Hershey Reports Fourth-Quarter and Full-Year 2018 Financial Results; Provides 2019 Outlook

HERSHEY, Pa., Jan. 31, 2019 (GLOBE NEWSWIRE) — The Hershey Company (NYSE: HSY) today announced net sales and earnings for the fourth quarter and full year ended December 31, 2018.  The company also provided its 2019 reported net sales and earnings outlook.

“I’m pleased that we delivered our 2018 financial commitments and continued to invest in our future growth,” said Michele Buck, The Hershey Company President and Chief Executive Officer. “The strategic investments we are making in our core confection business have resulted in improved retail trends and margins.  Our recently acquired snacking brands continue to generate strong growth and delivered against our financial objectives.  And our International business generated a record year of profitability.  We are excited to build on this momentum in 2019.”

2018 Full-Year Financial Results Summary ¹

• Consolidated net sales of $7,791.1 million, an increase of 3.7%.
• Constant currency net sales growth of 3.9%, with a 0.2 point headwind from foreign currency exchange.
• The net impact of acquisitions and divestitures was a 3.6 point benefit to net sales growth.
• Reported net income of $1,177.6 million, or $5.58 per share-diluted.
• Adjusted earnings per share-diluted of $5.36, an increase of 14.3%.

¹ All comparisons for full year 2018 are with respect to the full year ended December 31, 2017

 Fourth-Quarter 2018 Financial Results Summary ²

• Consolidated net sales of $1,987.9 million, an increase of 2.5%.
• Constant currency net sales growth of 3.1%, with a 0.6 point headwind from foreign currency exchange.
• The net impact of acquisitions and divestitures was a 3.0 point benefit to net sales growth.
• Reported net income of $336.8 million, or $1.60 per share-diluted.
• Adjusted earnings per share-diluted of $1.26, an increase of 23.5%.

² All comparisons for the fourth quarter of 2018 are with respect to the fourth quarter ended December 31, 2017

2019 Full-Year Financial Outlook Summary ³

• Full-year reported net sales are expected to increase in the 1% to 3% range.
  • The net impact of acquisitions and divestitures is estimated to be approximately a 0.5 point benefit.
  • The impact of foreign currency exchange is planned to be negligible based on current exchange rates.
• Full-year reported earnings per share-diluted are expected to be in the $5.50 to $5.66 range.
• Full-year adjusted earnings per share-diluted are expected to be in the $5.63 to $5.74 range, an increase of 5% to 7%.

³ All comparisons for full year 2019 are with respect to the full year ended December 31, 2018

Fourth-Quarter 2018 Results

Consolidated net sales were $1,987.9 million in the fourth quarter of 2018 versus $1,939.6 million in the year ago period, an increase of 2.5%.  The net impact of acquisitions and divestitures was a 3.0 point benefit, volume was a 0.9 point benefit and net price realization was a 0.8 point headwind.  Foreign currency translation was a 0.6 point headwind.

As outlined in the table below, the company’s fourth-quarter 2018 results, as prepared in accordance with U.S. generally accepted accounting principles (GAAP), included items impacting comparability of $56.1 million, or $0.34 per share-diluted.  For the fourth quarter of 2017, items impacting comparability totaled $7.0 million, or $0.17 per share-diluted.

Reported gross margin of 47.5% represented an increase of 430 basis points versus the fourth quarter of 2017. Adjusted gross margin was 42.5% in the fourth quarter of 2018, compared to 42.7% in the fourth quarter of 2017, a decrease of 20 basis points.  This was driven by higher freight and logistics costs, as well as incremental investments in trade and packaging.

Advertising and related consumer marketing expense declined 13.3% in the fourth quarter of 2018 versus the same period last year.  This was consistent with previous quarters and was driven by optimization of emerging brand spend, reductions in agency and production fees, and media efficiency gains including an increased focus on earned, or non-paid media.  Selling, marketing and administrative expenses, excluding advertising and related consumer marketing was in line with the fourth quarter of 2017.  A continued reduction in general administrative costs was offset by incremental Amplify selling, marketing and administrative expenses and investment in the multi-year implementation of the company’s enterprise resource planning (ERP) system.

Fourth-quarter 2018 reported operating profit was $421.2 million, resulting in an operating margin of 21.2%.  Adjusted operating profit of $368.9 million increased 13.1% versus the fourth quarter of 2017.  This resulted in an adjusted operating margin of 18.6%, an increase of 180 basis points versus the fourth quarter of 2017 driven by lower selling, marketing and administrative expenses.

The effective tax rate in the fourth quarter of 2018 was 3.6%, a decline of 2,670 basis points versus the fourth quarter of 2017.   The adjusted tax rate in the fourth quarter of 2018 was 9.5%, a decline of 560 basis points versus the fourth quarter of 2017.  The decline in both the effective and adjusted tax rates was driven primarily by U.S. tax reform.

The following table presents a summary of items impacting comparability in each period (see Appendix I for additional information):

¹ There were no pre-tax impairment charges associated with long-lived assets during the three months ended December 31, 2017. However, the long-lived asset impairment charge in the first quarter of 2017 was not treated as a discrete tax item. Therefore, the tax impact was included in the estimated annual effective tax rate resulting in an earnings per share- (EPS) diluted impact for each of the quarters throughout 2017.
² We recorded a net benefit of $7.8 million during the fourth quarter of 2018, which represents measurement period adjustments to the one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries. We recorded a net charge of $32.5 million during the fourth quarter of 2017, which includes the estimated impact of the one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries offset in part by the benefit from revaluation of net deferred tax liabilities based on the new lower corporate income tax rate.

The following are comments about segment performance for the fourth quarter of 2018 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 $1,746.5 million in the fourth quarter of 2018, an increase of 4.3% versus the same period last year.  Acquisitions and volume were a 4.8 point and 0.8 point benefit, respectively.  Net price realization and foreign currency exchange rates were a 1.1 point and 0.2 point headwind, respectively.

Total Hershey U.S. retail takeaway³ for the 12 weeks ended December 30, 2018, in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores) increased 1.2% versus the prior-year period. Hershey’s U.S. candy, mint and gum (CMG) retail takeaway increased 1.0%, resulting in a market share loss of 22 basis points versus the prior-year period.  These results were in line with expectations and outpaced net sales growth during the quarter due to anticipated inventory reductions at key customers.

North America advertising and related consumer marketing declined 13.3% in the fourth quarter of 2018 versus the same period last year.  This was consistent with previous quarters and was driven by optimization of emerging brand spend, reductions in agency and production fees, and media efficiency gains, including an increased focus on earned, or non-paid media.  Favorable sales, marketing and administrative costs resulted in a segment income increase of 1.8% to $485.7 million in the fourth quarter of 2018, compared to $477.2 million in the fourth quarter of 2017.

³Includes candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items.

International and Other

Fourth-quarter 2018 net sales for Hershey’s International and Other segment decreased 8.9% to $241.4 million.  Divestitures and foreign currency exchange rates were a 8.4 point and 3.1 point headwind, respectively.  Volume and net price realization were a 1.9 point and 0.7 point benefit, respectively.  Combined organic constant currency net sales growth in Mexico, Brazil, India and China was approximately 7%.

International and Other segment income of $8.4 million in the fourth quarter of 2018 compared to segment loss of $15.0 million in the fourth quarter of 2017, an increase of $23.4 million, driven by volume and gross margin increases, as well as selling, marketing and administrative expense reductions as the company continues to execute against its Margin for Growth Program initiatives.

Unallocated Corporate Expense

Hershey’s unallocated corporate expense in the fourth quarter of 2018 was $125.3 million, a decrease of $10.8 million versus the same period of 2017.  The decline was driven by Margin for Growth Program initiatives to reduce general administrative costs, partially offset by the multi-year implementation of the company’s ERP system.

A reconciliation between reported and constant currency growth rates is provided below:

¹ China results reflect the divestiture of the company’s Shanghai Golden Monkey business.  Excluding this business, organic constant currency net sales growth was 15% in the fourth quarter of 2018.

¹ China results reflect the divestiture of the company’s Shanghai Golden Monkey business.  Excluding this business, organic constant currency net sales growth was approximately 7% for the full year 2018.

The company also presents the percentage change in 2018 net sales on a constant currency basis.  To determine this, 2018 net sales for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the company’s average monthly exchange rates in effect during the corresponding period of the prior fiscal year and are compared to the 2017 results translated into U.S. dollars using the same 2017 average monthly exchange rates.

2019 Full-Year Financial Outlook

Full-year reported net sales are expected to increase in the 1% to 3% range.  The net impact of acquisitions and divestitures is estimated to be approximately a 0.5 point benefit and the foreign currency exchange rate impact is expected to be minimal based on current exchange rates.

