HERSHEY CO

Net Sales

Net sales were $3,252.7 million in the first quarter of 2024 compared to $2,987.6 million in the same period of 2023, an increase of $265.1 million, or 8.9%. The net sales increase reflects a favorable price realization of 5.2% driven by higher list prices primarily within our North America Confectionery and North America Salty Snacks segments. The net sales increase was further driven by a volume increase of 3.4% primarily due to an increase in everyday core U.S. confection, as a result of accelerated shipments in anticipation of our enterprise resource planning (“ERP”) system implementation, which was completed in the beginning of the second quarter of 2024, as well as an increase in salty snack brands. Foreign currency exchange rates resulted in a 0.3% impact.

Key U.S. Marketplace Metrics

For the first quarter of 2024, our total U.S. retail takeaway increased 7.0% in the expanded multi-outlet combined plus convenience store channels (Circana MULO + C-Stores), which includes candy, mint, gum, salty snacks and grocery items. Our U.S. candy, mint and gum (“CMG”) consumer takeaway increased 8.1% and experienced a CMG market share increase of 6 basis points. Our Salty consumer takeaway declined 4.1% in the first quarter of 2024 and experienced a Salty market share decline of 16 basis points.

The CMG consumer takeaway and market share information reflects measured channels of distribution accounting for approximately 90% of our U.S. confectionery retail business. These channels of distribution primarily include food, drug, mass merchandisers, and convenience store channels, plus Wal-Mart Stores, Inc., partial dollar, club and military channels. These metrics are based on measured market scanned purchases as reported by Circana, the Company’s market insights and analytics provider, and provide a means to assess our retail takeaway and market position relative to the overall category.

Cost of Sales and Gross Margin

Cost of sales were $1,576.6 million in the first quarter 2024 compared to $1,605.3 million in the same period 2023, a decrease of $28.7 million, or 1.8%. The decrease was driven by an incremental $208.4 million of favorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years’ commodity purchases (See Part I, Item 3 - Quantitative and Qual itative Disclosures About Market Risk included in this Quarterly Report on Form 10-Q for more information). The decrease was further driven by $57.7 million of favorable supply chain productivity. The decreases were partially offset by $237.4 million driven by higher commodity costs, primarily driven by cocoa, unfavorable mix and higher supply chain costs.

Gross margin was 51.5% in the first quarter of 2024 compared to 46.3% in the same period of 2023, an increase of 520 basis points. The increase was driven by favorable activity on our mark-to-market impact from commodity derivative instruments, favorable price realization, volume increases, and favorable supply chain productivity. The increase was partially offset by unfavorable commodity costs, higher supply chain costs, including higher labor costs, and unfavorable mix.

SM&A Expenses

SM&A expenses were $618.0 million in the first quarter of 2024 compared to $581.6 million in the same period of 2023, an increase of $36.4 million, or 6.3%. Total advertising and related consumer marketing expenses increased 12.0% driven primarily by increases across all segments. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 3.3% in the first quarter of 2024 driven by higher investments in capabilities and technology and higher compensation costs across segments.

Business Realignment Activities

We periodically undertake business realignment activities designed to increase our efficiency and focus our business in support of our key growth strategies. During the first quarter of 2024, we recorded no business realignment costs versus costs of $0.8 million in the first quarter of 2023. The costs in 2023 related to the International Optimization Program, which completed in 2023. The International Optimization Program was focused on optimizing our China operating model to improve our operational efficiency and provide for a strong, sustainable and simplified base going forward. In February 2024, the Board of Directors approved the Advancing Agility & Automation (“AAA”) Initiative, focused on leveraging new technology to improve supply chain and manufacturing-related spend, and optimize selling, general and administrative expenses. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in Note 9 to the Unaudited Consolidated Financial Statements.

Operating Profit and Operating Profit Margin

Operating profit was $1,058.1 million in the first quarter of 2024 compared to $799.9 million in the same period of 2023, an increase of $258.2 million, or 32.3%. The increase was predominantly due to higher gross profit, partially offset by higher SM&A expenses, as noted above. Operating profit margin increased to 32.5% in 2024 from 26.8% in 2023 driven by the same factors noted above that resulted in higher gross margin for the period.

Interest Expense, Net

Net interest expense was $39.8 million in the first quarter of 2024 compared to $37.7 million in the same period of 2023, an increase of $2.1 million, or 5.7%. The increase was primarily due to higher rates on long-term debt balances in 2024 versus 2023, specifically related to the $350 million 4.25% Notes and $400 million 4.50% Notes issued in May 2023. The increase was partially offset by higher interest income.

Other (Income) Expense, Net

Other (income) expense, net was $32.0 million in the first quarter of 2024 versus net expense of $2.9 million in the first quarter of 2023, an increase of $29.1 million, or 973.4%. The increase in net expense was primarily driven by an increase of $31.4 million of higher write-downs on equity investments qualifying for tax credits in 2024 versus the first quarter of 2023, partially offset by a decrease of $2.6 million of non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans.

Income Taxes and Effective Tax Rate

The effective income tax rate was 19.1% for the first quarter of 2024 compared with 22.7% for the first quarter of 2023. Relative to the 21% statutory rate, the 2024 effective tax rate was primarily impacted by investment tax credits partially offset by state taxes. Relative to the 21% statutory rate, the 2023 effective tax rate was impacted by state taxes, partially offset by employee share-based payments.

Net Income and Earnings Per Share-diluted

Net income was $797.5 million in the first quarter of 2024 compared to $587.2 million in the same period of 2023, an increase of $210.3 million, or 35.8%. EPS-diluted was $3.89 in the first quarter of 2024 compared to $2.85 in the first quarter of 2023, an increase of $1.04, or 36.5%. The increase in both net income and EPS-diluted was driven primarily by higher gross profit, partially offset by higher SM&A expenses, higher other income and expenses and higher income taxes. Our 2024 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs.