Hershey: Reports Third-quarter 2019 Financial Results

Hershey / PA. (thc) The Hershey Company announced net sales and earnings for the third quarter ended September 29, 2019 and updated its 2019 net sales outlook to reflect the acquisition of ONE Brands LLC. «We are pleased with our third-quarter results and the momentum we are seeing in our core business,» said Michele Buck, The Hershey Company President and Chief Executive Officer. «Investments in our brands, capabilities and strong execution are driving solid confection sales and share gains in both our U.S. and International markets. Our Amplify portfolio continues to deliver mid- to high-single-digit growth. And we continue to execute against our broader snacking ambition with the acquisition of ONE Brands and its portfolio of high-growth, better-for-you nutrition bars. We remain confident in our strategies and ability to deliver our financial commitments for the year.»

Third-Quarter 2019 Financial Results Summary(1)

• Consolidated net sales of USD 2,134.4 million, an increase of 2.6 percent.
• Organic constant currency net sales increased 1.6 percent.
• The net impact of acquisitions and divestitures on net sales was a 1.2 point benefit, while foreign currency exchange was a 0.2 point headwind.
• Reported net income of USD 325.3 million, or USD 1.54 per share-diluted, an increase of 23 percent.
• Adjusted earnings per share-diluted of USD 1.61, an increase of 3.9 percent.

2019 Full-Year Financial Outlook Summary(2)

• Full-year reported net sales are expected to increase around 2.5 percent, an increase versus previous guidance of around 2 percent, driven by the acquisition of ONE Brands.
  • The net impact of acquisitions and divestitures is estimated to be approximately a 1.0 point benefit(3).
  • The impact of foreign currency exchange is anticipated to be slightly negative based on current exchange rates.
• Full-year reported earnings per share-diluted are expected to be in the USD 5.54 to USD 5.66 range, between a decline of 1 percent and an increase of 1 percent versus prior year.
• Full-year adjusted earnings per share-diluted are expected to be in the USD 5.68 to USD 5.74 range, an increase of 6 percent to 7 percent.

(1) All comparisons for the third quarter of 2019 are with respect to the third quarter ended September 30, 2018
(2) All comparisons for full-year 2019 are with respect to the full year ended December 31, 2018
(3) Reflects the impact from the acquisitions of Amplify Snack Brands, Pirate Brands and ONE Brands as well as the divestitures of Tyrells, Shanghai Golden Monkey and the Van Houten brand rights

Third-Quarter 2019 Results

Consolidated net sales were USD 2,134.4 million in the third quarter of 2019 versus USD 2,079.6 million in the year ago period, an increase of 2.6 percent. The net impact of acquisitions and divestitures was a 1.2 point benefit. Price realization was a 1.1 point benefit, reflecting full execution of the company’s 2018 price increase, partially offset by the transitional period related to the company’s July 2019 pricing announcement. These results were in line with expectations. Volume was a 0.5 point benefit and foreign currency exchange was a 0.2 point headwind.

As outlined in the table below, the company’s third-quarter 2019 results, as prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items impacting comparability of USD 18.4 million, or USD 0.07 per share-diluted. For the third quarter of 2018, items impacting comparability totaled USD 68.0 million, or USD 0.30 per share-diluted.

Reported gross margin was 44.2 percent in the third quarter of 2019, compared to 41.5 percent in the third quarter of 2018, an increase of 270 basis points. Adjusted gross margin was 44.8 percent in the third quarter of 2019, compared to 44.0 percent in the third quarter of 2018, an increase of 80 basis points. This increase in both reported and adjusted gross margin was driven by favorable commodities and net price realization.

Selling, marketing and administrative expenses increased 6.0 percent in the third quarter of 2019 versus the third quarter of 2018. Advertising and related consumer marketing expenses increased 10.5 percent in the third 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 3.5 percent versus the third quarter of 2018 driven by increased spending related to incentive compensation.

Third-quarter 2019 reported operating profit of USD 460.8 million increased 13.4 percent versus the third quarter of 2018, resulting in an operating margin of 21.6 percent, an increase of 210 basis points driven primarily by gross margin gains. Adjusted operating profit of USD 477.0 million increased 1.3 percent versus the third quarter of 2018. This resulted in an adjusted operating margin of 22.3 percent, a decrease of 30 basis points versus the third quarter of 2018 as gross margin gains were more than offset by increased advertising in North America and higher incentive compensation.

The effective tax rate in the third quarter of 2019 was 20.2 percent, a decrease of 540 basis points versus the third quarter of 2018. The adjusted tax rate in the third quarter of 2019 was 20.1 percent, a decline of 270 basis points versus the third quarter of 2018. Both the effective and adjusted tax rate favorability were driven primarily by excess tax benefits from stock-based compensation and higher investment tax credits.

