Hershey: Announces Third-Quarter 2016 Results

Hershey / PA. (thc) The Hershey Company, a global leader in confection, announced sales and earnings for the third quarter ended October 02, 2016. Consolidated net sales were 2’003.5 million USD compared with 1’960.8 million USD for the third quarter of 2015. Reported net income for the third quarter of 2016 was 227.4 million USD or 1.06 USD per share-diluted, compared with 154.8 million USD or 0.70 USD per share-diluted for the comparable period of 2015. Highlights:

• Third-quarter net sales increased 2.2 percent, including the impact of acquisitions and foreign currency exchange rates:
  • Acquisitions a 0.7 point benefit
  • Unfavorable foreign currency exchange rates a 0.2 point headwind
• Third-quarter earnings per share-diluted of 1.06 USD as reported and 1.29 USD adjusted
• Outlook for 2016 net sales and earnings per share-diluted updated:
  • Full-year net sales expected to increase around 1 percent, including a net benefit from acquisitions and divestitures of about 0.5 points and unfavorable foreign currency exchange rates of about 0.75 points
  • Reported earnings per share-diluted expected to be in the 3.82 USD to 3.90 USD range
  • Adjusted earnings per share-diluted expected to increase 4 percent to 5 percent, including dilution from acquisitions of 0.05 USD to 0.06 USD per share, and be in the 4.28 USD to 4.32 USD range

«I’m pleased with Hershey’s third-quarter operating results, which were relatively in line with our estimates across all markets», said John P. Bilbrey, Chairman, President and Chief Executive Officer, The Hershey Company. «Our U.S. business benefited from performance within key retail channels and Halloween programming and merchandising in the marketplace. Throughout 2016, our top priority has been to restore consistency across the business. Against a backdrop of continued snacks competition, we experienced improvements in key aspects of our business. Our brands responded positively to the marketplace investments we discussed last quarter, which is why we continue to believe that candy, mint and gum (CMG) is an attractive category capable of solid growth over the long term when supported with the right mix of customer and consumer marketing. Therefore, we intend to make the necessary investments in our business to drive growth and market share over the strategic planning cycle. Initiatives such as the demand landscape work we discussed last quarter and platform innovation, similar to «Hershey’s Cookie Layer Crunch» bar that we announced earlier this month, should enable us to improve net sales and operating income performance in 2017. Additionally, analysis of our cost structure continues. This is a comprehensive global review across all businesses and functions with a goal of ensuring that we operate more effectively and efficiently. I continue to work closely with my management team on this important endeavor and look forward to discussing the value enhancing outcomes in the near future».

As described in the Note below, for the third quarter of 2016, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items impacting comparability of 72.4 million USD, or 0.23 USD per share-diluted. Reported gross margin of 42.5 percent represented a decrease of 300 basis points versus the third quarter of 2015, while reported operating profit increased 23.4 percent to 374.0 million USD. For the third quarter of 2015, items impacting comparability totaled 140.2 million USD, or 0.47 USD per share-diluted. As described in the Note, adjusted net income, which excludes these items, was 277.3 million USD, or 1.29 USD per share-diluted, for the third quarter of 2016, compared with 257.2 million USD, or 1.17 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
		October 02, 2016				October 04, 2015				October 02, 2016				October 04, 2015
Derivative Mark-to-Market Losses		USD	35.8			USD	—			USD	0.10			USD	—
Business Realignment Activities		28.0				67.5				0.10				0.20
Acquisition Integration Costs		2.3				9.4				0.01				0.03
Non-Service Related Pension Expense		6.3				4.0				0.02				0.01
Goodwill Impairment		—				31.0				—				0.15
Loss on Early Extinguishment of Debt		—				28.3				—				0.08
		USD	72.4			USD	140.2			USD	0.23			USD	0.47

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For the first nine months of 2016, consolidated net sales were 5’469.9 million USD compared with 5’477.4 million USD for the same period of 2015, a decrease of 0.1 percent. Reported net income for the first nine months of 2016 was 603.2 million USD or 2.80 USD per share-diluted, compared with a 299.6 million USD or 1.35 USD per share-diluted for the comparable period of 2015. For the first nine months of 2016 and 2015, these results, prepared in accordance with GAAP, included items impacting comparability of 133.1 million USD and 421.8 million USD, or 0.44 USD and 1.69 USD per share-diluted, respectively. Adjusted net income, which excludes these items, was 698.9 million USD, or 3.24 USD per share-diluted, for the first nine months of 2016, compared with 672.7 million USD, or 3.04 USD per share-diluted, for the same period of 2015, an increase of 6.6 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
		Nine Months Ended								Nine Months Ended
		October 02, 2016				October 04, 2015				October 02, 2016				October 04, 2015
Derivative Mark-to-Market Losses		USD	30.9			USD	—			USD	0.09			USD	—
Business Realignment Activities		104.5				101.4				0.40				0.30
Acquisition Integration Costs		3.7				14.3				0.01				0.04
Non-Service Related Pension Expense		20.7				7.0				0.06				0.02
Settlement of Shanghai Golden Monkey Liability		(26.7		)		—				(0.12		)		—
Goodwill Impairment		—				280.8				—				1.28
Loss on Early Extinguishment of Debt		—				28.3				—				0.08
Gain on Sale of Trademark		—				(10.0		)		—				(0.03		)
		USD	133.1			USD	421.8			USD	0.44			USD	1.69

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In 2016, the company expects reported earnings per share-diluted of 3.82 to 3.90 USD, including items impacting comparability of approximately 0.42 to 0.46 USD per share-diluted. This projection, prepared in accordance with GAAP, assumes business realignment charges of 0.45 to 0.47 USD per share-diluted, non-service related pension expense (NSRPE) of 0.07 to 0.08 USD per share-diluted, net acquisition integration costs of 0.02 to 0.03 USD per share-diluted and a favorable settlement of the Shanghai Golden Monkey (SGM) liability of 0.12 USD per share-diluted.

