts within emerging brands, resulting in an overall decline of 6.1 percent in the second quarter of 2018 versus the same period last year. Gross margin pressures and incremental business investment costs resulted in a segment income decline of 3.5 percent to USD 443.9 million in the second quarter of 2018, compared to USD 460.0 million in the second quarter of 2017.

As a category leader and key partner to its customers, the company continues to invest in core brands and build capabilities in this dynamic environment. As consumers increasingly blur the physical and digital shopping experience, Hershey is making meaningful progress to drive awareness, equity and conversion across the retail ecosystem from any touchpoint. Second-half consumer-driven initiatives, including Reese’s Outrageous! bar, strong Halloween and Holiday activity, and new campaigns on Reese’s and Hershey’s brands will be important contributors to the company’s growth.

1 Includes candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items.

International and Other

Second-quarter 2018 net sales for Hershey’s International and Other segment increased 3.1 percent to USD 191.7 million.  Net price realization and volume were a 3.8 point and 1.0 point benefit, respectively. The impact of foreign currency exchange rates was a 1.7 point headwind. Combined constant currency net sales growth in Mexico, Brazil and India was about 15 percent. The transformation of our China business continues and is on track. Recent strategic international divestitures enable us to further streamline operations and focus on driving profitable growth in our core Hershey’s portfolio throughout key markets and channels. International and Other segment income of USD 16.6 million in the second quarter of 2018 compared to segment income of USD 8.4 million in the second quarter of 2017.

Unallocated Corporate Expense

Hershey’s unallocated corporate expense in the second quarter of 2018 was USD 121.0 million, a decrease of USD 0.9 million versus the same period of 2017. The decline was driven by Margin for Growth Program initiatives to reduce our foundational cost structure, partially offset by the Amplify acquisition and the multi-year implementation of the company’s ERP system.
A reconciliation between reported and constant currency growth rates is provided below:

Three Months Ended July 1, 2018
Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis
North America segment
Canada (2.6 )% 3.8 % (6.4 )%
Total North America segment 5.6 % 0.2 % 5.4 %
International and Other segment
Mexico 3.2 % (4.4 )% 7.6 %
Brazil 8.3 % (13.9 )% 22.2 %
India 23.1 % (5.1 )% 28.2 %
Greater China 6.7 % 7.8 % (1.1 )%
Total International and Other segment 3.1 % (1.7 )% 4.8 %
Total Company 5.3 % % 5.3 %

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We also present the percentage change in projected 2018 net sales on a constant currency basis. To determine this, projected 2018 net sales for entities reporting in currencies other than the U.S. Dollar are translated into U.S. Dollars at the company’s average monthly exchange rates in effect during the corresponding period of the prior fiscal year, and are compared to the 2017 results translated into U.S. Dollars using the same 2017 average monthly exchange rates.

2018 Full Year Financial Outlook

Full-year reported net sales are expected to increase towards the lower end of the updated 3.5 percent to 5.5 percent range. This includes an updated net impact from acquisitions and divestitures of approximately 3.5 points versus the previous estimate of 5.0 points, reflecting recent international business divestitures. Estimated reported earnings per share-diluted are now expected to be in the USD 4.76 to USD 4.96 range.

Consistent with its previous guidance for 2018, the company expects:

  • Organic sales growth towards the low end of the slightly up to 2 percent range.
  • Foreign currency exchange rate impact to be negligible.
  • Adjusted earnings per share-diluted of USD 5.33 to USD 5.43, an increase of 14 percent to 16 percent.
  • Adjusted gross margin to decrease around 125 basis points, as benefits from productivity and cost savings initiatives are more than offset by unfavorable sales mix and higher freight, logistics and packaging costs.
  • Margin for Growth Program savings of USD 80 million to USD 90 million.
  • Adjusted effective tax rate of approximately 19 percent to 20 percent.
  • Total capital additions, including software, of USD 355 million to USD 375 million Dollars.

Below is a reconciliation of projected 2018 and full-year 2017 earnings per share-diluted calculated in accordance with GAAP to non-GAAP adjusted earnings per share-diluted:

2018 (Projected) 2017
Reported EPS – Diluted USD 4.76 – USD 4.96 USD 3.66
Derivative mark-to-market gains (0.14)
Business realignment costs 0.20 – 0.25 0.25
Acquisition-related costs 0.15 – 0.20
Gain on sale of licensing rights (0.01)
Pension settlement charges relating to Company-directed initiatives 0.02
Long-lived asset impairment charges 0.13 0.87
Impact of U.S. tax reform 0.15
Noncontrolling interest share of business realignment and impairment charges (0.12)
Adjusted EPS – Diluted USD 5.33 – USD 5.43 USD 4.69

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2018 projected earnings per share-diluted, as presented above, does not include the impact of mark-to-market gains and losses on our commodity derivative contracts that will be reflected within corporate unallocated expenses in segment results until the related inventory is sold, since we are not able to forecast the impact of the market changes.

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