Hershey: Announces Q2 Results, Updates Outlook

Hershey / PA. (thc) The Hershey Company, a global leader in confection, announced sales and earnings for the second quarter ended July 3, 2016. Consolidated net sales were 1’637.7 million USD compared with 1’578.8 million USD for the second quarter of 2015. Reported net income for the second quarter of 2016 was 146.0 million USD or 0.68 USD per share-diluted, compared with a net loss of 99.9 million USD or 0.47 USD per share-diluted for the comparable period of 2015.

«Second-quarter operating results were better than our estimates as North America and International sales sequentially improved, as expected, versus last quarter», said John P. Bilbrey, Chairman, President and Chief Executive Officer, TheHershey Company. «Performance partially benefited from the timing of select merchandising and program net sales that occurred in the second quarter that were initially expected to ship in the third quarter. Non-seasonal candy, mint and gum (CMG) category growth progressed in the second quarter; however, given the amount of activity in the marketplace, category growth was less than what we anticipated. We’ve yet to experience consistent broad-based marketplace gains that are reflective of the attractive CMG category and Hershey’s competitive advantages. In the coming quarters we will begin to share the results of the work being performed that should benefit the company in the near and long term. Over the remainder of 2016, our CMG in-store merchandising, new products and consumer investment will be strong and should result in a sequential improvement in retail takeaway performance. Additionally, as we stated last quarter, the company continues to focus on its cost structure and estimates that full-year 2016 productivity and cost savings initiatives will be greater than our previous forecast, enabling the company to deliver on its adjusted earnings per share-diluted commitment. I’m also pleased that the Board of Directors approved a dividend increase of 6 percent. The company continues to generate steady free cash flow and has a strong balance sheet. This dividend increase reflects our confidence in Hershey’s marketplace position and long-term growth potential».

As described in the Note below, for the second quarter of 2016, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items impacting comparability of 32.9 million USD, or 0.17 USD per share-diluted. Reported gross margin of 45.6 percent represented a decline of 100 basis points versus the second quarter of 2015, while reported operating profit of 262.8 million USD increased 255.3 million USD versus the same period last year. For the second quarter of 2015, items impacting comparability totalled 281.9 million USD, or 1.25 USD per share-diluted. As described in the Note, adjusted net income, which excludes these items, was 182.6 million USD, or 0.85 USD per share-diluted, for the second quarter ended July 3, 2016, compared with 171.9 million USD, or 0.78 USD per share-diluted, for the same period of 2015.

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 3, 2016 July 5, 2015 July 3, 2016 July 5, 2015
Derivative Mark-to-Market Gains USD (39.9 ) USD USD (0.11 ) USD
Business Realignment Activities 62.1 28.8 0.25 0.09
Acquisition Integration Costs 1.5 2.3 0.01
Non-Service Related Pension Expense 9.2 1.0 0.03
Goodwill Impairment 249.8 1.13
Impact of excluding securities that are antidilutive when calculating GAAP EPS due to GAAP net loss 0.02
USD 32.9 USD 281.9 USD 0.17 USD 1.25

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For the first six months of 2016, consolidated net sales were 3’466.5 million USD compared with 3’516.6 million USD for the same period of 2015, a decrease of 1.4 percent. Reported net income for the first six month of 2016 was 375.8 million USD or 1.74 USD per share-diluted, compared with a 144.8 million USD or 0.65 USD per share-diluted for the comparable period of 2015. For the first six months of 2016 and 2015, these results, prepared in accordance with GAAP, included items impacting comparability of 60.7 million USD and 281.6 million USD, or 0.21 USD and 1.22 USD per share-diluted, respectively. Adjusted net income, which excludes these items, was 421.5 million USD, or 1.95 USD per share-diluted, for the first six months of 2016, compared with 415.4 million USD, or 1.87 USD per share-diluted, for the same period of 2015, an increase of 4.3 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
Six Months Ended Six Months Ended
July 3, 2016 July 5, 2015 July 3, 2016 July 5, 2015
Derivative Mark-to-Market Gains USD (4.9 ) USD USD (0.01 ) USD
Business Realignment Activities 76.5 34.0 0.30 0.10
Acquisition Integration Costs 1.5 4.9 0.01
Non-Service Related Pension Expense 14.3 2.9 0.04 0.01
Settlement of Shanghai Golden Monkey (SGM) Liability (26.7 ) (0.12 )
Goodwill Impairment 249.8 1.13
Gain on Sale of Trademark (10.0 ) (0.03 )
USD 60.7 USD 281.6 USD 0.21 USD 1.22

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In 2016, the company expects reported earnings per share-diluted of 3.77 USD to 3.86 USD, including items impacting comparability of approximately 0.42 USD to 0.47 USD per share-diluted. This projection, prepared in accordance with GAAP, assumes business realignment charges of 0.44 USD to 0.47 USD per share-diluted, non-service related pension expense (NSRPE) of 0.07 USD to 0.08 USD per share-diluted, net acquisition integration costs of 0.03 USD to 0.04 USD per share-diluted and a favorable settlement of the Shanghai Golden Monkey liability of 0.12 USD per share-diluted.

Additionally, the Board of Directors of The Hershey Company declared a quarterly dividend of 0.618 USD on the Common Stock and 0.562 USD on the Class B Common Stock, an increase of 6 percent on both classes of stock, or 0.035 USD and 0.032 USD per share, respectively.

Second-Quarter Performance

Consolidated net sales were 1’637.7 million USD in the second quarter of 2016, an increase of 3.7 percent versus the second quarter of 2015. Excluding the effect of foreign currency translation, a 0.8 point headwind, net sales increased 4.5 percent versus the year ago period. Volume was a 3.1 point contribution to sales growth and slightly greater than forecast due to the timing of shipments in North America. As expected, net price realization was 0.9 points favorable as direct trade and returns, discounts and allowances in the International and Other segment were less than last year. Acquisitions were a 0.5 point benefit in the second quarter.

Adjusted gross margin was 45.5 percent in the second quarter of 2016, compared to 46.7 percent in the second quarter of 2015. The 120 basis point decline was driven by higher commodity and other supply chain costs and unfavorable sales mix, partially offset by supply chain productivity and costs savings initiatives.

Total advertising and related consumer marketing expense increased about 5 percent versus the second quarter of 2015. For the full year, the combined investments of advertising and related consumer marketing expense, as well as direct trade in North America, are expected to increase, supporting new product launches and in-store merchandising and display activity. Selling, marketing and administrative (SM+amp;A) expenses, excluding advertising and related consumer marketing and the barkTHINSacquisition, declined about 2.6 percent in the quarter, driven by the previously mentioned increase in our annual productivity and cost savings target as well as the initiative announced in June of 2015. As a result, consolidated adjusted operating profit of 295.6 million USD in the second quarter of 2016 increased 2.1 percent versus the second quarter of 2015.

As expected, the second-quarter adjusted tax rate of 31.4 percent was lower than the prior year period of 35.3 percent, largely as a result of investment tax credits. However, due to timing differences, the corresponding book expense for a portion of the credit investments will not be recognized until the second half of the year. In the first half of 2016, the company repurchased 420 million USD of outstanding shares, resulting in diluted shares outstanding of 214.5 million at the end of the second quarter of 2016, compared to 219.6 million for the same period of 2015.