Third-Quarter Performance

Consolidated net sales were 2’003.5 million USD in the third quarter of 2016, an increase of 2.2 percent versus the third quarter of 2015. Excluding the effect of foreign currency translation, a 0.2 point headwind, net sales increased 2.4 percent versus the year ago period. Volume was a 1.0 point contribution and in line with estimates. Net price realization was 0.7 points favorable as direct trade and returns, discounts and allowances in the International and Other segment were less than last year. Acquisitions were a 0.7 point benefit in the third quarter.

Adjusted gross margin was 45.6 percent in the third quarter of 2016, compared to 46.0 percent in the third quarter of 2015. The 40 basis point decline was driven by unfavorable mix and other supply chain costs, partially offset by supply chain productivity and costs savings initiatives.

As expected, total advertising and related consumer marketing expense was lower in the third quarter of 2016. 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 «barkTHINS» acquisition, declined about 2 percent in the quarter, as higher employee-related costs were more than offset by productivity and cost savings programs. As a result, consolidated adjusted operating profit of 446.4 million USD in the third quarter of 2016 increased 7.6 percent versus the third quarter of 2015.

The third-quarter tax rate decline versus the prior year period was greater than anticipated, largely as a result of favorable tax outcomes related to R+amp;D tax credits. For the full year, the company estimates that the tax rate will be lower than last year by about 100 basis points versus a previous estimate of a 50 basis point decline.

For the first nine months of 2016, the company repurchased 420 million USD of outstanding shares, resulting in diluted shares outstanding of 215.2 million at the end of the third quarter of 2016, compared to 220.1 million for the same period of 2015.

Outlook

«Our priorities for the year remain unchanged and we’re focused on delivering on the objectives we outlined earlier this year», Bilbrey continued. «We’re making the necessary investments we believe will strengthen Hershey’s leadership position and build upon our latest marketplace results. Our seasonal business and programs are on track and the launch of «Hershey’s Cookie Layer Crunch» bar should enable us to end the year with momentum», 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. The impact of unfavorable foreign currency exchange rates is expected to be about 0.75 points versus the previous estimate of around 1 point. Additionally, the company continues to expect gross margin to be slightly below last year due primarily to unfavorable sales mix. Business productivity and cost savings programs are on track with our targets and the tax rate is expected to be slightly favorable versus our previous expectations. As a result, the company expects adjusted earnings per share-diluted for 2016 to increase 4 percent to 5 percent, including «barkTHINS» dilution of 0.05 to 0.06 USD per share, and be in the 4.28 to 4.32 USD range versus a previous estimate of 4.24 to 4.28 USD.

Business Segment Results

The following are comments about segment performance for the third 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 1’764.5 million USD in the third quarter of 2016, an increase of 1.8 percent versus the same period last year. Volume was a 1.1 point contribution to sales growth and net price realization a 0.1 point headwind. The «barkTHINS» acquisition was a 0.8 point benefit in the third quarter of 2016.

Total Hershey U.S. retail takeaway (candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items) for the 12 weeks ended October 8, 2016, in the expanded all outlet combined plus convenience store channels (xAOC+C-store) increased 0.6 percent. For the 12 weeks ended October 8, 2016, Hershey’s U.S. CMG market share was 31.0 percent, the same as the year ago period.

North America segment income increased 3.3 percent to 563.9 million USD in the third quarter of 2016, compared to 546.1 million USD in the third quarter of 2015. The increase in segment income was driven by an increase in gross profit of about 1.0 percent and lower advertising and related consumer marketing expense.

International and Other

Third-quarter net sales for Hershey’s International and Other segment increased 5.3 percent to 238.9 million USD. Net price realization was a 7.4 point benefit as direct trade and returns, discounts and allowances in China were less than the same period last year. Volume was a 0.1 point contribution to net sales and unfavorable foreign currency exchange rates were a 2.2 point headwind. Combined third-quarter constant currency net sales in Mexico and Brazil increased nearly 18 percent driven by solid Hershey’s marketplace performance. China gross sales declined in line with expectations due to the challenging macroeconomic and competitive environment. In the third quarter of 2016, China chocolate category retail sales declined about 4.0 percent.

International and Other segment income of 4.3 million USD compares to a segment loss of 13.5 million USD in the third quarter of 2015. Combined income in Latin America and export markets improved versus the prior year and performance in China benefited from lower returns, discounts and allowances and direct trade.

Unallocated Corporate Expense

Hershey’s unallocated adjusted corporate expense in the third quarter of 2016 was 121.8 million USD, an increase of 4.1 million USD versus last year. Savings from the previously mentioned productivity and cost savings initiatives were more than offset by higher employee-related costs and other corporate fees.