The Hershey Company — Q1 2023 Form 10-Q
Reporting period: Three months ended April 2, 2023; unaudited. Comparisons are with the three months ended April 3, 2022. Hershey sells confectionery and snack products through three segments: North America Confectionery, North America Salty Snacks, and International.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $2,987.6 million | $2,666.2 million | +12.1% |
| Gross profit / margin | $1,382.3 million / 46.3% | $1,245.5 million / 46.7% | Profit +11.0%; margin down 0.4 percentage points |
| Operating profit / margin | $799.9 million / 26.8% | $721.0 million / 27.0% | Profit +10.9%; margin down 0.2 percentage points |
| Net income | $587.2 million | $533.5 million | +10.1% |
| Diluted EPS, Common Stock | $2.85 | $2.57 | +10.9% |
| Operating cash flow | $755.4 million | $656.5 million | +$98.9 million |
- Sales growth reflected favorable pricing of 8.9% and volume growth of 3.3%, partly offset by a 0.1% foreign exchange headwind.
- Cost of sales rose 13.0%, faster than sales, amid higher volume, supply-chain inflation and unfavorable commodity-derivative mark-to-market effects. Price realization and productivity partly offset these pressures.
- Cash and equivalents were $460.3 million at quarter-end. Total short- and long-term debt was approximately $4.7 billion, including $758.1 million of current long-term debt. Short-term debt was $603.1 million.
- Investing cash outflow was $188.3 million, including $176.1 million of capital additions; financing cash outflow was $552.2 million, including $207.4 million of dividends and $239.9 million for a share purchase from the Milton Hershey School Trust.
Material changes and segment results
- North America Confectionery sales rose 10.6% to $2,452.2 million; segment income increased 13.5% to $887.8 million, with margin up to 36.2% from 35.3%.
- North America Salty Snacks sales increased 19.4% to $270.0 million; segment income rose 119.7% to $46.8 million, with margin up to 17.3% from 9.4%. Growth included SkinnyPop and Dot’s Homestyle Pretzels.
- International sales rose 19.0% to $265.4 million; segment income increased 31.0% to $55.0 million. Growth was led by volume, including in Brazil, India and Mexico.
- U.S. candy, mint and gum consumer takeaway increased 12.3%, while market share declined approximately 70 basis points in the measured channels cited by the company.
- Higher corporate expense, acquisition and integration costs, compensation, technology investment and inflation partly offset segment gains. Commodity derivatives produced a $10.2 million unallocated mark-to-market loss, versus a $27.4 million gain in Q1 2022.
Outlook, risks and unusual items
- Management reported strong consumer demand but continuing supply-chain disruption, labor and logistics costs, inflation and gross-margin pressure. It warned that further inflation, supply constraints, changing consumer behavior or escalation of the Russia-Ukraine conflict could adversely affect results; the conflict had not materially affected commodity prices or supply availability in the quarter.
- 2023 capital expenditures, including capitalized software, were expected to be approximately $800–$900 million, supporting capacity expansion, innovation and the multi-year ERP implementation. The filing provides no clear full-year revenue or EPS guidance.
- Two fixed-rate notes totaling $750 million matured in May 2023. Hershey said it expected to meet obligations through operating cash, new debt and/or its revolving facility. Subsequent to quarter-end, on April 26, the company replaced its $1.5 billion facility with a $1.35 billion facility, with an option to increase commitments by $500 million, expiring in April 2028 subject to extensions.
- On April 14, 2023, Hershey agreed to acquire specified manufacturing assets and facilities from Weaver Popcorn for approximately $164 million, subject to regulatory approvals and expected to close in Q2 2023.
- The ongoing International Optimization Program is expected to finish by year-end 2023, with total pre-tax costs of $50–$75 million; $52.7 million had been incurred through quarter-end. Management said ordinary-course legal matters were not expected to have a material effect. Tax audits and disputes remain ongoing in several jurisdictions.
Most important facts for investors to verify
- Whether pricing and volume momentum can continue without further market-share losses in U.S. confectionery.
- Whether supply-chain inflation, commodity costs and derivative timing continue to pressure gross margins.
- How the May 2023 debt maturities were funded and how the new revolving facility affects borrowing costs and liquidity.
- Whether the $800–$900 million capital program, ERP rollout and Weaver transaction deliver planned capacity and operating benefits.
- Whether tax disputes, the international restructuring and other disclosed risks result in material costs or changes to the outlook.