Outlook

«Over the remainder of the year we believe our mix of new products and in-store programming will bring the right level of excitement, variety and news to the category», Bilbrey continued. «We’re particularly excited about the upcoming launch ofReeses Pieces Peanut Butter Cups, Krave Meat Bars and a yet to be announced Snackfection item in the fourth quarter. We’ll also continue to rollout the Kit Kat Big Kat, Reese’s Snack Mix and Hershey’s Snack Bites products. Additionally, in the fall, our simple ingredients advertising campaign begins on Hershey’s Milk Chocolate Bars and Hershey’s Kisses Milk Chocolates manufactured with fresh milk from local Pennsylvania farms, cocoa beans sourced responsibly from West Africa, pure cane sugar and natural flavors. We’ll also have greater levels of in-store merchandising and displays as we leverage large promotional events such as the Summer Olympics and Reese’s NCAA Football College Game Day. In the second half of the year in China, distribution gains in smaller format stores will continue and a new advertising campaign on Hershey’s Milk Chocolate Bars and Hershey’s Kisses Milk Chocolates will begin», Bilbrey concluded.

The company estimates that full-year 2016 net sales will increase around 1.0 percent, including a net benefit from acquisitions and divestitures of about 0.5 points and the impact of unfavorable foreign currency exchange rates of 1 point. Constant currency net sales growth of around 2.0 percent is less than the previous estimate of about 2.5 percent primarily due to our expectation of lower U.S. CMG category growth over the remainder of the year and macroeconomic challenges in China impacting purchasing behavior. The company expects gross margin to be slightly below last year due to unfavorable sales mix and higher commodity costs. Business productivity and cost savings programs are on track with our targets. As a result, the company expects adjusted earnings per share-diluted for 2016 to increase 3.0 percent to 4.0 percent, including barkTHINS dilution of 0.05 USD to 0.06 USD per share, and be in the 4.24 USD to 4.28 USD range.

Business Segment Results

The following are comments about segment performance for the second quarter of 2016 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 1’444.8 million USD in the second quarter of 2016, an increase of 3.2 percent versus the same period last year. Excluding the 0.3 point impact of unfavorable foreign exchange rates in Canada, North America net sales increased 3.5 percent. Volume was a 4.5 point contribution to sales growth, slightly greater than forecast due to timing of shipments. Net price realization was off 1.6 points, as anticipated, due to higher levels of direct trade supporting in-store merchandising and display and related promotional price points. The barkTHINS acquisition was a 0.6 point benefit in the second quarter of 2016.

Total Hershey U.S. retail takeaway for the 12 weeks ended July 9, 2016, in the expanded all outlet combined plus convenience store channels (xAOC+C-store) increased 0.5 percent, with market share off 0.1 points. For the 12 weeks ended July 9, 2016, Hershey’s U.S. CMG market share was 30.8 percent, a decline of 0.7 points versus the same period last year.

North America segment income declined 7.6 percent to 425.7 million USD in the second quarter of 2016, compared to 460.7 million USD in the second quarter of 2015. The decline in segment income was driven by lower gross margin due to higher levels of direct trade, unfavorable sales mix, increased commodity costs and a 10.6 percent increase in advertising and related consumer marketing expense.

International and Other: Second-quarter net sales for Hershey’s International and Other segment increased 7.6 percent to 192.8 million USD. Net price realization was a 20.3 point benefit as direct trade and returns, discounts and allowances in China were less than the same period last year. Volume was off 7.2 points due to the previously stated discontinuance of edible oil products in India and declines inChina that were in line with estimates. Unfavorable foreign currency exchange rates were a 5.5 point headwind. Combined second-quarter constant currency net sales in Mexico and Brazil increased nearly 13 percent driven by solid Hershey’s marketplace performance. As expected, China gross sales declined in line with expectations due to the challenging macroeconomic and competitive environment. China chocolate category retail sales sequentially improved in the second quarter versus the trends in the first quarter and second half of last year.

International and Other segment loss of 3.5 million USD compares to segment loss of 44.5 million USD in the second quarter of 2015. Combined income in Latin America and export markets improved versus the prior year and performance in China benefited from lower direct trade as well as returns, discounts and allowances which were lower than the prior year.

Unallocated Corporate Expense

Hershey’s unallocated adjusted corporate expense in the second quarter of 2016 was 126.6 million USD, a decline of 0.2 million USD versus last year. Savings from the previously mentioned productivity and cost savings initiatives were partially offset by the timing of employee-related costs and other corporate fees.

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