Hershey Announced Increase in Sales for the Third-Quarter

30 Oct 2014 --- The Hershey Company announced sales and earnings for the third quarter ended September 28, 2014. Consolidated net sales were $1,961,578,000 compared with $1,853,886,000 for the third quarter of 2013. Reported net income for the third quarter of 2014 was $223,741,000 or $1.00 per share-diluted, compared with $232,985,000 or $1.03 per share-diluted for the comparable period of 2013.

“We made good progress against our third-quarter objectives as net sales, retail takeaway and market share trends improved versus the first half of the year,” said John P. Bilbrey, President and Chief Executive Officer, The Hershey Company. “As expected, third-quarter U.S. marketplace performance was solid as we gained market share across all segments - chocolate, non-chocolate candy, gum and mint - and essentially throughout every quad. Halloween seasonal orders and net sales were slightly better than our estimates. While preliminary, data indicates Halloween sell through is on track and that we will gain market share in this important season. By class-of-trade, our marketplace performance was solid in the convenience store, large mass and value channels. I was particularly pleased with our third quarter convenience store retail takeaway of 4.0 percent and market share gain of 0.2 points. However, retail store traffic and consumer trips continue to be irregular within the food channel. This has adversely impacted purchases of non-seasonal everyday candy products. Over the remainder of the year and into 2015 we are focused on driving non-seasonal and seasonal net sales growth, across all channels, with the optimal mix of innovation, advertising, merchandising and programming that we believe positions us to win across the confectionery and broader snacks categories.

“I’m pleased that we completed the initial closing and acquired an 80 percent stake in the iconic Shanghai Golden Monkey. This strategic acquisition advances our international growth agenda and builds on our commitment to the China market. We intend to leverage Shanghai Golden Monkey’s diverse product portfolio and strong sales force to build on the organic growth we’ve delivered in China over the past several years. With the acquisition of Shanghai Golden Monkey, China is expected to be Hershey’s second largest market by year-end 2015 with net sales of around $500 million on a constant currency basis.”

As described in the Note below, for the third quarter of 2014, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included net pre-tax charges of $13.8 million or $0.05 per share-diluted. These charges included $3.0 million, or $0.01 per share-diluted, related to the Project Next Century program, a gain of $7.7 million related to a foreign currency exchange contract associated with Shanghai Golden Monkey which more than offset acquisition costs of $5.6 million, and non-service-related pension income (NSRPI) of $0.4 million. Additionally, a non-cash trademark impairment charge of $13.3 million, or $0.04 per share-diluted, was recorded related to a non-chocolate brand. Reported gross margin of 43.8 percent declined 230 basis points versus last year. For the third quarter of 2013, results included net pre-tax charges for Project Next Century of $3.0 million or $0.01 per share-diluted, non-service-related pension expense (NSRPE) of $2.8 million and acquisition and integration costs of $0.1 million. Adjusted net income, which excludes these net charges, was $234,199,000 or $1.05 per share-diluted in the third quarter of 2014, compared with $236,618,000 or $1.04 per share-diluted in the third quarter of 2013, an increase of 1.0 percent in adjusted earnings per share-diluted.

For the first nine months of 2014, consolidated net sales were $5,411,741,000 compared with $5,189,826,000 for the first nine months of 2013. Reported net income for the first nine months of 2014 was $644,404,000 or $2.86 per share-diluted, compared with $634,395,000 or $2.79 per share-diluted for the first nine months of 2013. As described in the Note, for the first nine months of 2014 and 2013, these results, prepared in accordance with GAAP, included net pre-tax charges of $29.1 million and $23.1 million, or $0.09 and $0.07 per share-diluted, respectively. Charges associated with the Project Next Century program for the first nine months of 2014 and 2013 were $7.3 million and $13.6 million or $0.02 and $0.04 per share-diluted, respectively. Acquisition and integration costs for the first nine months of 2014 and 2013 were $9.9 million or $0.03 per share-diluted and $1.0 million, respectively. NSRPI for the first nine months of 2014 was $1.4 million, compared with NSRPE of $8.4 million or $0.03 per share-diluted for the first nine months of 2013. Additionally, the aforementioned impairment charge recorded in the current period was $13.3 million or $0.04 per share-diluted. As described in the Note, adjusted net income for the first nine months of 2014, which excludes these net charges, was $664,152,000 or $2.95 per share-diluted, compared with $648,693,000 or $2.86 per share-diluted in 2013, an increase of 3.1 percent in adjusted earnings per share-diluted.

