01—Abstract
Summary
Summary of the 10-Q filed May 3, 2024. Cited figures are marked; the original filing is the authoritative source.
The Hershey Company's first-quarter 2024 Form 10-Q, covering the three months ended March 31, 2024, reports net sales of $3,252.7 milliona, up 8.9% from $2,987.6 million in the prior-year quarter, with net income of $797.5 million (up 35.8%) and diluted EPS of $3.89 versus $2.85.
Gross margin expanded to 51.5% from 46.3%, driven in part by a $218.0 millionb unallocated mark-to-market gain on commodity derivatives recognized in the quarter. The filing attributes the net sales increase to 5.2% favorable price realization and a 3.4% volume increase, with volume helped by accelerated shipments ahead of the ERP system implementation, which the company completed in early second quarter 2024. Segment income rose in North America Confectionery but declined in North America Salty Snacks and International.
Cash generated from operations was $569.2 millionc, down from $755.4 million, as working capital and tax timing absorbed cash. Short-term debt rose to $1.29 billion from $719.8 million, largely from commercial paper, and the company repurchased $494.2 million of stock. Cocoa futures prices rose sharply in the quarter, and management expects 2024 capital expenditures of approximately $600 million to $650 million.
The company also approved the Advancing Agility & Automation initiative in February 2024, with total pre-tax costs estimated at $200 million to $250 milliond through 2026. Investors should note that cocoa price volatility remains a key risk, and that the quarter's margin improvement relied heavily on non-cash derivative gains that the company excludes from segment income. Management said it expects some moderation in consumer spending for the rest of 2024.
02—Key points
Key Highlights
- Net sales rose 8.9% to $3,252.7 million, with price realization of 5.2% and volume growth of 3.4%.
- Gross margin increased to 51.5% from 46.3%, aided by a $208.4 million favorable year-over-year mark-to-market swing on commodity derivatives.
- Net income increased 35.8% to $797.5 million; diluted EPS was $3.89 versus $2.85.
- Operating cash flow declined to $569.2 million from $755.4 million, mainly due to working capital and tax timing.
- Short-term debt increased to $1.29 billion from $719.8 million, mainly U.S. commercial paper, while the company repurchased $494.2 million of stock.
- Cocoa futures averaged $2.60 per pound in the quarter, an increase of approximately 74% over the 2023 annual average of $1.49 per pound.
- The Advancing Agility & Automation initiative carries estimated pre-tax costs of $200 million to $250 million through 2026, with expected ongoing annual savings of approximately $300 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q1 FY2024, Hershey kept $0.25.
- Revenue$3.25B100.0%
- Cost of revenue−$1.58B48.5%
- Gross profit$1.68B51.5%
- Operating costs−$618.0M19.0%
- Operating income$1.06B32.5%
- Interest, other & tax−$260.6M8.0%
- Net income$797.5M24.5%
04—Financials
Financial Highlights
Figures from 10-QQ1 FY2024filed May 3, 2024Financial Statements
05—Questions
Frequently Asked Questions
What drove the improvement in Hershey's profitability this quarter?
Operating profit rose 32.3% to $1,058.1 million, mainly from higher gross profit. Gross profit benefited from favorable price realization, volume growth, supply chain productivity, and a $208.4 million year-over-year favorable swing in mark-to-market activity on commodity derivatives. Segment income for North America Confectionery grew 6.8%, while Salty Snacks and International segment income declined.
Why did operating cash flow decline?
Operating cash flow fell $186.2 million to $569.2 million. The filing cites net working capital items, specifically trade receivables, inventory, payables and accrued liabilities, consuming $237.7 million versus $128.2 million a year earlier. Cash taxes paid also rose to $31.3 million from $12.3 million.
How is the company funding its share repurchases and dividends?
During the quarter, Hershey generated $569.9 million from net short-term borrowings, mainly commercial paper, which lifted short-term debt to $1.29 billion. Dividends paid totaled $273.4 million and stock repurchases totaled $494.2 million. Management states that operating cash flow and access to capital markets are expected to meet its short- and long-term cash requirements.
What is the company's exposure to cocoa prices?
The filing states that cocoa futures averaged $2.60 per pound in the first quarter, with a trading range of $1.99 to $3.35 per pound, and that prices continued to rise in April 2024. Hershey uses forward purchasing and hedging over 3- to 24-month periods, and open commodity derivative contracts had a notional value of $206.3 million at March 31, 2024. A 10% decrease in commodity prices would have increased net unrealized losses by $10.5 million.
What costs are associated with the new AAA productivity initiative?
The Board approved the Advancing Agility & Automation initiative on February 2, 2024. Estimated total pre-tax costs are $200 million to $250 million through 2026, including severance of $45 million to $60 million. Costs recognized to date were $16.7 million. Expected ongoing annual savings are approximately $300 million at program conclusion in 2026.
06—Continue