Hershey / PA. (thc) The Hershey Company announced sales and earnings for the first quarter ended April 1, 2018, and refined its 2018 financial outlook:
- Consolidated net sales were USD 1,972.0 million, an increase of 4.9 percent versus the first quarter of 2017. Acquisitions and foreign currency exchange rates were a 3.4 point and 0.5 point benefit to net sales, respectively.
- Reported net income for the first quarter of 2018 was USD 350.2 million or USD 1.65 per share-diluted. Adjusted earnings per share-diluted was USD 1.41, an increase of 8.5 percent versus the year ago period.
- Full-year reported net sales are expected to increase towards the lower end of the previously communicated range of 5 percent to 7 percent, as the company implements new initiatives to reduce complexity and improve margins. The net impact of acquisitions and divestitures is estimated to be approximately 5 points. The impact of foreign currency exchange rates is estimated to be negligible.
- Full-year reported earnings per share-diluted are expected to be in the USD 4.73 to USD 4.98 range, an increase of USD 0.02 versus initial guidance.
- Full-year adjusted earnings per share-diluted reaffirmed in the USD 5.33 to USD 5.43 range, an increase of 14 percent to 16 percent versus 2017, including accretion from the Amplify acquisition, the benefit of U.S. tax reform, and the impact of revising the company’s adjusted earnings in connection with the adoption of a recent pension accounting change.
«First-quarter net sales and earnings per share were in line with our expectations as we continue to make progress in our key strategic focus areas», said Michele Buck, The Hershey Company President and Chief Executive Officer. «We continue to drive growth in our core chocolate brands. The Amplify acquisition is on track and delivering accelerated earnings accretion in 2018. We are transforming the international business model, delivering another quarter of profitable growth. And despite heightened cost pressures, we continue to invest in the business and deliver strong earnings growth».
Reported net income for the first quarter of 2018 was USD 350.2 million or USD 1.65 per share-diluted, compared to USD 125 million or USD 0.58 per share-diluted for the first quarter of 2017. As described in the Note below, for the first quarter of 2018, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items impacting comparability of USD 51.9 million, or USD 0.24 per share-diluted. For the first quarter of 2017, items impacting comparability totaled USD 212.2 million, or USD 0.72 per share-diluted. As described in the Note, adjusted net income, which excludes these items, was USD 298.0 million, or USD 1.41 per share-diluted, for the first quarter of 2018, compared to USD 279.3 million, or USD 1.30 per share-diluted, for the same period of 2017. Reported gross margin of 49.4 percent for the first quarter of 2018 represented an increase of 100 basis points versus the first quarter of 2017, while reported operating profit of USD 480.5 million in the first quarter of 2018 resulted in operating margin of 24.4 percent. The effective tax rate in the first quarter of 2018 was 21.9 percent, including the impact of U.S. tax reform.
The following table presents a summary of items impacting comparability in each period (see Appendix I for additional information):
| Pre-Tax (millions) | Earnings Per Share-Diluted | ||||||||||||||
| Three Months Ended | Three Months Ended | ||||||||||||||
| 2018-04-01 | 2017-04-02 | 2018-04-01 | 2017-04-02 | ||||||||||||
| Derivative Mark-to-Market Gains | USD | (96.3 | ) | USD | (17.1 | ) | USD | (0.41 | ) | USD | (0.09 | ) | |||
| Business Realignment Activities | 16.0 | 47.0 | 0.06 | 0.17 | |||||||||||
| Acquisition-Related Costs | 27.9 | 0.3 | 0.11 | — | |||||||||||
| Long-Lived Asset Impairment Charges | — | 208.7 | — | 0.76 | |||||||||||
| Noncontrolling Interest Share of Business Realignment and Impairment Charges | 0.5 | (26.7 | ) | — | (0.12 | ) | |||||||||
| Total | USD | (51.9 | ) | USD | 212.2 | USD | (0.24 | ) | USD | 0.72 | |||||
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First-Quarter Performance
Consolidated net sales were USD 1,972.0 million in the first quarter of 2018 versus USD 1,879.7 million in the year ago period. Excluding a foreign currency translation contribution of 0.5 points, net sales increased 4.4 percent versus the year ago period. Acquisitions were a 3.4 point benefit, volume was a 2.4 point contribution and net price realization was a 1.4 point headwind.
