Hershey: Reports First-quarter 2020 Financial Results

Hershey / PA. (thc) The Hershey Company announced net sales and earnings for the first quarter ended March 29, 2020. «We had a solid start to the year with our business performing as expected prior to the impact of Covid-19,» said Michele Buck, The Hershey Company President and Chief Executive Officer. «Our best wishes go out to those being affected by this pandemic, and our heartfelt thanks to those working tirelessly to help us persevere through it. At Hershey, we have an opportunity to help ensure a steady food supply and create some economic stability for our employees and the farmers, suppliers and partners that rely on us. We take great pride and passion in our ability to make moments of goodness during this time when physical connection is limited. The team has demonstrated relentless energy and dedication to plan and adapt while continuing to operate safely. The situation continues to evolve rapidly, and it is difficult to predict the future with much certainty. But we have more than 125 years of experience managing through challenging, fast-moving and unprecedented moments in time. We continue to focus on making the best long-term decisions for all our key stakeholders and believe this resilience will make us stronger in the days and years ahead.»

First-Quarter 2020 Financial Results Summary1

  • Consolidated net sales of USD 2,037.3 million, an increase of 1.0 percent.
  • Organic, constant currency net sales increased 0.5 percent.
  • The net impact of acquisitions and divestitures on net sales was a 0.8 point benefit, while foreign currency exchange was a 0.3 point headwind.
  • Reported net income of USD 271.1 million, or USD 1.29 per share-diluted, a decrease of 11.0 percent.
  • Adjusted earnings per share-diluted of USD 1.63, an increase of 2.5 percent.

1 All comparisons for the first quarter of 2020 are with respect to the first quarter ended March 31, 2019.

2020 Full-Year Financial Outlook
The company’s previously issued net sales and earnings guidance on January 30, 2020, did not anticipate a significant impact from Covid-19. Overall, the company’s first quarter performance was relatively in line with expectations, with a modest impact from Covid-19. However, retail foot traffic and takeaway have been volatile and consumer shopping and consumption behaviors are evolving in light of social distancing protocols. The length and severity of the pandemic and associated changes to consumer behaviors remain uncertain. Due to the rapidly, evolving situation and the high degree of uncertainty, the company does not believe that it can estimate the full financial impacts with reasonable accuracy, and therefore believes it is prudent to withdraw fiscal 2020 full-year guidance at this time. The company believes it has sufficient liquidity to satisfy its cash needs, as supported by access to bank lines of credit and an unsecured revolving credit facility. The company reaffirms its long-term financial objectives of net sales growth in the range of 2 percent to 4 percent and an increase in earnings per share of 6 percent to 8 percent.

First-Quarter 2020 Results
Consolidated net sales were USD 2,037.3 million in the first quarter of 2020 versus USD 2,016.5 million in the year ago period, an increase of 1.0 percent. Price realization was a 2.8 point benefit and the net impact of acquisitions and divestitures was a 0.8 point benefit driven by the acquisition of ONE Brands. Volume and foreign currency exchange were a 2.3 point and a 0.3 point headwind, respectively. These results were relatively in line with expectations, with a modest impact from Covid-19.

The company’s first-quarter 2020 results, as prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items positively impacting comparability of USD 86.3 million, or USD 0.34 per share-diluted, as outlined in the table below. For the first quarter of 2019, items positively impacting comparability totaled USD 31.2 million, or USD 0.14 per share-diluted.

Reported gross margin was 42.5 percent in the first quarter of 2020, compared to 44.3 percent in the first quarter of 2019, a decrease of 180 basis points. This decrease was driven by incremental derivative mark to market commodity losses. Adjusted gross margin was 46.6 percent in the first quarter of 2020, compared to 45.7 percent in the first quarter of 2019, an increase of 90 basis points, driven by net price realization and plant efficiencies from proactively building inventory to mitigate risk related to Covid-19.

Selling, marketing and administrative expenses increased 4.8 percent in the first quarter of 2020 versus the first quarter of 2019, driven by increased advertising spending and business investments. Advertising and related consumer marketing expenses increased 4.5 percent in the first quarter of 2020 versus the same period last year driven by advertising increases in North America. Selling, marketing and administrative expenses, excluding advertising and related consumer marketing, increased 5.0 percent versus the first quarter of 2019. This increase was driven by the timing of investments in strategic growth capabilities and initiatives, including supply chain and the company’s new enterprise resource planning system.

