Hershey: Announces Second Quarter Results

Hershey / PA. (thc) The Hershey Company, a global leader in confection, announced sales and earnings for the second quarter ended July 05, 2015. Consolidated net sales were 1’578.8 million USD compared with 1’578.3 million USD for the second quarter of 2014. Reported net loss for the second quarter of 2015 was 99.9 million USD or 0.47 USD per share-diluted, compared with net income of 168.2 million USD or 0.75 USD per share-diluted for the comparable period of 2014. Highlights:

  • Second-quarter net sales in line with last year, including the impact of acquisitions and divestitures and foreign currency exchange rates
    • Net acquisitions and divestitures a 1.4 point benefit
    • Unfavorable foreign currency exchange rates a 1.3 point headwind
  • Second-quarter reported net loss of 0.47 USD per share-diluted
    • Reported results include impairment charge of 250 million USD, or 1.13 USD per share-diluted
    • Adjusted earnings per share-diluted of 0.78 USD
  • Outlook for 2015 net sales updated and adjusted earnings per share-diluted reaffirmed:
    • Full-year net sales expected to increase 1.5 percent to 2.5 percent, including a net benefit from acquisitions and divestitures of about one point and unfavorable foreign currency exchange rates of approximately 1.5 points
    • Adjusted earnings per share-diluted reaffirmed, expected to increase three percent to five percent
  • Quarterly dividend declared on Common Stock and increased nine percent

«Second quarter operating results were largely in line with our revised expectations, particularly in the North America business where we continue to build on our momentum». said John P. Bilbrey, Chairman, President and Chief Executive Officer, The Hershey Company. «Net sales increased 1.3 percent in the second quarter, excluding unfavorable foreign currency translation of 1.3 points. U.S. results were slightly ahead of our expectations with year-to-date combined candy, mint and gum (CMG) market share up 0.1 points. Results were adversely impacted by international performance, primarily in China. As previously stated, macroeconomic challenges and changing consumer shopping behaviour in China were a headwind. Over the remainder of the year we are optimistic that our core brand and new product initiatives in both North America and international markets will drive growth. The continued roll-out of new products as well as solid Halloween and Holiday orders provide good visibility into our net sales outlook over the remainder of the year, particularly in North America. I’m also pleased that the Board approved the dividend increase. 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 2015, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included net pre-tax charges of 281.9 million USD, or 1.23 USD per share-diluted. These charges included 26.1 million USD, or 0.08 USD per share-diluted, primarily related to the business productivity initiative announced on June 19, 2015. Net acquisition, integration and transaction costs were 2.3 million USD, or 0.01 USD per share-diluted, international business realignment and other supply chain program costs were 2.8 million USD, or 0.01 USD per share-diluted, and non-service-related pension expense (NSRPE) was 0.9 million USD. Additionally, the company performed an initial assessment of the fair value of the Shanghai Golden Monkey (SGM) business as a result of several contributing factors. Thus far in 2015, SGM net sales and profitability have been significantly lower than initial expectations. In addition, as part of the ongoing integration process, the company has continued to assess the quality of SGM’s accounts receivable and existing distributor networks. As a result of this assessment, the company has recorded an initial non-cash goodwill impairment charge of 249.8 million USD, or 1.13 USD per share-diluted. The company expects to finalize its valuation assessment in the third quarter of 2015 and additional charges, including charges related to other long-lived assets, may be required. The company anticipates completing the acquisition of the remaining 20 percent of SGM in the fourth quarter of 2015, but the timing and terms will be informed by the results of the ongoing assessment. The reconciliation of GAAP earnings per share-diluted to adjusted earnings per share-diluted also reflects a 0.02 USD per share-diluted impact resulting from the exclusion of certain otherwise dilutive securities, the inclusion of which would be anti-dilutive in the calculation of GAAP earnings per share-diluted due to the GAAP net loss.

Reported gross margin of 46.6 percent increased 110 basis points versus last year, while operating profit declined 97.3 percent to 7.5 million USD. For the second quarter of 2014, results 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 of 1.1 million USD, and non-service-related pension income (NSRPI) of 0.3 million USD. Adjusted net income, which excludes these net charges, was 171.9 million USD, or 0.78 USD per share-diluted, in the second quarter of 2015, compared with 170.0 million USD, or 0.76 USD per share-diluted, in the second quarter of 2014, an increase of 2.6 percent in adjusted earnings per share-diluted.

For the first six months of 2015, consolidated net sales were 3’516.6 million USD compared with 3’450.2 million USD for the first six months of 2014. Reported net income for the first six months of 2015 was 144.8 million USD or 0.65 USD per share-diluted, compared with 420.7 million USD or 1.86 USD per share-diluted for the first six months of 2014. As described in the Note, for the first six months of 2015 and 2014, these results, prepared in accordance with GAAP, included net pre-tax charges of 281.6 million USD and 15.4 million USD, or 1.22 USD and 0.04 USD per share-diluted, respectively. These charges included 26.1 million USD, or 0.08 USD per share-diluted, primarily related to the business productivity initiative announced on June 19, 2015. Charges associated with international business realignment and other supply chain programs for the first six months of 2015 and 2014 were 5.2 million USD and 4.3 million USD, or 0.02 USD and 0.01 USD per share-diluted, respectively. Acquisition and integration costs for the first six months of 2015 and 2014 were 4.9 million USD, or 0.01 USD per share-diluted, and 12.0 million USD, or 0.03 USD per share-diluted, respectively. Additionally, for the first six months of 2015 NSRPE was 2.9 million USD, or 0.01 USD per share-diluted, compared with NSRPI of 0.9 million USD in 2014. Also, in 2015 the company had a gain on the sale of a trademark of 10.0 million USD, or 0.03 USD per share-diluted, incurred divestiture costs related to Mauna Loa of 2.7 million USD and recorded an impairment charge of 249.8 million USD, or 1.13 USD per share-diluted, related to SGM. As described in the Note, adjusted net income, which excludes these net charges, was 415.4 million USD, or 1.87 USD per share-diluted, for the first six months of 2015, compared with 430.0 million USD, or 1.90 USD per share-diluted, for the same period of 2014, a decrease of 1.6 percent in adjusted earnings per share-diluted.

In 2015, the company expects reported gross margin to increase 125 to 135 basis points versus last year and reported earnings per share-diluted of 2.49 USD to 2.66 USD, including net pre-tax GAAP charges of approximately 1.52 USD to 1.61 USD per share-diluted. This projection, prepared in accordance with GAAP, assumes business productivity initiatives of 0.29 USD to 0.35 USD per share-diluted, international business realignment and other supply chain program costs of 0.04 USD to 0.05 USD per share-diluted, NSRPE of 0.04 USD to 0.05 USD per share-diluted, net acquisition, integration and transaction costs of 0.05 USD to 0.06 USD per share-diluted, a gain on the sale of a trademark of 0.03 USD per share-diluted and the aforementioned goodwill impairment charge of 1.13 USD per share-diluted.

Second-Quarter Performance

Consolidated net sales were 1’578.8 million USD in the second quarter, in line with the second quarter of 2014. Price realization, primarily in the U.S., was a 5.8 point benefit. Volume was off 3.6 points due primarily to elasticity related to the previously announced price increase, in line with expectations and lower sales in China. Increased promotional spending, mainly in China, and foreign currency translation were a 2.3 point and 1.3 point headwind, respectively. Net acquisitions and divestitures were a 1.4 point benefit. North America net sales were slightly better than expectations, primarily due to solid U.S. CMG performance. International and Other net sales, excluding the benefit of the SGM acquisition and unfavorable foreign currency exchange rates, declined versus a year ago due primarily to the underperformance of Hershey’s chocolate business in China.

Adjusted gross margin was 46.7 percent in the second quarter of 2015, compared to 45.4 percent in the second quarter of 2014. The 130 basis point increase was driven by net price realization, supply chain productivity and costs savings initiatives, partially offset by international trade allowances and inventory obsolescence, primarily in China.

Advertising and related consumer marketing expense declined about three percent in the second quarter, driven by a reduction in international spending. Selling, marketing and administrative (SM+A) expenses, excluding advertising and related consumer marketing, increased about seven percent. Excluding the SGM, KRAVE Pure Foods Inc. (Krave) and Allan Candy Company (Allan Candy) acquisitions and the Mauna Loa Macadamia Nut Corporation (Mauna Loa) divestiture, SM+A expenses excluding advertising and related consumer marketing were about the same as the year ago period. Consolidated adjusted operating profit increased 3.3 percent to 289.4 million USD in the second quarter of 2015, compared to 280.1 million USD in the second quarter of 2014.

Additionally, the Board of Directors of The Hershey Company declared a quarterly dividend of 0.583 USD on the Common Stock, an increase of about nine percent, or 0.048 USD per share. The Board also announced a quarterly dividend on the Class B Common Stock of 0.53 USD, an increase of about nine percent, or 0.044 USD per share. Solid North America results, as well as the company’s focus on working capital, generated an increase in operating cash flow during the first six months of the year. The company’s solid balance sheet and ability to generate consistent and predictable free cash flow should enable the company to support a dividend payout ratio of at least 50 percent.

Outlook

«Over the remainder of the year, we expect that net sales will be driven by strong Halloween and Holiday seasonal programming and the continued roll-out of new products in North America, including, Kit Kat White Minis, Hershey’s Caramels and Ice Breakers Cool Blasts Chews». Bilbrey continued. «Additionally, the launches of Brookside Fruit and Nut Bars, Hershey’s Kisses Deluxe and a limited launch of Reese’s Snack Mix and Hershey’s Snack Bites brings the right level of excitement, variety and news to the category. For the second half of the year in China, distribution gains in smaller format stores and a broader roll-out of Brookside chocolates are on track. Year-to-date advertising and related consumer marketing is up about three percent, and with the exception of China, our methodology hasn’t changed. Given the changing consumer dynamics and our ongoing work in China, we expect advertising and related consumer marketing in this market to be lower than last year. However, for the full year, we still expect North America advertising and consumer marketing to increase around two times the organic net sales growth rate. We believe these investments in new products and marketing will enable us to build on our North America momentum, positioning us to deliver on our objectives».

The company estimates full-year 2015 net sales will increase around 1.5 percent to 2.5 percent, including a net benefit from acquisitions and divestitures of about one percentage point and unfavorable foreign currency exchange of approximately 1.5 percentage points. Excluding unfavorable foreign currency exchange rates, full-year net sales are expected to increase about 3.0 percent to 4.0 percent. For the full year, the company expects gross margin expansion of 135 to 145 basis points as solid North America gains, driven by price realization, are partially offset by international softness related to the aforementioned higher direct trade rate and obsolescence in China. Additionally, as stated in June, the company expects to achieve approximately ten million USD to 15 million USD in savings related to its business productivity initiative. The company expects adjusted earnings per share-diluted to be in the 4.10 USD to 4.18 USD range, an increase of three percent to five percent on a percentage basis versus 2014, including dilution from acquisitions and divestitures of around 0.20 USD per share (Imgage Source: Hershey).

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