Hershey / PA. (thc) The Hershey Company announced net sales and earnings for the fourth quarter and full year ended December 31, 2019. The company also provided its 2020 reported net sales and earnings outlook.
«We had a strong year in 2019 with accelerated business performance and differentiated financial results,» said Michele Buck, The Hershey Company President and Chief Executive Officer. «This was driven by momentum in our core U.S. confection portfolio in both retail takeaway and margin expansion, incremental and profitable international growth, and further expansion of our snacking portfolio. We continued investing in our brands, capabilities, and people and have confidence we will deliver another year of high-quality financial results in 2020.»
Fourth-Quarter 2019 Financial Results Summary [1]
- Consolidated net sales of USD 2,068.1 million, an increase of 4.0 percent.
- Organic, constant currency net sales increased 1.9 percent.
- The net impact of acquisitions and divestitures on net sales was a 2.2 point benefit, while foreign currency exchange was a 0.1 point headwind.
- Reported net income of USD 207.2 million, or USD 0.98 per share-diluted, a decrease of 38.8 percent.
- Adjusted earnings per share-diluted of USD 1.28, an increase of 1.6 percent.
2019 Full-Year Financial Results Summary [2]
- Consolidated net sales of USD 7,986.3 million, an increase of 2.5 percent.
- Organic, constant currency net sales increased 1.8 percent.
- The net impact of acquisitions and divestitures on net sales was a 1.0 point benefit, while foreign currency exchange was a 0.3 point headwind.
- Reported net income of USD 1,149.7 million, or USD 5.46 per share-diluted, a decrease of 2.2 percent.
- Adjusted earnings per share-diluted of USD 5.78, an increase of 7.8 percent.
2020 Full-Year Financial Outlook Summary [3]
- Full-year reported net sales are expected to increase in the range of 2 percent to 4 percent.
- Acquisitions are estimated to be a 1.0 point benefit to net sales growth [4].
- The impact of foreign currency exchange is anticipated to be a slight headwind based on current exchange rates.
- Full-year reported earnings per share-diluted are expected to be in the range of USD 6.04 to USD 6.20, an increase of 11 percent to 14 percent versus 2019.
- Full-year adjusted earnings per share-diluted are expected to be in the range of USD 6.13 to USD 6.24, an increase of 6 percent to 8 percent versus 2019.
[4] Reflects the impact from the acquisition of ONE Brands, LLC
Fourth-Quarter 2019 Results
Consolidated net sales were USD 2,068.1 million in the fourth quarter of 2019 versus USD 1,987.9 million in the year ago period, an increase of 4.0 percent. Price realization was a 3.6 point benefit and the net impact of acquisitions and divestitures was a 2.2 point benefit driven by the acquisition of ONE Brands. Volume and foreign currency exchange were a 1.7 point and a 0.1 point headwind, respectively. These results were in line with expectations.
As outlined in the table below, the company’s fourth-quarter 2019 results, as prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items positively impacting comparability of USD 81.6 million, or USD 0.30 per share-diluted. For the fourth quarter of 2018, items negatively impacting comparability totaled USD 56.1 million, or USD 0.34 per share-diluted.
Reported gross margin was 44.1 percent in the fourth quarter of 2019, compared to 47.5 percent in the fourth quarter of 2018, a decrease of 340 basis points. This decrease was driven by lower derivative mark to market gains. Adjusted gross margin was 43.4 percent in the fourth quarter of 2019, compared to 42.5 percent in the fourth quarter of 2018, an increase of 90 basis points, driven by net price realization and favorable commodities.
Selling, marketing and administrative expenses increased 6.4 percent in the fourth quarter of 2019 versus the fourth quarter of 2018, driven by increased advertising spending, higher incentive compensation related to strong 2019 performance and a structural, market-based increase in variable compensation linked to company performance for our managers and individual contributors. Advertising and related consumer marketing expenses increased 2.1 percent in the fourth quarter of 2019 versus the same period last year driven by advertising increases in North America. Selling, marketing and administrative expenses, excluding advertising and related consumer marketing, increased 8.9 percent versus the fourth quarter of 2018. This increase was driven by the aforementioned higher incentive compensation and increased variable compensation.
Fourth-quarter 2019 reported operating profit of USD 286.2 million decreased 32.0 percent versus the fourth quarter of 2019, resulting in an operating profit margin of 13.8 percent, a decrease of 740 basis points driven by the recognition of impairment charges to write down long-lived and intangible assets associated with the 2015 KRAVE Pure Foods Inc. (Krave) acquisition. Adjusted operating profit of USD 370.5 million increased 0.4 percent versus the fourth quarter of 2018. This resulted in an adjusted operating profit margin of 17.9 percent, a decrease of 70 basis points versus the fourth quarter of 2018 as gross margin gains were more than offset by higher incentive compensation.
