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Hershey: Reports Q4 and Full-Year 2018 Results

Hershey / PA. (thc) The Hershey Company announced net sales and earnings for the fourth quarter and full year ended December 31, 2018. The company also provided its 2019 reported net sales and earnings outlook. «I’m pleased that we delivered our 2018 financial commitments and continued to invest in our future growth,» said Michele Buck, The Hershey Company President and Chief Executive Officer. «The strategic investments we are making in our core confection business have resulted in improved retail trends and margins. Our recently acquired snacking brands continue to generate strong growth and delivered against our financial objectives. And our International business generated a record year of profitability. We are excited to build on this momentum in 2019.»

2018 Full-Year Financial Results Summary

  • Consolidated net sales of USD 7,791.1 million, an increase of 3.7 percent.
  • Constant currency net sales growth of 3.9 percent, with a 0.2 point headwind from foreign currency exchange.
  • The net impact of acquisitions and divestitures was a 3.6 point benefit to net sales growth.
  • Reported net income of USD 1,177.6 million, or USD 5.58 per share-diluted.
  • Adjusted earnings per share-diluted of USD 5.36, an increase of 14.3 percent.

All comparisons for full year 2018 are with respect to the full year ended December 31, 2017

Fourth-Quarter 2018 Financial Results Summary

  • Consolidated net sales of USD 1,987.9 million, an increase of 2.5 percent.
  • Constant currency net sales growth of 3.1 percent, with a 0.6 point headwind from foreign currency exchange.
  • The net impact of acquisitions and divestitures was a 3.0 point benefit to net sales growth.
  • Reported net income of USD 336.8 million, or USD 1.60 per share-diluted.
  • Adjusted earnings per share-diluted of USD 1.26, an increase of 23.5 percent.

All comparisons for the fourth quarter of 2018 are with respect to the fourth quarter ended December 31, 2017

2019 Full-Year Financial Outlook Summary

  • Full-year reported net sales are expected to increase in the 1 percent to 3 percent range.
    • The net impact of acquisitions and divestitures is estimated to be approximately a 0.5 point benefit.
    • The impact of foreign currency exchange is planned to be negligible based on current exchange rates.
  • Full-year reported earnings per share-diluted are expected to be in the USD 5.50 to USD 5.66 range.
  • Full-year adjusted earnings per share-diluted are expected to be in the USD 5.63 to USD 5.74 range, an increase of 5 percent to 7 percent.

All comparisons for full year 2019 are with respect to the full year ended December 31, 2018

Fourth-Quarter 2018 Results

Consolidated net sales were USD 1,987.9 million in the fourth quarter of 2018 versus USD 1,939.6 million in the year ago period, an increase of 2.5 percent. The net impact of acquisitions and divestitures was a 3.0 point benefit, volume was a 0.9 point benefit and net price realization was a 0.8 point headwind. Foreign currency translation was a 0.6 point headwind.

The company’s fourth-quarter 2018 results, as prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items impacting comparability of USD 56.1 million, or USD 0.34 per share-diluted. For the fourth quarter of 2017, items impacting comparability totaled USD 7.0 million, or USD 0.17 per share-diluted.

Reported gross margin of 47.5 percent represented an increase of 430 basis points versus the fourth quarter of 2017. Adjusted gross margin was 42.5 percent in the fourth quarter of 2018, compared to 42.7 percent in the fourth quarter of 2017, a decrease of 20 basis points. This was driven by higher freight and logistics costs, as well as incremental investments in trade and packaging.

Advertising and related consumer marketing expense declined 13.3 percent in the fourth quarter of 2018 versus the same period last year. This was consistent with previous quarters and was driven by optimization of emerging brand spend, reductions in agency and production fees, and media efficiency gains including an increased focus on earned, or non-paid media. Selling, marketing and administrative expenses, excluding advertising and related consumer marketing was in line with the fourth quarter of 2017. A continued reduction in general administrative costs was offset by incremental Amplify selling, marketing and administrative expenses and investment in the multi-year implementation of the company’s enterprise resource planning (ERP) system.

Fourth-quarter 2018 reported operating profit was USD 421.2 million, resulting in an operating margin of 21.2 percent. Adjusted operating profit of USD 368.9 million increased 13.1 percent versus the fourth quarter of 2017. This resulted in an adjusted operating margin of 18.6 percent, an increase of 180 basis points versus the fourth quarter of 2017 driven by lower selling, marketing and administrative expenses.

The effective tax rate in the fourth quarter of 2018 was 3.6 percent, a decline of 2,670 basis points versus the fourth quarter of 2017. The adjusted tax rate in the fourth quarter of 2018 was 9.5 percent, a decline of 560 basis points versus the fourth quarter of 2017. The decline in both the effective and adjusted tax rates was driven primarily by U.S. tax reform.

The following are comments about segment performance for the fourth quarter of 2018 versus the year-ago period. See the schedule of supplementary information within this press release for additional information on segment net sales and profit.

North America (U.S. and Canada)

Hershey’s North America net sales were USD 1,746.5 million in the fourth quarter of 2018, an increase of 4.3 percent versus the same period last year. Acquisitions and volume were a 4.8 point and 0.8 point benefit, respectively. Net price realization and foreign currency exchange rates were a 1.1 point and 0.2 point headwind, respectively.

Total Hershey U.S. retail takeaway for the 12 weeks ended December 30, 2018, in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores) increased 1.2 percent versus the prior-year period. Hershey’s U.S. candy, mint and gum (CMG) retail takeaway increased 1.0 percent, resulting in a market share loss of 22 basis points versus the prior-year period. These results were in line with expectations and outpaced net sales growth during the quarter due to anticipated inventory reductions at key customers.

North America advertising and related consumer marketing declined 13.3 percent in the fourth quarter of 2018 versus the same period last year. This was consistent with previous quarters and was driven by optimization of emerging brand spend, reductions in agency and production fees, and media efficiency gains, including an increased focus on earned, or non-paid media. Favorable sales, marketing and administrative costs resulted in a segment income increase of 1.8 percent to USD 485.7 million in the fourth quarter of 2018, compared to USD 477.2 million in the fourth quarter of 2017.

International and Other

Fourth-quarter 2018 net sales for Hershey’s International and Other segment decreased 8.9 percent to USD 241.4 million. Divestitures and foreign currency exchange rates were a 8.4 point and 3.1 point headwind, respectively. Volume and net price realization were a 1.9 point and 0.7 point benefit, respectively. Combined organic constant currency net sales growth in Mexico, Brazil, India and China was approximately 7 percent.

International and Other segment income of USD 8.4 million in the fourth quarter of 2018 compared to segment loss of USD 15.0 million in the fourth quarter of 2017, an increase of USD 23.4 million, driven by volume and gross margin increases, as well as selling, marketing and administrative expense reductions as the company continues to execute against its Margin for Growth Program initiatives.

Unallocated Corporate Expense

Hershey’s unallocated corporate expense in the fourth quarter of 2018 was USD 125.3 million, a decrease of USD 10.8 million versus the same period of 2017. The decline was driven by Margin for Growth Program initiatives to reduce general administrative costs, partially offset by the multi-year implementation of the company’s ERP system.

The company also presents the percentage change in 2018 net sales on a constant currency basis. To determine this, 2018 net sales for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the company’s average monthly exchange rates in effect during the corresponding period of the prior fiscal year and are compared to the 2017 results translated into U.S. dollars using the same 2017 average monthly exchange rates.

2019 Full-Year Financial Outlook

Full-year reported net sales are expected to increase in the 1 percent to 3 percent range. The net impact of acquisitions and divestitures is estimated to be approximately a 0.5 point benefit and the foreign currency exchange rate impact is expected to be minimal based on current exchange rates. Full-year reported earnings per share-diluted are expected to be in the USD 5.50 to USD 5.66 range and adjusted earnings per share-diluted in the USD 5.63 to USD 5.74 range, an increase of 5 percent to 7 percent versus 2018.