Hershey / PA. (thc) The Hershey Company, a global leader in confection, on October 26 (hm, hm, hm …) announced sales and earnings for the third quarter ended October 01, 2017. Consolidated net sales were USD 2’033.1 million compared with USD 2’003.5 million for the third quarter of 2016. Reported net income for the third quarter of 2017 was USD 273.3 million or USD 1.28 per share-diluted, compared with USD 227.4 million or USD 1.06 per share-diluted for the comparable period of 2016. Overview:
- Third-quarter net sales increased 1.5 percent, including a contribution from favorable foreign currency exchange rates of 0.4 points
- Third-quarter earnings per share-diluted of USD 1.28 as reported and USD 1.33 adjusted
- Outlook for 2017 updated:
- Full-year net sales expected to increase about 1.25 percent
- foreign currency exchange rates expected to be about neutral
- Reported earnings per share-diluted expected to be in the USD 3.54 to USD 3.68 range
- Adjusted earnings per share-diluted expected to increase around the high end of the 7 percent to 9 percent range of USD 4.72 to USD 4.81
«Snacking continues to outpace the market in a rapidly changing environment», said Michele Buck, President and Chief Executive Officer, The Hershey Company. «We’re executing against the right strategies and investing in the brands and channels that will continue to drive our business forward. Hershey’s solid third-quarter results were in-line with our expectations and we are on track to deliver on the goals we established earlier this year, including, core brand growth, the launch of successful innovation and progress against our multi-year productivity and cost savings initiatives. The implementation of our confectionery and snacks consumer-driven demand model continues. The investments we’re making in our power chocolate brands – Reese’s, Hershey’s, Kit Kat and Kisses – are resonating with consumers in the marketplace as evidenced by the third-quarter combined U.S. retail takeaway on these brands of about 5 percent. While early, our new warehouse-based snacks initiative is off to a good start with Hershey’s and Reese’s Popped Snack Mix and Chocolate Dipped Pretzels progressing as planned. Halloween seasonal sales are tracking as expected with solid programming, merchandising and promotions being executed in the marketplace».
The Hershey Company’s board of directors approved a new USD 100 million stock repurchase authorization. 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 buy backs and dividends while also being able to participate in opportunistic merger and acquisition activity.
As described in the Note below, for the third quarter of 2017, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items impacting comparability of USD 7.8 million, or USD 0.05 per share-diluted. Reported gross margin of 46.2 percent represented an increase of 370 basis points versus the third quarter of 2016, while reported operating profit of USD 439.0 million in the third quarter of 2017 resulted in operating margin of 21.6 percent. For the third quarter of 2016, items impacting comparability totalled USD 72.4 million, or USD 0.23 per share-diluted. As described in the Note, adjusted net income, which excludes these items, was USD 283.6 million, or USD 1.33 per share-diluted, for the third quarter of 2017, compared with USD 277.3 million, or USD 1.29 per share-diluted, for the same period of 2016. The following table presents a summary of items impacting comparability in each period:
| Pre-Tax (millions) | Earnings Per Share-Diluted | ||||||||||||||
| Q3/2017 | Q3/2016 | Q3/2017 | Q3/2016 | ||||||||||||
| Derivative Mark-to-Market (Gains) Losses | USD | (22.0 | ) | USD | 35.8 | USD | (0.08 | ) | USD | 0.10 | |||||
| Business Realignment Activities | 8.3 | 28.0 | 0.03 | 0.10 | |||||||||||
| Acquisition Integration Costs | – | 2.3 | – | 0.01 | |||||||||||
| Non-Service Related Pension Expense | 21.5 | 6.3 | 0.06 | 0.02 | |||||||||||
| Long-Lived Asset Impairment Charges* | – | – | 0.04 | – | |||||||||||
| USD | 7.8 | USD | 72.4 | USD | 0.05 | USD | 0.23 | ||||||||
(*) There were no pre-tax impairment charges associated with long-lived assets during the three months ended October 01, 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.
For the first nine months of 2017, consolidated net sales were USD 5’575.8 million compared with USD 5’469.9 million for the same period of 2016, an increase of 1.9 percent. Reported net income for the first nine months of 2017 was USD 601.8 million or USD 2.81 per share-diluted, compared with USD 603.2 million or USD 2.80 per share-diluted for the comparable period of 2016. For the first nine months of 2017 and 2016, these results, prepared in accordance with GAAP, included items impacting comparability of USD 253.3 million and USD 133.1 million, or USD 0.92 and USD 0.44 per share-diluted, respectively. Adjusted net income, which excludes these items, was USD 798.8 million, or USD 3.73 per share-diluted, for the first nine months of 2017, compared with USD 698.9 million, or USD 3.24 per share-diluted, for the same period of 2016, an increase of 15.1 percent in adjusted earnings per share-diluted.
The following table presents a summary of items impacting comparability in each period:
| Pre-Tax (millions) | Earnings Per Share-Diluted | ||||||||||||||
| 9M-2017 | 9M-2016 | 9M-2017 | 9M-2016 | ||||||||||||
| Derivative Mark-to-Market (Gains) Losses | USD | (27.5 | ) | USD | 30.9 | USD | (0.11 | ) | USD | 0.09 | |||||
| Business Realignment Activities | 69.7 | 104.5 | 0.24 | 0.40 | |||||||||||
| Acquisition Integration Costs | 0.3 | 3.7 | – | 0.01 | |||||||||||
| Non-Service Related Pension Expense | 30.1 | 20.7 | 0.08 | 0.06 | |||||||||||
| Non-controlling Interest Share of Business Realignment and Impairment Charges (After-Tax) | (28.0 | ) | – | (0.13 | ) | – | |||||||||
| Settlement of Shanghai Golden Monkey (SGM) Liability | – | (26.7 | ) | – | (0.12 | ) | |||||||||
| Long-Lived Asset Impairment Charges | 208.7 | – | 0.84 | – | |||||||||||
| USD | 253.3 | USD | 133.1 | USD | 0.92 | USD | 0.44 | ||||||||
.
In 2017, the company expects reported earnings per share-diluted of USD 3.54 to USD 3.68, including items impacting comparability of approximately USD 1.13 to USD 1.18 per share-diluted. This projection, prepared in accordance with GAAP, assumes business realignment costs of USD 0.16 to USD 0.21 per share-diluted, including Margin for Growth Program costs of USD 0.11 to USD 0.16 per share-diluted, long-lived asset impairment charges of USD 0.87 per share-diluted relating to the Margin for Growth Program, and non-service related pension expense (NSRPE) of about USD 0.10 per share-diluted. The total per share-diluted impact relating to the Margin for Growth Program, included in the amounts above, is currently estimated to be USD 0.98 to USD 1.03.
Third-Quarter Performance
Consolidated net sales were USD 2’033.1 million in the third quarter of 2017, an increase of 1.5 percent versus the third quarter of 2016, including a 0.4 point benefit from foreign currency translation. Net sales growth was driven by the North America segment which benefited from core brand growth, innovation, including Hershey’s Cookie Layer Crunch, and the launch of Hershey’s and Reese’s Popped Snack Mix and Chocolate Dipped Pretzels. Volume was a 0.7 point contribution to sales growth and net price realization was a 0.4 point benefit.
Adjusted gross margin was 45.3 percent in the third quarter of 2017, compared to 45.6 percent in the third quarter of 2016. Supply chain productivity and cost savings initiatives, as well as lower input costs, were more than offset by higher freight rates and increased manufacturing and distribution costs associated with an effort to maintain customer service targets, as well as unfavorable sales mix. Additionally, as discussed last quarter, the transition to new packaging formats continued and, as expected, pressured gross margin. Advertising and related consumer marketing expense increased 3.7 percent versus the third quarter of 2016. Advertising expense increased 10 percent, partially offset by lower consumer promotions. Selling, marketing and administrative expenses, excluding advertising and related consumer marketing, increased 0.2 percent in the quarter as previously discussed cost savings and efficiency initiatives were offset by investments in go-to-market capabilities and employee-related costs. As a result, consolidated adjusted operating profit of USD 446.9 million in the third quarter of 2017 was about the same as the third quarter of 2016.