First-quarter 2020 reported operating profit of USD 382.8 million decreased 12.8 percent versus the first quarter of 2019, resulting in an operating profit margin of 18.8 percent, a decrease of 300 basis points. This decrease was driven by lower gross profit related to incremental derivative mark to market commodity losses and higher selling, marketing and administrative expenses. Adjusted operating profit of USD 471.5 million increased 0.2 percent versus the first quarter of 2019. This resulted in an adjusted operating profit margin of 23.1 percent, a decrease of 20 basis points versus the first quarter of 2019 as gross margin gains were more than offset by incremental advertising expenses and accelerated business investments.

The effective tax rate in the first quarter of 2020 was 19.8 percent, a decrease of 340 basis points versus the first quarter of 2019. The adjusted tax rate in the first quarter of 2020 was 19.1 percent, a decrease of 290 basis points versus the first quarter of 2019. Both the effective and adjusted tax rate decreases were driven primarily by higher investment tax credits versus the year ago period.

The following table presents a summary of items impacting comparability in each period (see Appendix I for additional information):

Pre-Tax (millions) Earnings Per Share-Diluted
Three Months Ended Three Months Ended
March 29, 2020 March 31, 2019 March 29, 2020 March 31, 2019
Derivative Mark-to-Market Losses USD 81.8 USD 28.0 USD 0.39 USD 0.13
Business Realignment Activities 0.9 0.5
Acquisition-Related Costs 1.7 3.1 0.01 0.02
Long-Lived Asset Impairment Charges 7.5 0.04
Noncontrolling Interest Share of Business Realignment and Impairment Charges (2.4 ) (0.4 ) (0.01 )
Facility Closure Reserve Adjustment (3.2 ) (0.01 )
Tax effect of all adjustments reflected above (0.08 ) (0.01 )
USD 86.3 USD 31.2 USD 0.34 USD 0.14

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The following are comments about segment performance for the first quarter of 2020 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 1,844.8 million in the first quarter of 2020, an increase of 2.1 percent versus the same period last year. Price realization was a 2.9 point benefit and the net impact of acquisitions and divestitures was a 0.9 point benefit. Volume was a 1.7 point headwind and foreign currency exchange was negligible.

Total Hershey U.S. retail takeaway for the 12 weeks ended April 5, 20204 in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores) increased 5.9 percent versus the prior-year period. Hershey’s U.S. candy, mint and gum retail takeaway increased 5.9 percent, resulting in a 100 basis point market share gain versus the prior-year period. Hershey’s salty snack retail takeaway increased 12.0 percent during the latest 12 weeks led by strong Skinny Pop and Pirate’s Booty performance.

North America advertising and related consumer marketing expenses increased by 6.9 percent in the first quarter of 2020 versus the same period last year driven by higher advertising expenses. Gross margin gains were driven by net price realization, as well as plant efficiencies from proactively building inventory to mitigate risk related to Covid-19. These gains resulted in a segment income increase of 3.0 percent to USD 581.6 million in the first quarter of 2020, compared to USD 564.8 million in the first quarter of 2019.

4Includes candy, mint, gum, salty snacks, meat snacks and grocery items

International and Other
First-quarter 2020 net sales for Hershey’s International and Other segment decreased 8.1 percent versus the same period last year to USD 192.5 million. Excluding a 2.3 point headwind from foreign currency exchange rates, constant currency net sales declined 5.8 percent. Volume was a 7.2 point headwind, largely attributable to Covid-19 related softness, particularly in China. These losses were partially offset by favorable net price realization of 1.4 points. Combined net sales in the company’s strategic focus markets (Mexico, Brazil, India and China) decreased approximately 13.1 percent. Excluding a 4.7 point headwind from foreign currency exchange rates, combined organic constant currency net sales in Mexico, Brazil, India and China declined approximately 8.4 percent.

International and Other segment income decreased 20.9 percent to USD 16.0 million in the first quarter of 2020 driven by softness in China due to the impact of Covid-19.

A reconciliation between reported net sales growth rates and (i) constant currency net sales growth rates and (ii) organic constant currency net sales growth rates is provided below:

Three Months Ended March 29, 2020
Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis Impact of Acquisitions and Divestitures Percentage Change on Organic Constant Currency Basis
Mexico (1.4 ) % (1.5 ) % 0.1 % % 0.1 %
Brazil (6.4 ) % (16.9 ) % 10.5 % % 10.5 %
India (8.3 ) % (1.5 ) % (6.8 ) % % (6.8 ) %
China (46.7 ) % (1.3 ) % (45.4 ) % % (45.4 ) %
Total Strategic Focus Markets (13.1 ) % (4.7 ) % (8.4 ) % % (8.4 ) %

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Unallocated Corporate Expense
Hershey’s unallocated corporate expense in the first quarter of 2020 was USD 126.1 million, an increase of USD 11.6 million, or 10.1 percent versus the same period of 2019. This increase was driven by incremental investments to advance strategic capabilities for long-term growth.

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