The effective tax rate in the fourth quarter of 2019 was 4.6 percent, an increase of 100 basis points versus the fourth quarter of 2018. The adjusted tax rate in the fourth quarter of 2019 was 9.8 percent, an increase of 30 basis points versus the fourth quarter of 2018. Both the effective and adjusted tax rate increases were driven primarily by lower tax credits versus the year ago period.
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 | ||||||||||||||||||
| 2019-12-31 | 2018-12-31 | 2019-12-31 | 2018-12-31 | ||||||||||||||||
| Derivative Mark-to-Market Gains | USD | (15.2 | ) | USD | (98.8 | ) | USD | (0.08 | ) | USD | (0.47 | ) | |||||||
| Business Realignment Activities | 0.8 | 9.2 | — | 0.05 | |||||||||||||||
| Acquisition-Related Costs | 2.2 | 8.4 | 0.01 | 0.04 | |||||||||||||||
| Pension Settlement Charges Relating to Company-Directed Initiatives | 0.1 | 1.4 | — | 0.01 | |||||||||||||||
| Long-Lived and Intangible Asset Impairment Charges | 107.7 | 28.9 | 0.51 | 0.13 | |||||||||||||||
| Noncontrolling Interest Share of Business Realignment and Impairment Charges | (2.7 | ) | (5.2 | ) | (0.01 | ) | (0.02 | ) | |||||||||||
| Gain on Sale of Other Assets | (11.3 | ) | — | (0.05 | ) | — | |||||||||||||
| Tax effect of all adjustments reflected above | — | — | (0.08 | ) | (0.08 | ) | |||||||||||||
| USD | 81.6 | USD | (56.1 | ) | USD | 0.30 | USD | (0.34 | ) | ||||||||||
.
| Pre-Tax (millions) | Earnings Per Share-Diluted | ||||||||||||||||||
| Twelve Months Ended | Twelve Months Ended | ||||||||||||||||||
| 2019-12-31 | 2018-12-31 | 2019-12-31 | 2018-12-31 | ||||||||||||||||
| Derivative Mark-to-Market Gains | USD | (28.7 | ) | USD | (168.2 | ) | USD | (0.14 | ) | USD | (0.80 | ) | |||||||
| Business Realignment Activities | 9.2 | 51.8 | 0.04 | 0.25 | |||||||||||||||
| Acquisition-Related Costs | 10.2 | 44.8 | 0.05 | 0.21 | |||||||||||||||
| Pension Settlement Charges Relating to Company-Directed Initiatives | 2.4 | 5.5 | 0.01 | 0.03 | |||||||||||||||
| Long-Lived and Intangible Asset Impairment Charges | 112.5 | 57.7 | 0.53 | 0.27 | |||||||||||||||
| Noncontrolling Interest Share of Business Realignment and Impairment Charges | (2.8 | ) | (6.3 | ) | (0.01 | ) | (0.03 | ) | |||||||||||
| Gain on Sale of Other Assets | (11.3 | ) | (2.7 | ) | (0.05 | ) | (0.01 | ) | |||||||||||
| Tax effect of all adjustments reflected above | — | — | (0.11 | ) | (0.14 | ) | |||||||||||||
| USD | 91.5 | USD | (17.4 | ) | USD | 0.32 | USD | (0.22 | ) | ||||||||||
.
The following are comments about segment performance for the fourth quarter of 2019 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 1,812.7 million in the fourth quarter of 2019, an increase of 3.8 percent versus the same period last year. Price realization was a 4.0 point benefit and the net impact of acquisitions and divestitures was a 2.5 point benefit. Volume was a 2.7 point headwind and foreign currency exchange was negligible.
Total Hershey U.S. retail takeaway for the 12 weeks ended December 29, 2019 [5] in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores) increased 2.5 percent versus the prior-year period. Hershey’s U.S. candy, mint and gum retail takeaway increased 2.8 percent, resulting in a 17 basis point market share gain versus the prior-year period. Hershey’s salty snack retail takeaway increased 11.3 percent during the latest 12 weeks led by strong Skinny Pop performance.
North America advertising and related consumer marketing expenses increased 5.1 percent in the fourth quarter of 2019 versus the same period last year driven by advertising. Gross margin gains driven by net price realization and favorable commodities resulted in a segment income increase of 7.0 percent to USD 519.8 million in the fourth quarter of 2019, compared to USD 485.7 million in the fourth quarter of 2018.
[5] Includes candy, mint, gum, salty snacks, meat snacks and grocery itemsInternational and Other
Fourth-quarter 2019 net sales for Hershey’s International and Other segment increased 5.8 percent versus the same period last year, to USD 255.4 million. Constant currency net sales grew 6.3 percent, offset by a 0.5 point headwind from foreign currency exchange. Volume was a 5.7 point benefit and net price realization contributed an additional 0.6 points. Combined net sales in our strategic focus markets (Mexico, Brazil, India and China) increased approximately 5.3 percent. Excluding a 0.7 point headwind from foreign currency exchange rates, combined organic constant currency net sales in Mexico, Brazil, India and China grew approximately 6.0 percent.
