Hershey reports Q4 net earnings of US$186.1M, compared to year-ago earnings of US$149.9M, as net sales rise 11.3% to US$1.96B

Nevin Barich

HERSHEY, Pennsylvania , January 30, 2014 (press release) – The Hershey Company (HSY):

Fourth quarter and full-year 2013 net sales increase 11.7% and 7.6%, respectively

Fourth quarter earnings per share-diluted of $0.82 as reported and $0.86 adjusted

Full-year 2013 earnings per share-diluted of $3.61 as reported and $3.72 adjusted

Outlook for 2014 net sales and earnings per share-diluted reaffirmed:

Full-year net sales expected to increase 5-7%, driven primarily by volume

Reported earnings per share-diluted expected to be $4.02 to $4.11

Adjusted earnings per share-diluted expected to increase 9-11% and be in the $4.05 to $4.13 range

The Hershey Company (HSY) today announced sales and earnings for the fourth quarter and full-year ended December 31, 2013. For the fourth quarter of 2013, consolidated net sales were $1,956,253,000 compared with $1,751,035,000 for the fourth quarter of 2012. Reported net income for the fourth quarter of 2013 was $186,075,000 or $0.82 per share-diluted, compared with $149,879,000 or $0.66 per share-diluted for the comparable period of 2012.

“The Hershey Company ended 2013 strongly with high-quality net sales and adjusted earnings per share-diluted growth slightly exceeding our expectations,” said John P. Bilbrey, President and Chief Executive Officer, The Hershey Company. “Net sales increased 11.7 percent in the fourth quarter, driven by solid volume growth in North America and in international markets. Our results are also reflected in our marketplace data. Specifically, in the U.S., we gained candy, mint and gum (CMG) market share in every measured channel for the third consecutive year. As a result, Hershey reclaimed its CMG category leadership position in the U.S. with a 31.1 percent share of the market. Additionally, our China business reached a milestone 10.2 percent share of the chocolate market and, in Canada, our combined candy and mint segments became the category leader in that marketplace. The progress we’ve made across our business gives us confidence that our strategies are working well and meeting consumer wants and needs. In 2014, our plans are focused on targeted growth initiatives in key global markets, new product launches in both the U.S. and international geographies and continued support of our core brands. I’m also pleased with the agreement we entered into last month with Shanghai Golden Monkey. This will build on Hershey’s continuing commitment to the China market and will further accelerate the Company’s scale and geographic footprint in that market. We continue to anticipate that the acquisition will close by the end of the second quarter.”

As described in the Note below, for the fourth quarter of 2013, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included pre-tax charges of $10.9 million or $0.04 per share-diluted. These charges included $5.5 million, or $0.02 per share-diluted, primarily related to the Project Next Century program, $3.0 million, or $0.02 per share-diluted, of acquisition and integration costs and non-service-related pension expense (NSRPE) of $2.4 million. Reported gross margin of 43.8 percent increased 70 basis points versus last year, while reported income before interest and income taxes (EBIT) increased 22.0 percent, generating EBIT margin of 15.8 percent, an increase of 140 basis points versus 2012. For the fourth quarter of 2012, results included net pre-tax charges of $24.3 million or $0.08 per share-diluted. These charges included $7.9 million, or $0.03 per share-diluted, related to the Project Next Century program, NSRPE of $7.6 million, or $0.02 per share-diluted, and acquisition and integration costs related to Brookside Foods Ltd. (Brookside) of $1.3 million. Additionally, in the fourth quarter of 2012, the Company recorded a non-cash impairment charge of $7.5 million, or $0.03 per share-diluted, related to its 69 percent investment in Tri-US, Inc. of Boulder, Colorado, a company that manufactured nutritional beverages under the “Mix1” brand name.

For the full year 2013, consolidated net sales were $7,146,079,000, compared with $6,644,252,000 in 2012, an increase of 7.6 percent. Reported net income for 2013 was $820,470,000, or $3.61 per share-diluted, compared with $660,931,000 or $2.89 per share-diluted, for 2012. As described in the Note, for the full years 2013 and 2012, these results, prepared in accordance with GAAP, included net pre-tax charges of $34.0 million and $117.7 million, or $0.11 and $0.35 per share-diluted, respectively. Charges associated with the Project Next Century program for 2013 and 2012 were $19.1 million and $76.3 million, or $0.05 and $0.22 per share-diluted. NSRPE for 2013 and 2012 was $10.9 million and $20.6 million, or $0.03 and $0.06 per share-diluted, respectively.

Acquisition and integration costs, primarily related to Shanghai Golden Monkey in 2013 and Brookside in 2012, were $4.1 million and $13.4 million, or $0.03 and $0.04 per share-diluted. Additionally, 2012 results were impacted by the aforementioned non-cash goodwill impairment charge of $7.5 million, or $0.03 per share-diluted. As described in the Note, adjusted net income for each year, which excludes these net charges, was $844,320,000, or $3.72 per share-diluted in 2013, compared with $740,040,000, or $3.24 per share-diluted in 2012, an increase of 14.8 percent in adjusted earnings per share-diluted.

In 2014, the Company expects reported earnings per share-diluted of $4.02 to $4.11, including net GAAP charges of about $7 million to $9 million, or $0.02 to $0.03 per share-diluted. This projection, prepared in accordance with GAAP, assumes net business realignment charges related to Project Next Century of $0.01 to $0.02 per share-diluted, non-service-related pension income (NSRPI) of $0.01 to $0.02 per share-diluted as well as acquisition and transaction costs associated with Shanghai Golden Monkey of $0.02 to $0.03 per share-diluted. Despite the impact of these charges, in 2014, reported gross margin is expected to increase around 50 basis points.

Fourth Quarter Performance

Hershey's fourth-quarter net sales increased 11.7 percent, driven primarily by core brand volume growth and new products, a 9.0 point and 3.2 point benefit, respectively. Foreign currency exchange rates were 0.5 points unfavorable. Net sales in North America slightly exceeded expectations driven by a solid holiday season. As expected, fourth quarter net sales outside the U.S. and Canada accelerated, resulting in a 3.5 point contribution to the Company’s overall top-line growth.

Hershey’s U.S. candy, mint and gum (CMG) retail takeaway for the 12 weeks and 52 weeks ended December 28, 2013, in the expanded All Outlet Combined plus convenience store channels (xAOC+C-store), which accounts for approximately 90 percent of our U.S. retail business, was up 5.2 percent and 6.3 percent, respectively, and relatively in line with U.S. net sales. Hershey U.S. CMG market share increased 1.1 points in 2013.

Adjusted gross margin for the fourth quarter and full year increased 80 basis points and 220 basis points, respectively, slightly lower than expectations. In the fourth quarter, lower commodity costs and supply chain productivity contributed to gross margin expansion. The gross margin expansion was less than our earlier estimates as greater than expected fourth quarter volume required purchases at higher prices and year-end inventory valuations generated higher costs than anticipated.

Selling, marketing and administrative (SM&A) expenses, excluding advertising, increased 10 percent in the fourth quarter, driven by planned investments in global go-to-market capabilities, selling and marketing costs, and other employee-related expenses. As a result, adjusted EBIT for the fourth quarter increased 15.3 percent generating adjusted EBIT margin of 16.3 percent, a 50 basis point increase versus last year. For the fourth quarter and full year, advertising increased 20 percent and 21 percent, respectively, supporting new product launches as well as core brands in the U.S. and international markets. Additionally, as previously communicated, the tax rate in the fourth quarter of 34.2 percent was greater than the year ago period resulting in a full-year tax rate of 34.3 percent, in line with our estimate.

