HERSHEY CO

Net Sales

Net sales were $2,074.5 million in the second quarter of 2024 compared to $2,490.3 million in the same period of 2023, a decrease of $415.8 million, or 16.7%. The net sales decrease was driven by a volume decline of approximately 18%, primarily due to a decrease in everyday core U.S. confection, primarily as a result of accelerated shipments in the first quarter of 2024 due to the anticipation of our enterprise resource planning (“ERP”) system implementation, which was completed in the beginning of the second quarter of 2024. Consolidated volume decline was partially offset by an increase in salty snack brands. The net sales decrease was partially offset by a favorable price realization of approximately 1%, driven by higher list prices primarily within our North America Confectionery and International segments, partially offset by unfavorable price realization in our North America Salty Snacks segment. Foreign currency exchange rates resulted in a favorable impact of less than 1%.

Key U.S. Marketplace Metrics

For the second quarter of 2024, our total U.S. retail takeaway declined 2.9% 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 declined 5.0% and experienced a CMG market share decline of 138 basis points. Our Salty consumer takeaway increased 8.0% in the second quarter of 2024 and experienced a Salty market share increase of 22 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 $1,240.7 million in the second quarter 2024 compared to $1,358.2 million in the same period 2023, a decrease of $117.5 million, or 8.6%. The decrease was driven by $224.0 million related to lower sales volume, in line with the declines in net sales noted above, and lower supply chain costs. The decrease was partially offset by $74.6 million in higher commodity costs, primarily driven by cocoa, an increase of $8.1 million of incremental business realignment costs, as well as unfavorable mix. The decrease was further offset by $31.9 million of unfavorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years’ commodity purchases (See Part I, Item 3 - Quantitative and Qualitative Disclosures About Market Risk included in this Quarterly Report on Form 10-Q for more information).

Gross margin was 40.2% in the second quarter of 2024 compared to 45.5% in the same period of 2023, a decrease of 530 basis points. The decrease was driven by unfavorable activity on our mark-to-market impact from commodity derivative instruments, unfavorable commodity costs, increased business realignment costs and unfavorable mix. The decrease was partially offset by the decline in net sales, as noted above, and lower supply chain costs.

SM&A Expenses

SM&A expenses were $541.0 million in the second quarter of 2024 compared to $571.8 million in the same period of 2023, a decrease of $30.8 million, or 5.4%. Total advertising and related consumer marketing expenses decreased 15.4% driven primarily by a decrease in the North America Confectionery segment. SM&A expenses, excluding advertising and related consumer marketing, decreased 0.8% in the second quarter of 2024 driven by lower compensation costs across segments, partially offset by $24.1 million of incremental business realignment costs, as well as higher investments in capabilities and technology.

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. Excluding the portion recorded within Cost of Sales and SM&A expenses (as noted above), we recorded $4.9 million business realignment costs during the second quarter of 2024, versus a benefit of $0.3 million in the second quarter of 2023. The costs in 2024 related to the Advancing Agility & Automation (“AAA”) Initiative, which commenced in 2024, focused on leveraging new technology to improve supply chain and manufacturing-related spend, and optimize selling, general and administrative expenses. 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. 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 $287.9 million in the second quarter of 2024 compared to $560.6 million in the same period of 2023, a decrease of $272.7 million, or 48.7%. The decrease was primarily due to lower gross profit and higher business realignment costs, partially offset by lower SM&A expenses, as noted above. Operating profit margin decreased to 13.9% in 2024 from 22.5% in 2023 driven by the same factors noted above that resulted in lower gross margin for the period.

Interest Expense, Net

Net interest expense was $41.4 million in the second quarter of 2024 compared to $36.7 million in the same period of 2023, an increase of $4.7 million, or 12.9%. The increase was primarily due to higher rates on short-term debt balances in 2024 versus 2023, specifically related to outstanding commercial paper borrowings.

Other (Income) Expense, Net

Other (income) expense, net was $0.6 million in the second quarter of 2024 versus net expense of $84.5 million in the second quarter of 2023, a decrease of $83.9 million, or 99.3%. The decrease in net expense was primarily driven by $77.4 million of lower write-downs on equity investments qualifying for tax credits in 2024 versus the second quarter of 2023, and a decrease of $7.1 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 26.4% for the second quarter of 2024 compared with 7.4% for the second quarter of 2023. Relative to the 21% statutory rate, the 2024 effective tax rate was primarily impacted by state taxes, tax reserves and unfavorable foreign rate differential, partially offset by the benefit of employee share-based payments. Relative to the 21% statutory rate, the 2023 effective tax rate was impacted by investment tax credits and employee share-based payments partially offset by state taxes and tax reserves.

Net Income and Earnings Per Share-diluted

Net income was $180.9 million in the second quarter of 2024 compared to $406.9 million in the same period of 2023, a decrease of $226.0 million, or 55.6%. EPS-diluted was $0.89 in the second quarter of 2024 compared to $1.98 in the second quarter of 2023, a decrease of $1.09, or 55.1%. The decrease in both net income and EPS-diluted was driven by lower gross profit and higher income taxes, partially offset by lower SM&A expenses and lower other income and expenses. Our 2024 EPS-diluted benefited from lower weighted-average shares outstanding.