Adjusted gross margin was 44.9 percent in the first quarter of 2018 compared to 47.5 percent in the first quarter of 2017, a decline of 260 basis points. The company had anticipated gross margin contraction in the first quarter due to higher freight and logistics costs, as well as incremental investments in trade and packaging, however the gross margin result was below expectations driven by unfavorable mix, cost of complexity and higher input costs.
Advertising and related consumer marketing expense increased on core confection brands in North America but was offset by spend optimization and shifts within emerging brands and international, resulting in an overall decline of 5.3 percent in the first quarter of 2018 versus the same period last year. Selling, marketing and administrative expenses, excluding advertising and related consumer marketing, increased 3.6 percent in the first quarter of 2018. The company continued to reduce its foundational cost structure, but that benefit was more than offset by costs relating to the Amplify acquisition and continued investment in the multi-year implementation of its enterprise resource planning (ERP) system. As a result, consolidated adjusted operating profit of USD 428.1 million in the first quarter of 2018 declined 1.8 percent versus the first quarter of 2017.
As anticipated, the first-quarter 2018 adjusted tax rate of 24.9 percent declined versus the prior year period due to the recently passed U.S. Tax Cuts and Jobs Act of 2017.
2018 Outlook
«We have a strong track record of consistently delivering earnings without compromising key business initiatives and investments, and we plan to do so again this year», Buck continued. «We are taking swift action to mitigate the cost headwinds that many in the industry are facing. We believe our focus on in-year margin improvement will benefit the company over the long term and enable us to achieve our goals. We are excited about our brand activations, innovation, and in store merchandising for the rest of the year and believe these activities will drive consumer engagement and growth across our portfolio».
In 2018, the company estimates net sales to increase towards the lower end of the previously communicated range of 5 percent to 7 percent, including an approximate 5 point benefit from the Amplify acquisition. This reflects the impact of new initiatives to reduce complexity and improve margins in the second half of the year, including the expansion of the company’s SKU rationalization program to the United States. Foreign currency exchange impact is expected to be negligible.
For the full year, the company expects adjusted gross margin to decrease around 125 basis points versus its previous outlook of about the same year over year. Compared to 2017, increased productivity and cost savings initiatives are expected to be offset by unfavorable sales mix, freight and logistics inflation, previously announced packaging initiatives, and costs relating to increased complexity. Investments in marketing, technology and IT capabilities, including the multi-year ERP project, are initiatives to enable profitable growth. Margin for Growth Program savings in 2018 are estimated to be USD 80 million to USD 90 million, an increase of approximately USD 25 million versus previous estimates, driven by selling, general and administrative expense favorability. The company now expects to deliver towards the high end of the USD 150 million to USD 175 million Margin for Growth Program target by 2019.
The recently passed U.S. Tax Cuts and Jobs Act of 2017 will have a favorable impact on the company’s net income, earnings per share-diluted and cash flow. The company has continued to evaluate the details within this legislation, and as a result has updated its 2018 adjusted tax rate estimate to approximately 19 percent to 20 percent. Additionally, the company has decided to invest a portion of the cash benefit of U.S. tax reform in increased capital spending of USD 25 million. Total capital additions, including software, are now expected to be USD 355 million to USD 375 million. In 2018, the company adopted ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715). This requires an employer to report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Accordingly, the company has restated 2017 results for comparability purposes.
The company expects full-year 2018 reported earnings per share-diluted of USD 4.73 to USD 4.98, including items impacting comparability of approximately USD 0.45 to USD 0.60 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 0.37per share-diluted, and acquisition related costs of USD 0.15 to USD 0.20 per share-diluted.
The company expects full-year adjusted earnings per share-diluted of USD 5.33 to USD 5.43, an increase of 14 percent to 16 percent versus 2017. This includes accretion from the Amplify acquisition, the benefit of U.S. tax reform, and the impact of revising non-GAAP earnings in connection with the adoption of the GAAP pension accounting change. The revision in the company’s determination of non-GAAP earnings resulted in a 2017 net reduction of USD 0.07 to adjusted earnings per share-diluted, to USD 4.69.
