Hershey Q1 earnings beat expectations, bolstered by Amplify deal

Hershey’s has announced sales and earnings for the first quarter ended April 1, 2018, and refined its 2018 financial outlook, stating that consolidated net sales were US$1,972.0 million, an increase of 4.9 percent versus the first quarter of 2017.

And sales in the US, the largest revenue generator for Hershey’s, increased 4.4 percent to US$1.75 billion in Q1.

Acquisitions and foreign currency exchange rates were a 3.4 point and 0.5 point benefit to net sales, respectively, and reported net income for the first quarter of 2018 was US$350.2 million or US$1.65 per share-diluted, compared to US$125 million or US$0.58 per share-diluted for the first quarter of 2017.

Adjusted earnings per share-diluted were US$1.41, an increase of 8.5 percent versus the year-ago period.

And, 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.

Full-year reported earnings per share-diluted are expected to be in the US$4.73 to US$4.98 range, an increase of $0.02 versus initial guidance.

Full-year adjusted earnings per share-diluted reaffirmed in the US$5.33 to US$5.43 range, an increase of 14 percent to 16 percent versus 2017, including accretion from the Amplify acquisition, the benefit of US 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,” she added.

Hershey’s has previously outlined its vision of becoming a snacking powerhouse. And initiatives are underway to support the company’s growth agenda and financial targets, including its Margin for Growth program.

First-quarter performance

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.

The 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 says it 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 US$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 US Tax Cuts and Jobs Act of 2017.

Outlook
Talking about the company’s outlook for 2018, Buck says Hershey’s is taking swift action to lessen the impact of headwinds.

“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,” she 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 estimated 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 US.  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.

Hershey’s estimates Margin for Growth Program savings in 2018 to be US$80 million to US$90 million, an increase of approximately US$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 US$150 million to US$175 million Margin for Growth Program target by 2019.

Hershey’s US and Canada
Hershey’s North America net sales were US$1,751.7 million in Q1 2018, an increase of 4.4 percent versus the same period last year, including a 0.2 point benefit from foreign currency translation. The Amplify acquisition was a 3.8 point benefit, volume was a 1.8 point benefit, and net price realization was a 1.4 point headwind.

Total Hershey U.S. retail takeaway for the 12 weeks ended April 8, 2018, increased 10.2 percent in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores).

Hershey’s US candy, mint, and gum (CMG) retail takeaway for the 12 weeks ended April 8, 2018, in the MULO + C-Stores channels increased 10.7 percent, driven by the earlier Easter, resulting in a CMG market share loss of 30 basis points.

The company’s core chocolate brands continue to perform well and Hershey’s renewed investment in highly productive brands such as York, Payday, Almond Joy and Mounds is driving accelerated growth in the US business. It says the Hershey’s Gold bar launch is off to a strong start and Reese’s Outrageous Bar will launch in May bringing excitement and innovation to the category.

International
First-quarter 2018 net sales for Hershey’s International and Other segment increased 8.8 percent to US$220.3 million, including a 2.4 point benefit from foreign currency translation.

Volume was an 8.1 point benefit and net price realization was a 1.7 point headwind. Combined constant currency net sales growth in Mexico, Brazil and India was about 12 percent.

As expected, the business in China continued to sequentially improve, resulting in a constant currency net sales increase of about 1 percent versus the year-ago period. International and Other segment income of US$17.7 million compared to segment income of US$1.7 million in the first quarter of 2017.