Outlook
The company continues to execute against the priorities outlined earlier in the year. Our seasonal business and programs are on track and the fourth quarter launch of Hershey’s Gold, a caramelized crème with peanuts and pretzels, should enable us to deliver on our objectives. The company is committed to its business model of investing in its brands and go-to-market capabilities that should strengthen Hershey’s leadership position and build upon marketplace results. The company reaffirms its full-year constant currency net sales growth of around 1.25 percent and expects foreign currency exchange rates to be about neutral, versus a prior estimate of 0.25 points unfavorable.
For the full year, we expect adjusted gross margin to increase about 25 basis points versus our previous outlook of about a 50 basis point increase. Productivity and cost savings initiatives, as well as lower input costs, are expected to be partially offset by the aforementioned higher freight, new packaging and customer service costs. Our brands typically respond positively to marketplace investments and there is no change to our full-year North America advertising and related consumer marketing outlook. International and Other segment advertising and related consumer marketing expense is estimated to be lower in 2017 versus 2016, resulting in total company spend that should be about the same as last year. In 2017, the company continues to anticipate its effective tax rate to be in the 26.5 percent to 27.0 percent range. As discussed earlier this year, the reduction in the 2017 tax rate versus 2016 is primarily driven by favorable foreign rate differential and investment tax credits, as well as the adoption of Accounting Standards update 2016-09 for the accounting of employee share-based payments. As a result, the company continues to expect the full year increase in adjusted earnings per share-diluted to be around the high end of its outlook of USD 4.72 to USD 4.81, or a 7 percent to 9 percent increase versus last year.
Business Segment Results
The following are comments about segment performance for the third quarter of 2017 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. and Canada)
Hershey’s North America net sales were USD 1’792.4 million in the third quarter of 2017, an increase of 1.6 percent versus the same period last year, including a 0.3 point benefit from foreign currency translation. Volume was a 1.6 point contribution to sales growth and net price realization was a 0.3 points headwind.
Total Hershey U.S. retail takeaway(1) for the 12 weeks ended October 08, 2017 increased 1.0 percent 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 October 8, 2017, in the MULO + C-Stores channels increased 1.4 percent, with market share off 0.3 points. Given our strong performance in the first half of the year, our year-to-date CMG market share is up 0.1 points.
Advertising and related consumer marketing expense increased 5.3 percent in the third quarter of 2017 versus the year ago period. The aforementioned increase in supply chain costs and slightly higher division selling, general and administrative expense pressured segment income. The company believes that these marketplace investments will be enablers of future profitable growth. As a result, North America segment income declined 1.7 percent to USD 554.6 million in the third quarter of 2017, compared to USD 563.9 million in the third quarter of 2016.
(1)Includes candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items.
International and Other
Third-quarter net sales for Hershey’s International and Other segment increased 0.8 percent to USD 240.7 million. Net price realization was a 4.7 point benefit and volume a 5.2 point headwind. Excluding the 1.3 point impact of favorable foreign currency exchange rates, net sales declined 0.5 percent. Combined constant currency net sales growth in Mexico, Brazil and India was about 8 percent. As expected, China net sales were about the same as the year ago period. International and Other segment income of USD 16.4 million compares to segment income of USD 4.3 million in the third quarter of 2016, driven primarily by cost savings initiatives in China related to the Margin for Growth program discussed in previous quarters.
Unallocated Corporate Expense
Hershey’s unallocated adjusted corporate expense in the third quarter of 2017 was USD 124.1 million, an increase of USD 2.3 million versus the same period of 2016 due primarily to higher employee-related costs.