In 2014, the company expects reported gross margin to decline 60 basis points versus last year and reported earnings per share-diluted of $3.88 to $3.92, including net pre-tax GAAP charges of approximately $38 million to $41 million, or $0.11 to $0.13 per share-diluted. This is greater than the previous estimate of $18 million to $23 million, or $0.05 to $0.07 per share-diluted, primarily due to the aforementioned non-cash impairment charge. This projection, prepared in accordance with GAAP, assumes net business realignment charges related to Project Next Century and other supply chain programs of $0.03 to $0.04 per share-diluted, NSRPI of $0.01 per share-diluted, and a non-cash impairment charge of $0.04 per share-diluted. Net acquisition and transaction costs, primarily associated with Shanghai Golden Monkey, are expected to be $0.05 to $0.06 per share-diluted.

Third-Quarter Performance

Third-quarter net sales increased 5.8 percent driven primarily by volume. North America net sales increased 4.2 percent driven by strong Halloween seasonal growth and new products. International net sales increased 18.4 percent, slightly less than estimates. Foreign currency exchange rates were a 0.2 point headwind.

Hershey’s U.S. candy, mint and gum (CMG) retail takeaway for the 12 weeks ended October 4, 2014, in the expanded all outlet combined plus convenience store channels (xAOC+C-store), which accounts for approximately 90 percent of the company’s U.S. retail business, was up 3.3 percent, resulting in a market share gain of 0.5 points. For the year-to-date period ended October 4, 2014, Hershey’s U.S. market share was an industry-leading 31.2 percent, up 0.2 points.

Third-quarter adjusted gross margin declined 240 basis points. As previously discussed, input cost inflation, primarily dairy, has pressured gross margin all year. Dairy remained at elevated levels throughout the third quarter and negatively impacted profitability. Additionally, unfavorable sales mix and other supply chain costs more than offset productivity and cost savings initiatives. Selling and administrative expenses declined about 1 percent in the third quarter while advertising and related consumer marketing expense increased 1 percent versus the prior period.

Outlook

The fourth-quarter U.S. launches of Brookside Crunchy Clusters, Reese’s Crunchy Cup and Reese’s Spreads in a take home jar are on track. Holiday seasonal orders are solid, with non-seasonal candy tracking slightly below initial expectations. Additionally, due to the complex manufacturing process and greater than expected customer orders for Ice Breakers Cool Blasts Chews, the launch date is now scheduled to occur in early 2015. In the fourth quarter of 2014, incremental Ice Breakers gum and mints programming is in the marketplace to partially offset the net sales that were anticipated from Ice Breakers Cool Blasts Chews. The company’s chocolate business in China continues to be strong with organic revenue expected to be about $200 million in 2014. However, net sales growth in select international export markets is mixed due to macroeconomic challenges. Therefore, including the impact of foreign currency exchange rates, full-year international organic net sales are expected to be up low double digits on a percentage basis versus last year, less than the company’s previous estimate of about a 15 percent increase. As a result, the company estimates full-year 2014 net sales to increase around 4.75 percent, including the impact of foreign currency exchange rates and a contribution from acquisitions of about 0.75 points. Given year-to-date results, the impact of unfavorable product mix and volatility in the commodity markets, primarily dairy, the company expects adjusted gross margin to decline about 75 basis points versus 2013. Total selling, marketing and administrative expenses will be about in line with 2013 as the company leverages investments made in go-to-market capabilities established over the last few years. As a result, the company anticipates adjusted earnings per share-diluted growth for the full year to increase around 8 percent.

Bilbrey continued, “In 2015, we have many exciting new products that will bring variety, news and excitement to the category. In addition to the fourth-quarter carryover benefit of Brookside Crunchy Clusters, Reese’s Crunchy Cup and Reese’s Spreads take home jar, we’ll launch Kit Kat White Minis, Hershey’s Caramels, Ice Breakers Cool Blasts Chews, Reese’s Spreads Snacksters Graham Dippers, as well as some other yet to be announced new products. We will work with our retail customers over the remainder of this year and into 2015 to ensure that the implementation of the previously announced price increase is supported with the right mix of customer trade promotions and merchandising to reduce the impact of volume elasticity. Furthermore, these initiatives will be supported with greater levels of advertising and related consumer marketing that is expected to increase in 2015 at a rate greater than sales growth.”

The company estimates full-year 2015 net sales will increase about 7 percent to 9 percent, including the impact of foreign currency exchange rates and a contribution from acquisitions of around 2.5 points. As has been the case for many years, Hershey is a gross margin focused company. While early in the planning cycle, the company expects the previously announced pricing action, as well as productivity and cost savings, to result in gross margin expansion next year and to drive 2015 growth in adjusted earnings per share-diluted in the 9 to 11 percent range.