Hershey / PA. (thc) The Hershey Company, a global leader in confection, announced sales and earnings for the fourth quarter ended December 31, 2017. Consolidated net sales were USD 1’939.6 million compared with USD 1’970.2 million for the fourth quarter of 2016. Reported net income for the fourth quarter of 2017 was USD 181.1 million or USD 0.85 per share-diluted, compared with USD 116.9 million or USD 0.55 per share-diluted for the comparable period of 2016.
Summary 2017 and Outlook 2018
- Fourth-quarter net sales declined 1.6 percent; full-year net sales increased 1.0 percent, including the impact of acquisitions and foreign currency exchange rates
- Fourth-quarter and full-year foreign currency exchange rates a benefit of 0.4 points and 0.2 points, respectively
- Acquisitions a 0.3 point contribution to full-year sales growth
- Fourth-quarter earnings per share-diluted of USD 0.85 as reported and USD 1.03 adjusted
- Full-year 2017 earnings per share-diluted of USD 3.66 as reported and USD 4.76 adjusted
- Outlook for 2018 provided:
- Full-year reported net sales expected to increase 5 percent to 7 percent:
- Organic net sales expected to increase in the range of slightly up to around 2 percent versus last year
- Acquisition of Amplify anticipated to be about a 5 point benefit
- Impact of foreign currency exchange rates estimated to be negligible
- Full-year reported net sales expected to increase 5 percent to 7 percent:
- Reported earnings per share-diluted expected to be in the USD 4.71 to USD 4.96 range
- Adjusted earnings per share-diluted expected to increase 12 percent to 14 percent, including Amplify accretion, and the benefit of U.S. tax reform and be in the USD 5.33 to USD 5.43 range
«In 2017, we continued to strengthen our core chocolate brands, positioned our snacks business for on-going success and increased adjusted operating profit margin,» said Michele Buck, The Hershey Company President and Chief Executive Officer. «We continue to drive strong growth in our core chocolate brands as Reese’s, Hershey’s, Kit Kat ® and Kisses combined retail takeaway was solid, up 2 percent in the fourth quarter and 5 percent for the full year. I am very excited about the acquisition of Amplify as we now have a meaningful presence, with the addition of the SkinnyPop brand, in the fast-growing warehouse salty snack aisle. We intend to bring scale and category management capabilities to this key sub-segment allowing us to capture more consumer snacking occasions with a broader portfolio of brands. In addition, our 2017 confectionery and warehouse-based snacks innovation, including Hershey’s Cookie Layer Crunch Bar and Hershey’s and Reese’sPopped Snack Mix and Dipped Pretzels, continue to perform well in the marketplace.»
As described below, for the fourth quarter of 2017, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items impacting comparability of USD 2.1 million, or USD 0.18 per share-diluted. Reported gross margin of 43.0 percent represented an increase of 530 basis points versus the fourth quarter of 2016, while reported operating profit of USD 328.3 million in the fourth quarter of 2017 resulted in operating margin of 16.9 percent. The effective tax rate in the fourth quarter of 2017 was 30.3 percent, including the impact of U.S. tax reform. For the fourth quarter of 2016, items impacting comparability totaled USD 148.9 million, or USD 0.62 per share-diluted. As described in the Note, adjusted net income, which excludes these items, was USD 218.1 million, or USD 1.03 per share-diluted, for the fourth quarter of 2017, compared with USD 249.7 million, or USD 1.17 per share-diluted, for the same period of 2016.
For the full year ended December 31, 2017, consolidated net sales were USD 7’515.4 million compared with USD 7’440.2 million for the same period of 2016, an increase of 1.0 percent. Reported net income for 2017 was USD 783.0 million or USD 3.66 per share-diluted, compared with USD 720.0 million or USD 3.34 per share-diluted for the comparable period of 2016. For the full year ended December 31, 2017, reported gross margin of 45.8 percent represented an increase of 340 basis points versus the comparable period of 2016. For the full year ended December 31, 2017, the effective tax rate was 31.9 percent, including the impact of U.S. tax reform. These results, prepared in accordance with GAAP, included items impacting comparability of USD 251.3 million and USD 282.0 million, or USD 1.10 and USD 1.07 per share-diluted, for 2017 and 2016, respectively. Adjusted net income, which excludes these items, was USD 1’016.9 million, or USD 4.76 per share-diluted, for the full year ended December 31, 2017, compared with USD 948.5 million, or USD 4.41 per share-diluted, for the same period of 2016, an increase of 7.9 percent in adjusted earnings per share-diluted.
In 2018, the company expects reported earnings per share-diluted of USD 4.71 to USD 4.96, including items impacting comparability of approximately USD 0.47 to USD 0.62 per share-diluted. This projection, prepared in accordance with GAAP, assumes business realignment costs of USD 0.30 to USD 0.40 per share-diluted, including Margin for Growth Program costs of USD 0.27 to USD 0.37 per share-diluted, and acquisition integration costs of USD 0.17 to USD 0.22 per share-diluted.
Fourth-Quarter Performance
Consolidated net sales were USD 1’939.6 million in the fourth quarter of 2017 versus USD 1’970.2 million in the year-ago period, slightly below the company’s estimate. As previously discussed, the expected decline in net sales was partially due to the timing of shipments last quarter and the launch of Hershey’s Cookie Layer Crunch Bar in the year-ago period. Net price realization was 0.3 point contribution to sales growth and volume was off 2.3 points. Foreign currency translation was a 0.4 point benefit.
Adjusted gross margin was 42.7 percent in the fourth quarter of 2017, compared to 44.5 percent in the fourth quarter of 2016. As a result, 2017 full-year adjusted gross margin was about the same as last year, less than our forecast of a 25 basis point increase. Supply chain productivity and cost savings initiatives, as well as slightly lower input costs, were more than offset by unfavorable sales mix, higher freight and distribution costs and other supply chain expenses.
Advertising and related consumer marketing expense declined 3.3 percent versus the fourth quarter of 2016 and was in line with our estimate. As expected, North America advertising and related consumer marketing increased in both the fourth-quarter and year-to-date periods. International and Other segment advertising and related consumer marketing declined, as planned, resulting in total company spend that was about the same as last year. Selling, marketing and administrative (SM+A) expenses, excluding advertising and related consumer marketing, increased about 3 percent in the fourth quarter due to higher corporate expenses. Corporate costs were greater than our estimate and the year-ago period driven by greater than expected expenses related to merger and acquisition (M+A) due diligence initiatives and the multi-year implementation of our enterprise resource planning (ERP) system. As a result, consolidated adjusted operating profit of USD 325.1 million in the fourth quarter of 2017 declined 14.1 percent versus the fourth quarter of 2016.
As anticipated, the fourth-quarter adjusted tax rate of 15.5 percent declined versus the prior year period due to the planned increase in investment tax credits versus the fourth quarter of 2016, favorable foreign rate differential, as well as the adoption of Accounting Standards update 2016-09 for the accounting of employee share-based payments. The full-year adjusted tax rate of 26.7 percent was in line with the outlook the company provided last quarter.
Outlook
«We will continue to invest in our core brands and build on our capabilities and strategies to drive growth as we work towards our vision of being an innovative snacking powerhouse,» Buck continued. «We believe these initiatives will benefit the company over the long term and enable us to achieve our goals. We have a good balance of variety, news and innovation in 2018, including the launches of Hershey’s Gold Bar, Hershey’s Cookie Layer Crunch Triple Chocolate Bar and Reese’s Outrageous Bar. We are excited about our innovation on these core chocolate brands and platforms, as well as new advertising campaigns and in-store merchandising that should drive consumer engagement and growth across our portfolio.»
In 2018, the company estimates net sales to increase 5 percent to 7 percent. Organic net sales are expected to increase in the range of slightly up to around 2 percent versus last year. This is lower than our long-term target primarily due to a shorter Easter season versus 2017 and the previously mentioned SKU optimization initiative. Additionally, the acquisition of Amplify will be about a 5 point benefit and foreign currency exchange is expected to be negligible.
In 2018, we estimate adjusted gross margin will be about the same as last year. Productivity and cost savings initiatives, as well as lower input costs, are expected to be offset by the previously mentioned new packaging initiatives and unfavorable sales mix. Investments in marketing, technology and IT capabilities, including the multi-year ERP project, are initiatives the company believes will be enablers of profitable growth. Margin for Growth Program savings in 2018 are estimated to be USD 55 million to USD 65 million.
The recently passed U.S. Tax Cuts and Jobs Act of 2017 will have a favorable impact on our net income, earnings per share-diluted and cash flow. Like most companies, we continue to evaluate the details within this legislation but it will reduce our 2018 effective tax rate versus last year. Our preliminary estimate indicates Hershey’s 2018 effective tax rate should be around 20 percent to 22 percent. The company is evaluating the cash benefit of tax reform and believes that it will complement its existing cash usage priorities such as business investment, including both brand building and capital expenditures that result in growth, dividends, share buybacks and debt reduction. The anticipated impacts of the lower tax rate and brand building reinvestment are included in the 2018 outlook. As a result, the company estimates the 2018 full year increase in adjusted earnings per share-diluted to be in the USD 5.33 to USD 5.43 range, or an increase of 12 percent to 14 percent.
Business Segment Results
The following are comments about segment performance for the fourth 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 1’674.6 million in the fourth quarter of 2017, a decline of 0.9 percent versus the same period last year, including a 0.4 point benefit from foreign currency translation. Net price realization was a 0.3 point contribution to sales growth and volume was off 1.6 points.
Total Hershey U.S. retail takeaway4 for the 12 and 52 weeks ended December 31, 2017 increased 0.4 percent and 1.2 percent, respectively, 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 and 52 weeks ended December 31, 2017, in the MULO + C-Stores channels increased 0.5 percent and 1.6 percent, respectively, with CMG market share off 0.3 points in the fourth quarter and about the same versus full-year 2016.
Advertising and related consumer marketing expense increased 3.1 percent in the fourth quarter of 2017 versus the year-ago period. The lower sales and aforementioned increase in supply chain costs pressured segment income. As expected, North America segment income declined 8.5 percent to USD 477.5 million in the fourth quarter of 2017, compared to USD 521.9 million in the fourth quarter of 2016.
International and Other
Fourth-quarter net sales for Hershey’s International and Other segment declined 5.4 percent to USD 265.0 million. Volume was off 6.6 points and favorable foreign currency exchange rates were a 1.2 point benefit. Combined constant currency net sales growth in Mexico, Brazil and India was about 11 percent. As expected, China net sales declined about 30 percent, driven by volume declines related to SKU optimization and our focus on pack types that meet marketplace velocity thresholds. International and Other segment loss of USD 15.0 million compares to a segment loss of USD 16.7 million in the fourth quarter of 2016. As expected, International and Other segment income for 2017 of USD 11.5 million, improved USD 40.7 million versus 2016, driven primarily by cost savings initiatives in China related to the Margin for Growth Program discussed in previous quarters.