Full-year reported earnings per share-diluted are expected to be in the $5.50 to $5.66 range and adjusted earnings per share-diluted in the $5.63 to $5.74 range, an increase of 5% to 7% versus 2018.

Below is a reconciliation of projected 2019, full-year 2018 and full-year 2017 earnings per share-diluted calculated in accordance with GAAP to non-GAAP adjusted earnings per share-diluted:

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 expenses in segment results until the related inventory is sold, since we are not able to forecast the impact of the market changes.

Live Webcast

At 8:30 a.m. ET today, Hershey will host a conference call to elaborate on fourth-quarter results. To access this call as a webcast, please go to Hershey’s web site at http://www.thehersheycompany.com.

Note: In this release, Hershey references income measures that are not in accordance with GAAP because they exclude business realignment activities, acquisition integration costs, long-lived asset impairment charges, gains and losses associated with mark-to-market commodity derivatives, pension settlement charges relating to company-directed initiatives, the one-time impact of U.S. tax reform and the gain realized on the sale of a trademark. These non-GAAP financial measures are used in evaluating results of operations for internal purposes and 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 of the non-GAAP financial measures referenced in this release to their nearest comparable GAAP financial measures as presented in the Consolidated Statements of Income is provided below.

In conjunction with the adoption of ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715), in the first quarter of 2018, the company elected to discontinue its practice of excluding the non-service related components of its net periodic benefit cost in deriving its non-GAAP financial measures, with a minor exception.  Historically, the company excluded from its non-GAAP results the following components relating to its pension benefit plans:  interest cost, expected return on plan assets, amortization of net loss (gain), and settlement and curtailment charges.  The company did not historically exclude from its non-GAAP results the non-service related components relating to its other post-retirement benefit plans.  Starting with the first quarter of 2018, the company will continue to exclude from its non-GAAP results the portion of pension settlement and/or curtailment charges relating to company-directed initiatives, such as significant business realignment events and benefit plan terminations or amendments.  As a result of this change in the composition of the company’s non-GAAP financial measures, the 2017 comparative information presented below provides the reconciliation of the revised non-GAAP measures, to their nearest comparable U.S. GAAP (reported) measures, which reflect the reclassifications required by the adoption of Topic 715.

The revision in the company’s determination of non-GAAP earnings resulted in a reduction of $0.01 to adjusted earnings per share-diluted from $1.03 to $1.02 for the three months ended December 31, 2017 and a reduction of $0.07 to adjusted earnings per share-diluted from $4.76 to $4.69 for the full year ended December 31, 2017.

* The tax effect for each adjustment is determined by calculating the tax impact of the adjustment on the company’s quarterly effective tax rate.
** There were no pre-tax impairment charges associated with long-lived assets during the three months ended December 31, 2017. However, the long-lived asset impairment charge in the first quarter of 2017 was not treated as a discrete tax item. Therefore, the tax impact was included in the estimated annual effective tax rate resulting in an EPS-diluted impact for each of the quarters throughout 2017.

In the assessment of our results, we review and discuss the following financial metrics that are derived from the reported and non-GAAP financial measures presented above:

(1) Calculated as non-GAAP gross profit as a percentage of net sales for each period presented.

(2) Calculated as non-GAAP operating profit as a percentage of net sales for each period presented.

(3) Calculated as non-GAAP provision for income taxes as a percentage of non-GAAP income before taxes (calculated as non-GAAP operating profit minus non-GAAP interest expense, net plus or minus non-GAAP other (income) expense, net).

We present certain percentage changes in net sales on a constant currency basis, which excludes the impact of foreign currency exchange.  To present this information for historical periods, current period net sales for entities reporting in other than the U.S. dollar are translated into U.S. dollars at the average monthly exchange rates in effect during the corresponding period of the prior fiscal year, rather than at the actual average monthly exchange rates in effect during the current period of the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.

Appendix I

Details of the charges included in GAAP results, as summarized in the press release (above), are as follows:

Mark-to-Market (Gains) Losses on Commodity Derivatives:  The mark-to-market (gains) losses on commodity derivatives are recorded as unallocated and excluded from adjusted results until such time as the related inventory is sold, at which time the corresponding (gains) losses are reclassified from unallocated to segment income. Since we often purchase commodity contracts to price inventory requirements in future years, we make this adjustment to facilitate the year-over-year comparison of cost of sales on a basis that matches the derivative gains and losses with the underlying economic exposure being hedged for the period.