International and Other segment income increased 67.9 percent to USD 14.1 million in the fourth quarter of 2019 driven by gains from volume growth and gross margin expansion along with increasingly efficient advertising and related consumer marketing expenses.
A reconciliation between reported net sales growth rates and (i) constant currency net sales growth rates and (ii) organic constant currency net sales growth rates is provided below:
| Three Months Ended December 31, 2019 | |||||||||||||||
| Percentage Change as Reported | Impact of Foreign Currency Exchange | Percentage Change on Constant Currency Basis | Impact of Acquisitions and Divestitures | Percentage Change on Organic Constant Currency Basis | |||||||||||
| Mexico | 8.4 | % | 2.7 | % | 5.7 | % | — | % | 5.7 | % | |||||
| Brazil | 2.7 | % | (9.1 | ) | % | 11.8 | % | — | % | 11.8 | % | ||||
| India | 16.0 | % | 1.4 | % | 14.6 | % | — | % | 14.6 | % | |||||
| China | 9.2 | % | (2.3 | ) | % | 11.5 | % | — | % | 11.5 | % | ||||
| Total Strategic Focus Markets | 5.3 | % | (0.7 | ) | % | 6.0 | % | — | % | 6.0 | % | ||||
.
| Twelve Months Ended December 31, 2019 | ||||||||||||||||||
| Percentage Change as Reported | Impact of Foreign Currency Exchange | Percentage Change on Constant Currency Basis | Impact of Acquisitions and Divestitures | Percentage Change on Organic Constant Currency Basis | ||||||||||||||
| Mexico | 6.7 | % | (0.3 | ) | % | 7.0 | % | — | % | 7.0 | % | |||||||
| Brazil | (5.9 | ) | % | (8.2 | ) | % | 2.3 | % | — | % | 2.3 | % | ||||||
| India | 4.9 | % | (3.3 | ) | % | 8.2 | % | — | % | 8.2 | % | |||||||
| China | (13.4 | ) | % | (3.4 | ) | % | (10.0 | ) | % | (17.7 | ) | % | 7.7 | % | ||||
| Total Strategic Focus Markets | (1.5 | ) | % | (2.7 | ) | % | 1.2 | % | (2.2 | ) | % | 3.5 | % | |||||
.
Unallocated Corporate Expense
Hershey’s unallocated corporate expense in the fourth quarter of 2019 was USD 163.4 million, an increase of USD 38.2 million, or 30.5 percent versus the same period of 2018. This increase was driven by higher incentive compensation related to strong 2019 performance and a structural, market-based increase of variable compensation linked to company performance for our managers and individual contributors.
2020 Full-Year Financial Outlook
Full-year reported net sales are expected to increase 2 percent to 4 percent. Acquisitions are expected to be a 1.0 point benefit to net sales growth, and the impact of foreign currency exchange is expected to be slightly negative based on current exchange rates.
Full-year reported earnings per share-diluted are expected to be in the range of USD 6.04 to USD 6.20, an increase of 11 percent to 14 percent versus 2019. Full-year adjusted earnings per share-diluted are expected to be in the range of USD 6.13 to USD 6.24, an increase 6 percent to 8 percent versus 2019.
Below is a reconciliation of projected 2020, full-year 2019 and full-year 2018 earnings per share-diluted calculated in accordance with GAAP to non-GAAP adjusted earnings per share-diluted:
| 2020 (Projected) | 2019 | 2018 | |||||
| Reported EPS – Diluted | $6.04 – $6.20 | USD | 5.46 | USD | 5.58 | ||
| Derivative mark-to-market gains | — | (0.14) | (0.80) | ||||
| Business realignment activities | 0.01 – 0.02 | 0.04 | 0.25 | ||||
| Acquisition-related costs | 0.02 – 0.04 | 0.05 | 0.21 | ||||
| Gain on sale of other assets | — | (0.05) | (0.01) | ||||
| Pension settlement charges relating to company-directed initiatives | 0.01 – 0.03 | 0.01 | 0.03 | ||||
| Long-lived and intangible asset impairment charges | — | 0.53 | 0.27 | ||||
| Noncontrolling interest share of business realignment and impairment charges | — | (0.01) | (0.03) | ||||
| Tax effect of all adjustments reflected above | — | (0.11) | (0.14) | ||||
| Adjusted EPS – Diluted | $6.13 – $6.24 | USD | 5.78 | USD | 5.36 |
.
2020 projected earnings per share-diluted, as presented above, does not include the impact of mark-to-market gains and losses on our commodity derivative contracts that will be reflected within corporate unallocated expense in segment results until the related inventory is sold, since we are not able to forecast the impact of the market changes.
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