Why is Hershey's 2024 EPS guidance flat despite expected sales growth?

The company says higher cocoa and sugar costs, one-time expenses related to the second-quarter ERP implementation, and planned incremental cost savings initiatives are expected to more than offset higher sales, price realization, productivity, administrative efficiencies, and a lower tax rate.

What is the Advancing Agility & Automation initiative and what will it cost?

It is a multi-year productivity program approved by the Board on February 2, 2024, to improve supply chain and manufacturing spend, optimize SG&A, and automate processes. Total pre-tax costs are estimated at $200 million to $250 million from inception through 2026, of which $175 million to $225 million is cash, and it is expected to generate about $300 million in ongoing annual savings at the program's conclusion.

What drove the decline in North America Salty Snacks results in the fourth quarter?

Segment net sales fell 24.6% to $205.2 million, with volume down 26.1%, including an approximate 16-point headwind from planned inventory declines tied to the October 2023 ERP implementation. The company also cited category softness in ready-to-eat popcorn, increased commodity costs, and higher brand and capability investments.

How did Hershey's adjusted results compare with reported results for 2023?

For full-year 2023, reported diluted EPS was $9.06 and adjusted EPS was $9.59. The difference reflects items such as derivative mark-to-market losses, acquisition and integration-related activities, and business realignment activities, which the company excludes from adjusted results.

What are the company's capital spending and interest expense expectations for 2024?

Capital expenditures are expected to be approximately $600 million to $650 million, driven by core confection capacity expansion and digital infrastructure, including the new ERP system. Interest expense is expected to be approximately $165 million to $175 million, reflecting a higher interest rate environment.

HSY 8-K: Earnings & Results & Financial Events

01—Abstract

Summary

Summary of the 8-K filed February 8, 2024. Cited figures are marked; the original filing is the authoritative source.

The Hershey Company reported fourth-quarter and full-year 2023 results on February 8, 2024.

Consolidated net sales for the fourth quarter were $2,657.1 million^a, up 0.2%, with organic, constant currency net sales down 0.1%. Reported net income was $349.0 million, or $1.70 per share-diluted, and adjusted EPS was $2.02, flat with the prior year. For full-year 2023, net sales were $11,165.0 million, up 7.2%, reported net income was $1,861.8 million, or $9.06 per share-diluted, and adjusted EPS was $9.59, up 12.6%.

For 2024, the company expects net sales growth of 2% to 3%, driven primarily by net price realization, with reported and adjusted EPS roughly flat. Management cites higher cocoa and sugar costs, one-time ERP implementation expenses in the second quarter, and planned incremental cost savings initiatives as offsets to higher sales. Guidance also includes an effective tax rate of about 13%, interest expense of $165 million to $175 million^b, and capital expenditures of $600 million to $650 million.

Separately, on February 2, 2024, the Board approved the multi-year "Advancing Agility & Automation" productivity initiative. The company estimates total pre-tax costs of $200 million to $250 million^c through 2026, of which $175 million to $225 million is cash, and expects about $300 million in ongoing annual savings at the program's conclusion in 2026, with $100 million expected to be realized in 2024.

02—Key points

Key Highlights

Fourth-quarter net sales of $2,657.1 million rose 0.2%, while organic, constant currency net sales decreased 0.1%; net price realization of 6.5 points was offset by volume declines and planned inventory reductions in North America Salty Snacks tied to the ERP implementation.
Full-year 2023 net sales reached $11,165.0 million, up 7.2%, with adjusted EPS of $9.59, up 12.6%, and reported diluted EPS of $9.06, up from $7.96 in 2022.
Fourth-quarter North America Salty Snacks net sales fell 24.6% to $205.2 million, and segment income dropped 81.7% to $10.4 million, reflecting volume deleverage and higher brand and capability investments.
North America Confectionery net sales grew 2.1% in the fourth quarter to $2,220.2 million, with segment income up 3.0% to $724.6 million and segment margin of 32.6%.
2024 guidance calls for net sales growth of 2% to 3% and roughly flat reported and adjusted EPS, as higher cocoa and sugar costs and one-time ERP costs offset sales growth and price realization.
The Advancing Agility & Automation initiative carries estimated pre-tax costs of $200 million to $250 million through 2026, with about $300 million in ongoing annual savings expected by 2026 and $100 million realized in 2024.
Long-term debt rose to $3,789.1 million at December 31, 2023, from $3,344.0 million a year earlier, while the current portion of long-term debt fell to $305.1 million from $753.6 million.

03—Questions

Frequently Asked Questions

Why is Hershey's 2024 EPS guidance flat despite expected sales growth?
The company says higher cocoa and sugar costs, one-time expenses related to the second-quarter ERP implementation, and planned incremental cost savings initiatives are expected to more than offset higher sales, price realization, productivity, administrative efficiencies, and a lower tax rate.
What is the Advancing Agility & Automation initiative and what will it cost?
It is a multi-year productivity program approved by the Board on February 2, 2024, to improve supply chain and manufacturing spend, optimize SG&A, and automate processes. Total pre-tax costs are estimated at $200 million to $250 million from inception through 2026, of which $175 million to $225 million is cash, and it is expected to generate about $300 million in ongoing annual savings at the program's conclusion.
What drove the decline in North America Salty Snacks results in the fourth quarter?
Segment net sales fell 24.6% to $205.2 million, with volume down 26.1%, including an approximate 16-point headwind from planned inventory declines tied to the October 2023 ERP implementation. The company also cited category softness in ready-to-eat popcorn, increased commodity costs, and higher brand and capability investments.
How did Hershey's adjusted results compare with reported results for 2023?
For full-year 2023, reported diluted EPS was $9.06 and adjusted EPS was $9.59. The difference reflects items such as derivative mark-to-market losses, acquisition and integration-related activities, and business realignment activities, which the company excludes from adjusted results.
What are the company's capital spending and interest expense expectations for 2024?
Capital expenditures are expected to be approximately $600 million to $650 million, driven by core confection capacity expansion and digital infrastructure, including the new ERP system. Interest expense is expected to be approximately $165 million to $175 million, reflecting a higher interest rate environment.

04—Continue

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