The following table presents a summary of items impacting comparability in each period:

	Pre-Tax (millions)								Earnings Per Share-Diluted
Three Months Ended …	2019-09-29				2018-09-30				2019-09-29				2018-09-30
Derivative Mark-to-Market Losses	USD	12.2			USD	47.6			USD	0.06			USD	0.22
Business Realignment Activities		1.6				11.4				0.01				0.04
Acquisition-Related Costs		2.4				3.7				0.01				0.02
Pension Settlement Charges Relating to Company-Directed Initiatives		2.3				4.0				0.01				0.02
Long-Lived Asset Impairment Charges		–				1.6				–				0.01
Noncontrolling Interest Share of Business Realignment and Impairment Charges		(0.1	)			(0.3	)			–				–
Tax effect of all adjustments reflected above		–				–				(0.02	)			(0.01	)
	USD	18.4			USD	68.0			USD	0.07			USD	0.30

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The following are comments about segment performance for the third 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 1,894.0 million in the third quarter of 2019, an increase of 2.7 percent versus the same period last year. Price realization was a 1.5 point benefit and the net impact of acquisitions and divestitures was a 1.5 point benefit. Volume was a 0.2 point headwind and foreign currency exchange rates were a 0.1 point headwind.

Total Hershey U.S. retail takeaway for the 12 weeks ended October 13, 20194 in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores) increased 1.5 percent versus the prior-year period. Hershey’s U.S. candy, mint and gum retail takeaway increased 2.2 percent, resulting in a 23 basis point market share gain versus the prior-year period. Hershey’s salty snack retail takeaway increased 6.3 percent during the latest 12 weeks led by strong Skinny Pop performance.

North America advertising and related consumer marketing expenses increased 14.4 percent in the third quarter of 2019 versus the same period last year driven by advertising. Favorable gross margin resulted in a segment income increase of 2.6 percent to USD 570.4 million in the third quarter of 2019, compared to USD 556.1 million in the third quarter of 2018.

(4) Includes candy, mint, gum, salty snacks, meat snacks and grocery items

International and Other

Third-quarter 2019 net sales for Hershey’s International and Other segment increased 1.8 percent versus the same period last year, to USD 240.4 million. Volume was a 5.3 point benefit. Net price realization was a 1.6 point headwind, foreign currency exchange rates were a 1.0 point headwind, and divestitures were a 0.9 point headwind. Combined net sales in our strategic focus markets (Mexico, Brazil, India and China) increased approximately 3.2 percent. Excluding a 2.1 point headwind from foreign currency exchange rates and a 2.1 point headwind from divestitures, combined organic constant currency net sales in Mexico, Brazil, India and China grew approximately 7.4 percent.

International and Other segment income increased 26.7 percent to USD 39.4 million in the third quarter of 2019 driven by gains from volume growth and gross margin expansion.
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 2019-09-29	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	5.8	%		(2.9	)%		8.7	%		–	%		8.7	%
Brazil	(1.9	)%		(0.8	)%		(1.1	)%		–	%		(1.1	)%
India	16.2	%		(0.5	)%		16.7	%		–	%		16.7	%
China	(2.6	)%		(2.8	)%		0.2	%		(7.6	)%		7.8	%
Total Strategic Focus Markets	3.2	%		(2.1	)%		5.3	%		(2.1	)%		7.4	%

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Unallocated Corporate Expense

Hershey’s unallocated corporate expense in the third quarter of 2019 was USD 132.8 million, an increase of USD 16.3 million, or 14.0 percent versus the same period of 2018. This increase was driven primarily by incentive compensation increases.

2019 Full-Year Financial Outlook

Full-year reported net sales are expected to increase around 2.5 percent. The net impact of acquisitions and divestitures is estimated to be approximately a 1.0 point benefit, and the impact from foreign currency exchange rates is expected to be slightly negative based on current exchange rates.

Full-year reported earnings per share-diluted are expected to be roughly in-line with 2018 reported earnings per share-diluted, while adjusted earnings per share-diluted are expected to increase 6 percent to 7 percent versus 2018.

Below is a reconciliation of projected 2019 and full-year 2018 earnings per share-diluted calculated in accordance with GAAP to non-GAAP adjusted earnings per share-diluted:

	2019 (Projected)		2018
Reported EPS – Diluted	USD 5.54 – USD 5.66		USD 5.58
Derivative mark-to-market gains	–		(0.80)
Business realignment activities	0.01 – 0.03		0.25
Acquisition-related costs	0.04 – 0.06		0.21
Gain on sale of licensing rights	–		(0.01)
Pension settlement charges relating to company-directed initiatives	0.03 – 0.05		0.03
Long-lived and intangible asset impairment charges	–		0.27
Noncontrolling interest share of business realignment and impairment charges	–		(0.03)
Tax effect of all adjustments reflected above	–		(0.14)
Adjusted EPS – Diluted	USD 5.68 – USD 5.74		USD 5.36

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2019 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.