Business Realignment Activities:  We periodically undertake restructuring and cost reduction activities as part of ongoing efforts to enhance long-term profitability.  During the first quarter of 2017, we commenced the Margin for Growth Program to drive continued net sales, operating income and earnings per share-diluted growth over the next several years.  This program is focused on improving global efficiency and effectiveness, optimizing the company’s supply chain, streamlining the company’s operating model and reducing administrative expenses to generate long-term savings.   For the three- and twelve-month periods of 2018, business realignment charges related primarily to severance expenses, accelerated depreciation and other third-party costs related to this program. For the three- and twelve-month periods of 2017, business realignment charges related primarily to severance expenses, other third-party advisory costs and non-cash accelerated depreciation expense related to this program, in addition to severance expenses incurred under a voluntary separation plan included within the Operational Optimization Program, a program commenced in 2016 to optimize our production and supply chain network, including the integration of the China sales force and consolidation of production within certain facilities in China and North America.

Acquisition-Related Costs:  Costs incurred during the three- and twelve-month periods of 2018 included consultant fees incurred to affect the Amplify and Pirate Brands acquisitions, as well as other costs relating to the integration of the businesses. Costs incurred during 2017 related to the integration of the 2016 acquisition of Ripple Brand Collective, LLC as we incorporate this business into our operating practices and information systems.

Pension Settlement Charges Relating to Company-Directed Initiatives:  During the three- and twelve-month periods of 2018, settlement charges in our hourly defined benefit plan were triggered by lump sum withdrawals by employees retiring or leaving the Company under a voluntary separation plan included within the Operational Optimization Program. In 2017, settlement charges were also triggered in the pension plan benefiting our employees in Puerto Rico as a result of lump sum distributions and the purchase of annuity contracts relating to the termination of this plan.

Long-Lived and Intangible Asset Impairment Charges:  During the three- and twelve-month periods of 2018, we recorded long-lived asset impairment charges to adjust the long-lived asset values within certain disposal groups. These charges represent the excess of the disposal groups’ carrying values, including the related currency translation adjustment amounts realized or to be realized upon completion of the sales, over the sales values less costs to sell for the respective businesses. In 2017, in conjunction with the Margin for Growth Program, we wrote-down certain intangible assets and property, plant and equipment.

Impact of U.S. Tax Reform: In connection with the enactment of The U.S. Tax Cuts and Jobs Act (U.S. tax reform), in December 2018 we recorded a net benefit of $7.8 million as a measurement period adjustment to the one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries. In December 2017, we recorded a net charge of $32.5 million during the fourth quarter of 2017, which included the estimated impact of the one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries offset in part by the benefit from revaluation of net deferred tax liabilities based on the new lower corporate income tax rate.

Noncontrolling Interest Share of Business Realignment and Impairment Charges:  Certain of the business realignment and impairment charges recorded in connection with the Margin for Growth Program related to a joint venture in which we own a 50% controlling interest.  Therefore, we have also adjusted for the portion of these charges included within the income (loss) attributed to the noncontrolling interest.

Gain on Sale of Licensing Rights:  In 2018, we recorded a gain on the sale of licensing rights for a non-core trademark relating to a brand marketed outside of the United States.

Safe Harbor Statement

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Many of these forward-looking statements can be identified by the use of words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “projected,” “estimated,” and “potential,” among others. These statements are made based upon current expectations that are subject to risk and uncertainty. Because actual results may differ materially from those contained in the forward-looking statements, you should not place undue reliance on the forward-looking statements when deciding whether to buy, sell or hold the company’s securities. Factors that could cause results to differ materially include, but are not limited to: issues or concerns related to the quality and safety of our products, ingredients or packaging; changes in raw material and other costs, along with the availability of adequate supplies of raw materials; selling price increases, including volume declines associated with pricing elasticity; market demand for our new and existing products; increased marketplace competition; disruption to our manufacturing operations or supply chain; failure to successfully execute and integrate acquisitions, divestitures and joint ventures; changes in governmental laws and regulations, including taxes; political, economic, and/or financial market conditions; risks and uncertainties related to our international operations; disruptions, failures or security breaches of our information technology infrastructure; our ability to hire, engage and retain a talented global workforce; our ability to realize expected cost savings and operating efficiencies associated with strategic initiatives or restructuring programs; complications with the design or implementation of our new enterprise resource planning system; and such other matters as discussed in our Annual Report on Form 10-K for the year ended December 31, 2017. All information in this press release is as of December 31, 2018. The company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the company’s expectations.