Hershey: Announces Q2/2014 Results; Reaffirms Outlook

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 second quarter ended June 29, 2014. Consolidated net sales were 1’578’350’000 USD compared with 1’508’514’000 USD for the second quarter of 2013. Reported net income for the second quarter of 2014 was 168’168’000 USD or 0,75 USD per share-diluted, compared with 159’504’000 USD or 0,70 USD per share-diluted for the comparable period of 2013.

«Second quarter net sales sequentially improved, as expected, versus the first quarter and we continued to make good progress against the initiatives that will drive strong results over the remainder of the year», said John P. Bilbrey, President and Chief Executive Officer, The Hershey Company. «Our Easter sell through was very good and we gained 1,1 market share points in this important season. We expect our seasonal momentum to continue in the second half of the year as retail customer orders for Halloween and Holiday products are solid. In the second quarter, macroeconomic headwinds in the U.S. continued to be an issue for many retailers and consumers. We continue to do well, although our U.S. second quarter net sales growth of 4,4 percent was less than expectations. Additionally, as it relates to the instant consumable pack type, there were increased levels of in-store activity from other snack categories that had an impact on our sales mix and profitability. Across all channels we are working with retail customers this year and into 2015 to ensure that the implementation of the price increase we announced last week is supported with merchandising, programming and innovation that continues to grow the category. These initiatives, as well as normal productivity and cost savings programs, will enable us to continue to invest in brand building that we expect will drive category growth over the long term».

For the second quarter of 2014, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included net pre-tax charges of 2,0 million USD or 0,01 USD per share-diluted. These charges included 1,2 million USD related to the Project Next Century program, net acquisition and transaction costs, primarily associated with Shanghai Golden Monkey, of 1,1 million USD, and non-service-related pension income (NSRPI) of 0,3 million USD. Reported gross margin of 45,5 percent declined 210 basis points versus last year while reported income before interest and income taxes (Ebit) increased 3,2 percent generating Ebit margin of 17,6 percent, a decline of 20 basis points versus 2013. For the second quarter of 2013, results included net pre-tax charges for Project Next Century of 3,6 million USD or 0,01 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 0,2 million USD. Adjusted net income, which excludes these net charges, was 169’978’000 USD or 0,76 USD per share-diluted in the second quarter of 2014, compared with 163’607’000 USD or 0,72 USD per share-diluted in the second quarter of 2013, an increase of 5,6 percent in adjusted earnings per share-diluted.

For the first six months of 2014, consolidated net sales were 3’450’163’000 USD compared with 3’335’940’000 USD for the first six months of 2013. Reported net income for the first six months of 2014 was 420’663’000 USD or 1,86 USD per share-diluted, compared with 401’410’000 USD or 1,77 USD per share-diluted for the first six months of 2013. For the first six months of 2014 and 2013, these results, prepared in accordance with GAAP, included net pre-tax charges of 15,4 million USD and 17,2 million USD, or 0,04 USD per share-diluted in each period, respectively. Charges associated with the Project Next Century program for the first six months of 2014 and 2013 were 4,3 million USD and 10,6 million USD or 0,01 USD and 0,03 USD per share-diluted, respectively. Acquisition and integration costs for the first six months of 2014 and 2013 were 12,0 million USD or 0,03 USD per share-diluted and 1,0 million USD, respectively. Additionally, for the first six months of 2014 NSRPI was 0,9 million USD compared with NSRPE of 5,6 million USD or 0,01 USD per share-diluted for the first six months of 2013. Adjusted net income for the first six months of 2014, which excludes these net charges, was 429’953’000 USD or 1,90 USD per share-diluted, compared with 412’075’000 USD or 1,81 USD per share-diluted in 2013, an increase of 5,0 percent in adjusted earnings per share-diluted.

In 2014, the company expects reported earnings per share-diluted of 3,98 USD to 4,08 USD, including net GAAP charges of approximately 18 million USD to 23 million USD, or 0,05 USD to 0,07 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 0,07 USD per share-diluted.

Additionally, the Board of Directors of The Hershey Company declared a quarterly dividend of 0,535 USD on the Common Stock, an increase of 0,05 USD per share, and a dividend of 0,486 USD on the Class B Common Stock, an increase of 0,051 USD per share. The dividends are payable September 15, 2014, to stockholders of record as of August 25, 2014.

Second-Quarter Performance

Second-quarter net sales increased 4,6 percent, driven primarily by volume. New products were approximately 60 percent of overall volume growth and core brands about 40 percent. Foreign currency exchange rates were a 0,7 point headwind, greater than expectations.

Hershey´s U.S. candy, mint and gum (CMG) retail takeaway for the 24 weeks ended June 14, 2014, which along with the comparable period in 2013 encompasses each year´s entire Easter season results, was up 2,2 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. For the 24 weeks ended June 14, 2014, Hershey´s U.S. market share was an industry-leading 31,1 percent, unchanged versus the prior period. In addition, Hershey´s Spreads are not included in the CMG database as Nielsen captures this within grocery items. Hershey´s Spreads, both the jar and instant consumable pack types, are off to a good start with trial and repeat tracking to expectations.

Second quarter adjusted gross margin declined 230 basis points as input cost inflation, due primarily to higher dairy costs, and unfavorable sales mix more than offset supply chain productivity and cost savings initiatives. As the company has previously stated, there is not a well-developed futures market to hedge dairy requirements, therefore, volatile and extended dairy price spikes impacted gross margin. Selling, marketing and administrative (SM+A) expenses, excluding advertising and related consumer marketing, were about the same as the prior year as higher selling and employee related costs were offset by a favorable gain of 5,6 million USD on a foreign currency exchange contract. Due to the timing of new product launches, a reduction in advertising production costs and a decision to shift resources to other areas in the second quarter, advertising and related consumer marketing expense declined about five percent versus the prior period. However, for the full year, advertising gross rating points are on track to increase mid-single digits on a percentage basis versus last year.

Outlook

The company expects full-year 2014 net sales growth to be around the low end of its long-term five to seven percent target, including the impact of the aforementioned price increase and foreign currency exchange rates. Over the remainder of the year, net sales will be driven by strong Halloween and Holiday seasons as well as the continued roll-out of York Minis and Hershey´s Spreads instant consumable, which launched in mid-May, and the fourth-quarter introductions of Ice Breakers Cool Blasts Chews and Brookside Crunchy Clusters. Additionally, in the fourth quarter the company will begin to ship Reese´s Spreads as well as some other yet to be announced new products that will ensure 2015 gets off to a good start. In key international markets the company will continue to build on the momentum of the Hershey´s and Hershey´s Kisses brands and a broader roll-out of Reese´s Peanut Butter Cups.

Management expects commodity costs to be greater than last year, resulting in adjusted gross margin that is slightly down versus 2013. Given the timing of new product launches in both North America and international markets, advertising and related consumer marketing expense is expected to increase low-single digits on a percentage basis versus last year. SM+A expenses, excluding advertising and related consumer marketing, are estimated to increase at a rate less than net sales growth as the company leverages the investments in go-to-market capabilities established over the last few years. Therefore, the company anticipates 2014 adjusted earnings per share-diluted growth to be around the low end of its long-term target of nine to eleven percent.

The aforementioned outlook excludes estimated operating results for Shanghai Golden Monkey. Completion of the acquisition is expected to occur in the second half of the year subject to necessary government and regulatory approvals and satisfaction of other conditions. Upon completion, and excluding integration and transition costs, the company expects the impact of the acquisition to be minimal on an adjusted basis in 2014.

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