Outlook

The Company expects 2014 net sales growth of 5 to 7 percent, including the impact of foreign currency exchange rates. Net sales will be driven primarily by core brand volume growth as well as innovation such as York Minis, Hershey’s Spreads, Lancaster Soft Crèmes Caramels and Brookside Crunchy Clusters in the U.S., Hershey’s Kisses Deluxe in China and the continued rollout of our five global brands in key international markets.

As stated in October, gross margin is expected to increase in 2014, driven by productivity and cost savings initiatives. Therefore, the Company expects 2014 adjusted gross margin expansion of around 50 basis points. Advertising and related consumer marketing is expected to increase mid to high single-digits, on a percentage basis versus last year. SM&A expenses, excluding advertising and related consumer marketing, will increase in 2014 building on the investments in go-to-market capabilities established over the last few years, as well as consumer knowledge-based projects related to our Insights Driven Performance initiative. As a result, the Company anticipates adjusted earnings per share-diluted growth for the full year to be in the 9 to 11 percent range. The aforementioned outlook excludes estimated operating results for Shanghai Golden Monkey. Completion of the agreement is expected to occur in the second quarter of 2014, subject to necessary government and regulatory approvals and satisfaction of other conditions. Upon completion, and excluding integration and transition costs, the Company expects the acquisition to be slightly accretive on an adjusted basis in 2014.

“Our business continues to respond to the investments we have made, as evidenced by our retail takeaway and market share gains, and we expect our momentum to continue in 2014,” stated Bilbrey. “Core brands, as well as our solid pipeline of new products, will be supported by advertising, merchandising and programming that is expected to continue to drive net sales and earnings growth. We’re focused on executing against our annual plan and believe that our agreement with Shanghai Golden Monkey, and the confectionery plant under construction in Malaysia, will enable us to achieve the goals outlined in our strategic plan, in a disciplined way,” Bilbrey concluded.

Note: In this release, Hershey references income measures that are not in accordance with U.S. generally accepted accounting principles (GAAP) because they exclude costs associated with business realignment and impairment, business acquisition closing and integration costs and non-service-related pension expenses (NSRPE). These non-GAAP financial measures are used in evaluating results of operations for internal purposes. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP. Rather, the Company believes exclusion of such items provides additional information to investors to facilitate the comparison of past and present operations. A reconciliation is provided below of earnings per share-diluted in accordance with GAAP as presented in the Consolidated Statements of Income to non-GAAP financial measures, which exclude business realignment and impairment charges, NSRPE and acquisition closing and integration costs.

Fourth Quarter Ended

In 2012, the Company recorded GAAP charges of $76.3 million, or $0.22 per share-diluted, attributable to the Project Next Century program and $20.6 million, or $0.06 per share-diluted, of NSRPE. Additionally, 2012 results were impacted by acquisition closing and integration costs related to the Brookside acquisition of $13.4 million, or $0.04 per share-diluted, and non-cash impairment charges of $7.5 million, or $0.03 per share-diluted, related to the discontinuance of the Tri-US, Inc. nutritional beverages business.

In 2013, the Company recorded total GAAP charges of $19.1 million, or $0.05 per share-diluted, attributable to Project Next Century and $10.9 million, or $0.03 per share-diluted, of NSRPE. Acquisition and integration costs, primarily related to Shanghai Golden Monkey, were $4.1 million, or $0.03 per share-diluted.

In 2014, the Company expects to record net GAAP charges of about $7 million to $9 million, or $0.02 to $0.03 per share-diluted. Charges associated with the Project Next Century program are expected to be $0.01 to $0.02 per share-diluted while NSRPI is expected to be $0.01 to $0.02 per share-diluted. Acquisition and transaction costs related to Shanghai Golden Monkey are expected to be $0.02 to $0.03 per share-diluted.

Live Webcast

As previously announced, the Company will hold a conference call with analysts today at 8:30 a.m. Eastern Time. The conference call will be webcast live via Hershey’s corporate website, www.thehersheycompany.com. Please go to the Investor Relations section of the website for further details.

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