Hershey / PA. (thc) The Hershey Company, the largest producer of quality chocolate in North America and a global leader in chocolate, sweets and refreshments, announced sales and earnings for the first quarter ended March 30, 2014. Consolidated net sales were 1’871’813’000 USD compared with 1’827’426’000 USD for the first quarter of 2013. Reported net income for the first quarter of 2014 was 252’495’000 USD or 1,11 USD per share-diluted, compared with 241’906’000 USD or 1,06 USD per share-diluted for the comparable period of 2013.
«The profile of Hershey´s results for the first quarter was slightly below our expectations», said John P. Bilbrey, President and Chief Executive Officer, The Hershey Company. «Given U.S. Brookside distribution gains in the year ago period, the timing of our more meaningful innovation later this year and softness in Latin America, first quarter organic net sales growth was pressured. Additionally, U.S. retail trends varied and were impacted by lower consumer trips in the instant consumable channels and irregular purchasing patterns within the traditional food and mass channels. However, towards the end of the first quarter, consumer trends began to normalize and, while preliminary, April Nielsen data indicates a good sell through for the Easter season and a sequential improvement in non-seasonal candy».
«During the first quarter we also made solid progress against the initiatives we discussed earlier this year, giving us confidence Hershey will deliver on its 2014 expectations of five to seven percent net sales growth, including the impact of foreign currency exchange rates and a nine to eleven percent increase in adjusted earnings per share-diluted. Net sales are expected to accelerate over the remainder of the year driven by core brands and innovation as well as the necessary amount of advertising and related consumer marketing. Specifically, our new product pipeline is robust. In the U.S., York Minis and Hershey´s Spreads instant consumable items launch in late May and Ice Breakers Cool Blasts Chews and Brookside Crunchy Clusters are expected to ship in the third quarter. In key international markets we will continue to build on Hershey´s chocolates and Hershey´s Kisses momentum and will begin a broader rollout of Reese´s Peanut Butter Cups in the second half of the year».
As described in the Note below, for the first quarter of 2014, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included net pre-tax charges of 13,4 million USD or 0,04 USD per share-diluted. These charges included 3,0 million USD or 0,01 USD per share-diluted related to the Project Next Century program, net acquisition and transaction costs primarily associated with Shanghai Golden Monkey of 11,0 million USD or 0,03 USD per share-diluted and non-service-related pension income (NSRPI) of 0,6 million USD. Reported gross margin of 46,6 percent increased ten basis points versus last year while reported income before interest and income taxes (Ebit) increased 3,0 percent, generating Ebit margin of 21,6 percent, an increase of 20 basis points versus 2013. For the first quarter of 2013, results included pre-tax charges for Project Next Century of 7,0 million USD or 0,02 USD per share-diluted, non-service-related pension expense (NSRPE) of 2,8 million USD or 0,01 USD per share-diluted and acquisition and integration costs of 0,8 million USD. Adjusted net income, which excludes these net charges, was 259’975’000 USD or 1,15 USD per share-diluted in the first quarter of 2014, compared with 248’468’000 USD or 1,09 USD per share-diluted in the first quarter of 2013, an increase of 5,5 percent in adjusted earnings per share-diluted.
In 2014, the company expects reported earnings per share-diluted of 3,99 USD to 4,08 USD including net GAAP charges of approximately 18 million USD to 20 million USD or 0,05 USD to 0,06 USD per share-diluted. This projection, prepared in accordance with GAAP, assumes net business realignment charges related to Project Next Century of 0,01 USD to 0,02 USD per share-diluted and NSRPI of 0,01 USD to 0,02 USD per share-diluted. Net acquisition and transaction costs, primarily associated with Shanghai Golden Monkey, are expected to be 0,05 USD to 0,06 USD per share-diluted, 0,03 USD greater than the previous estimate, due to the first quarter impact of losses from foreign currency exchange contracts used to cap the acquisition price as denominated in U.S. dollars. Despite the impact of these charges in 2014, reported gross margin is expected to increase around 30 basis points.
First Quarter Performance
First quarter net sales increased 2,4 percent, less than the company´s forecast, primarily due to the aforementioned U.S. retail trends and expected declines in Latin America. The company´s business in Mexico was impacted by macroeconomic challenges and new tax legislation on certain food products while Brazil was off due to volume elasticity related to a price increase. Volume was a 3,2 point benefit in the quarter and foreign currency exchange rates a 0,8 point headwind.
Hershey´s U.S. candy, mint and gum (CMG) retail takeaway for the twelve weeks ended March 22, 2014, excluding the impact of Easter seasonal activity in the year ago and current periods, increased 1,4 percent 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. Hershey´s U.S. CMG market share, including Easter seasonal activity in the year ago and current periods, declined 0,1 points. Hershey´s first quarter market share within the U.S. non-chocolate candy, mint and gum categories increased. However, this was offset by an expected decline in chocolate market share given the timing of new product launches and related advertising and consumer marketing.
Adjusted gross margin declined ten basis points in the quarter as input cost inflation and international sales mix more than offset supply chain productivity and cost savings initiatives. Selling, marketing and administrative (SM+A) expenses, excluding advertising and related consumer marketing, increased about four percent in the first quarter, less than the estimate of a low double-digit percentage increase, primarily due to timing. In the first quarter, advertising and related consumer marketing expense declined about three percent but is expected to increase over the remainder of the year in support of new product launches and core brands in both U.S. and key international markets. As a result, adjusted Ebit increased 30 basis points versus last year, generating adjusted Ebit margin of 22,3 percent.
The company continues to expect 2014 net sales growth of five to seven percent, including the impact of foreign currency exchange rates. Net sales will be driven primarily by core brand volume growth as well as innovation such as York Minis, Hershey´s Spreads, Lancaster Soft Crèmes Caramels and Brookside Crunchy Clusters in the U.S., Hershey´s Kisses Deluxe in China and the broader roll-out of Reese´s Peanut Butter Cups in Mexico, Brazil and China in the second half of the year.
As stated in January, gross margin is expected to increase in 2014, driven by productivity and cost savings initiatives and sales mix. However, given the continued volatility in the commodity markets, primarily dairy, the company now expects full-year adjusted gross margin expansion of around 20 basis points, versus a previous estimate of around 50 basis points. Advertising and related consumer marketing expense is expected to increase mid single-digits on a percentage basis versus last year, slightly less than our previous estimate. This change does not impact advertising spending on core brands, but instead reflects decisions of a return-on-investment analysis on non-scale brands. SM+A expenses, excluding advertising and related consumer marketing, will increase in 2014, building on the investments in go-to-market capabilities established over the last few years as well as consumer knowledge-based projects related to the Insights Driven Performance initiative. As a result, the company continues to anticipate adjusted earnings per share-diluted growth for the full year to be in the nine to eleven percent range.
«As we look ahead to the balance of 2014, plans are in place to deliver on our sales and earnings objectives. U.S. retail takeaway on our seasonal and non-seasonal business continues to improve and we will build on our momentum. Combined with the upcoming new product launches and greater levels of advertising and consumer marketing, we expect that net sales and earnings will build throughout the year», Bilbrey concluded.
The aforementioned outlook excludes estimated operating results for Shanghai Golden Monkey. Completion of the acquisition is expected to occur in the second quarter of 2014, subject to necessary government and regulatory approvals and satisfaction of other conditions. Upon completion and excluding integration and transition costs, the company expects the acquisition to be slightly accretive on an adjusted basis in 2014.