Net Sales

Net sales were $5,327.2 million in the first six months of 2024 compared to $5,477.9 million during the same period of 2023, a decrease of $150.7 million, or 2.8%. The net sales decrease was driven by a volume decrease of approximately 6%, primarily due to a decrease in everyday core U.S. confection and decreases across the International segment, partially offset by an increase in salty snack brands. The net sales decrease was partially offset by a favorable price realization of approximately 3%, primarily due to higher list prices across our reportable segments. Foreign currency exchange rates resulted in a favorable impact of less than 1%.

Key U.S. Marketplace Metrics

For the first six months of 2024, our total U.S. retail takeaway increased 0.5% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks and grocery items. Our U.S. CMG consumer takeaway declined 0.1% and experienced a CMG market share decline of 68 basis points. Our Salty consumer takeaway increased 3.2% and experienced a Salty market share increase of 5 basis points.

Cost of Sales and Gross Margin

Cost of sales were $2,817.4 million in the first six months of 2024 compared to $2,963.5 million in the same period of 2023, a decrease of $146.1 million, or 4.9%. The decrease was driven by an incremental $176.5 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 Qualitative Disclosures About Market Risk included in this Quarterly Report on Form 10-Q for more information). The decrease was further driven by $156.8 million related to lower sales volume. The decrease was partially offset by $187.2 million driven by higher commodity costs, higher supply chain costs, unfavorable mix and an increase of $9.7 million of incremental business realignment costs.

Gross margin was 47.1% in the first six months of 2024 compared to 45.9% in the same period of 2023, an increase of 120 basis points. The increase was driven by favorable year-over-year mark-to-market impact from commodity derivative instruments, favorable price realization and volume declines. The increase was partially offset by higher supply chain costs, including higher logistics and labor costs, unfavorable product mix and increased business realignment costs.

SM&A Expenses

SM&A expenses were $1,159.0 million in the first six months of 2024 compared to $1,153.4 million in the same period of 2023, an increase of $5.6 million, or 0.5%. Total advertising and related consumer marketing expenses decreased 1.1%, driven by a decrease in North America Confectionery, partially offset by an increase in North America Salty Snacks. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 1.2% in the first six months of 2024 driven by an increase of $37.6 million of incremental business realignment costs, as well as higher investments in capabilities and technology.

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. Excluding the portion recorded within Cost of Sales and SM&A expenses (as noted above), we recorded business realignment costs of $4.9 million during the first six months of 2024 versus $0.4 million in the first six months of 2023. The costs in 2024 related to the AAA Initiative, which commenced in 2024, focused on leveraging new technology to improve supply chain and manufacturing-related spend, and optimize selling, general and administrative expenses. 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. 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 $1,345.9 million in the first six months of 2024 compared to $1,360.6 million in the same period of 2023, a decrease of $14.7 million, or 1.1%. The decrease was predominantly due to higher SM&A expenses, higher business realignment costs and lower gross profit, as noted above. Operating profit margin increased to 25.3% in the first six months of 2024 from 24.8% in the same period in 2023 driven by the same factors that resulted in higher gross margin for the period.

Interest Expense, Net

Net interest expense was $81.2 million in the first six months of 2024 compared to $74.3 million in the same period of 2023, an increase of $6.9 million, or 9.2%. The increase was primarily due to higher rates on short-term debt balances in 2024 versus 2023, specifically related to outstanding commercial paper borrowings. The increase was further driven by higher rates on long-term debt balances in 2024 versus 2023, due to the $350 million 4.25% and $400 million 4.50% Notes issued in May 2023.

Other (Income) Expense, Net

Other (income) expense, net was $32.6 million in the firstsix months of 2024 versus a net expense of $87.5 million in the firstsix months of 2023, a decrease of $54.9 million, or 62.7%. The decrease in net expense was primarily driven by $46.0 million of lower write-downs on equity investments qualifying for tax credits in 2024 versus the first six months of 2023 and a decrease of $9.6 million of non-service cost components of net periodic benefit costs relating to pension and other post-retirement benefit plans.

Income Taxes and Effective Tax Rate

Our effective income tax rate was 20.6% for the first six months of 2024 compared with 17.1% for the first six months of 2023. Relative to the 21% statutory rate, the 2024 effective tax rate was impacted by investment tax credits partially offset by state taxes. Relative to the 21% statutory rate, the 2023 effective tax rate was impacted by investment tax credits and employee share-based payments partially offset by state taxes and tax reserves.

Net Income and Earnings Per Share-diluted

Net income was $978.3 million in the first six months of 2024 compared to $994.2 million in the same period of 2023, a decrease of $15.9 million, or 1.6%. EPS-diluted was $4.80 in the first six months of 2024 compared to $4.83 in the same period of 2023, a decrease of $0.03, or 0.6%. The decrease in both net income and EPS-diluted was driven by lower gross profit, higher income taxes and higher SM&A, partially offset by lower other income and expenses. Our 2024 EPS-diluted benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs.