HSY Hershey Company

The Hershey Company (NYSE:HSY):

● Earnings per share-diluted of $0.71 as reported and $0.73 adjusted

● Retail takeaway up 4.8% in channels that account for over 80% of the Company’s U.S. business

● Full-year net sales growth of 3-5% expected

● Outlook for 2009 adjusted earnings per share-diluted increased; to be in the $2.12 to $2.14 range

The Hershey Company (NYSE:HSY) today announced sales and earnings for the third quarter ended October 4, 2009. Consolidated net sales were $1,484,118,000 compared with $1,489,609,000 for the third quarter of 2008. Reported net income for the third quarter of 2009 was $162,023,000 or $0.71 per share-diluted, compared with $124,538,000 or $0.54 per share-diluted, for the comparable period of 2008.

For the third quarters of 2009 and 2008, these results, prepared in accordance with generally accepted accounting principles (GAAP), include net pre-tax charges of $11.0 million and $31.0 million, or $0.02 and $0.10 per share-diluted, respectively. These charges were associated with the Global Supply Chain Transformation (GSCT) program. Adjusted net income, which excludes these net charges, was $168,508,000 or $0.73 per share-diluted in the third quarter of 2009, compared with $145,813,000, or $0.64 per share-diluted in the third quarter of 2008, an increase of 14.1 percent in adjusted earnings per share-diluted.

For the first nine months of 2009, consolidated net sales were $3,891,332,000 compared with $3,755,388,000 for the first nine months of 2008. Reported net income for the first nine months of 2009 was $309,215,000 or $1.35 per share-diluted, compared with $229,250,000 or $1.00 per share-diluted, for the first nine months of 2008.

For the first nine months of 2009 and 2008, these results, prepared in accordance with GAAP, include net pre-tax charges of $72.7 million and $101.0 million, or $0.19 and $0.30 per share, respectively. These charges were associated with the GSCT program. Adjusted net income for the first nine months of 2009, which excludes these net charges, was $352,465,000, or $1.54 per share-diluted, compared with $296,680,000 or $1.30 per share-diluted in 2008, an increase of 18.5 percent in adjusted earnings per share-diluted.

Total GSCT program costs to date are $602.7 million. The forecast for total charges related to the program remains $640 million to $665 million and includes the non-cash pension settlement charges discussed in prior quarters and described in Appendix A. In 2009, the Company expects to record total GAAP charges, including possible non-cash pension settlement charges, of about $0.26 to $0.32 per share-diluted, generating expected GAAP earnings of $1.80 to $1.88 per share-diluted (see “Note” for GAAP to adjusted earnings per share-diluted reconciliation).

Third Quarter Performance and Outlook

“I’m pleased with Hershey’s third quarter results, which were driven by core brand growth, solid performance within key retail channels and strong productivity gains,” said David J. West, President and Chief Executive Officer. “Net sales, down slightly in the quarter versus the prior year, were in-line with our expectations as we’re lapping the buy-in related to the August 2008 price increase. Importantly, U.S. retail takeaway for the 12-weeks ended October 3, 2009, in channels that account for over 80 percent of our U.S. retail business, was up 4.8 percent. In the channels measured by syndicated data, U.S. market share was flat for the 12-weeks ended October 3, 2009, and up 0.3 points year-to-date. These results were driven by the investments we have made behind our core brands, including advertising, up about 50 percent in the third quarter.

“Increased levels of in-store programming and merchandising, as well as outstanding execution at the retail level, continue to drive our positive marketplace results in the food, convenience and mass classes of trade. We’ll continue to invest in our brands and business capabilities and anticipate a solid finish to the year.

“As anticipated, in the third quarter, net sales gains from the U.S. pricing action were offset by volume declines associated with pricing elasticity, the impact of unfavorable foreign currency exchange rates and previously communicated 2009 mid-year actions to discontinue certain premium chocolate products. Overall, the investments we made in selling capabilities were successful in the quarter and contributed to consumer acceptance of the new higher everyday, promoted and seasonal price points.

“Adjusted income before interest and income taxes increased 15.8 percent in the third quarter, slightly greater than our expectations, and resulted in a 280 basis point margin improvement. The increase was driven by net price realization, supply chain efficiencies and productivity gains. Offsetting a portion of these gains were higher commodity and employee-related costs, including pension expense. Additionally, our earnings growth, as well as our focus on improving net trading capital, generated strong operating cash flow in the quarter.

“We are working closely with retail customers and are monitoring category and Hershey brand performance given the higher promoted price points of seasonal candy. We’ll make the necessary consumer investments in the coming weeks and months to ensure a healthy category and Halloween and Holiday sell through at the retail level. Halloween-specific seasonal promotions, merchandising and advertising are currently being executed in the marketplace. We are also planning an additional increase in advertising in the fourth quarter and expect full-year 2009 advertising expense to increase about 50 percent versus 2008. This investment will benefit our everyday and seasonal business in the near term and into next year, as well as the December launches of Hershey’s Bliss white chocolate and the introduction of Hershey’s Special Dark, Almond Joy and York Pieces. These Hershey favorites, in a crunchy candy shell, are an expansion of the popular Reese’s Pieces format and will be available in take-home, resealable, standup pouches. These two launches represent the type of close-in innovation on our iconic brands that we believe resonate with consumers in this challenging environment.

“In the fourth quarter, gains from pricing will not be as significant as the Holiday season is smaller than Halloween. Additionally, due to timing, we expect shipments of Valentine’s and Easter seasonal product to be lower in the fourth quarter of 2009 versus 2008. Based on the year-to-date price/volume elasticity trends and brand-building and marketplace initiatives for the remainder of the year, we expect 2009 net sales growth to be within our 3 to 5 percent long-term objective. Over the balance of the year, we’re accelerating domestic and international investments in consumer capabilities, customer insights and category management techniques that will benefit the Company over the long term. Therefore, we anticipate adjusted earnings per share-diluted for the full-year to be in the $2.12 to $2.14 range.

“As we look to 2010, we assume the economic environment for consumers in the U.S. and international markets will continue to be challenging. We’ll continue to focus on and make appropriate investments in our core brands and expect 2010 net sales growth to be within our 3 to 5 percent long-term objective. The sell through at retail for Halloween will be greatly affected by the remaining days in the season and will determine our approach to the upcoming Holiday, Valentine’s and Easter seasons, all of which we expect will be at the higher seasonal promoted price points. While still early, for 2010, given our current views of our investments, marketplace performance and cost structure, we expect growth in adjusted earnings per share-diluted to be within our long-term objective of 6 to 8 percent,” West concluded.

Note: In this release, Hershey has provided income measures excluding certain items described above, in addition to net income determined in accordance with GAAP. These non-GAAP financial measures, as shown in the attached pro forma summary of consolidated statements of income, are used in evaluating results of operations for internal purposes. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP. Rather, the Company believes exclusion of such items provides additional information to investors to facilitate the comparison of past and present operations.

In 2008, the Company recorded GAAP charges of $130.0 million, or $0.38 per share-diluted, attributable to the GSCT program and $45.7 million, or $0.13 per share-diluted, related to the impairment of intangible trademark values, primarily Mauna Loa, recorded in the fourth quarter of 2008. Additionally, the Company recorded business realignment and impairment charges of $4.9 million, or $0.01 per share-diluted, related to the business realignment in Brazil.

In 2009, the Company expects to record total GAAP charges, including possible non-cash pension settlement charges (see Appendix A), of about $100 million to $120 million, or $0.26 to $0.32 per share-diluted.

The GSCT program is expected to result in total pre-tax charges and non-recurring project implementation costs of $640 million to $665 million, including possible non-cash pension settlement charges (see Appendix A) in 2009 and 2010. Total charges include project management and start-up costs of approximately $60 million.

Below is a reconciliation of GAAP and non-GAAP items to the Company’s adjusted earnings per share-diluted outlook:

               

2008

2009

Reported / Expected EPS-Diluted $1.36 $1.80 - $1.88   Total Business Realignment and Impairment Charges $0.52 $0.26 - $0.32   Adjusted EPS-Diluted * $1.88 --   Expected Adjusted EPS-Diluted* $2.12 - $2.14  

*Excludes business realignment and impairment charges.

 

Appendix A

Financial Accounting Standards Board Statement of Financial Accounting Standards No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (as amended) (now FASB Accounting Standards Codification 715-30-35) (“SFAS No. 88”) requires pension settlement charges to be recorded if withdrawals from pension plans in a calendar year exceed a certain level.

Pension settlement charges are non-cash charges for the Company. Such charges accelerate the recognition of pension expenses related to actuarial gains and losses resulting from interest rate changes and differences in actual versus assumed returns on pension assets. The Company normally amortizes actuarial gains and losses over a period of about 13 years.

The GSCT program charges recorded in 2007 and 2008 included pension settlement charges of approximately $25 million as employees leaving the Company under the program have withdrawn lump sums from the defined benefit pension plans. Pension settlement charges recorded during the first nine months of 2009 totaled approximately $36.7 million.

In addition to the settlement charges reflected above, incremental SFAS No. 88 pension settlement charges of $30 million to $40 million are included in the total GSCT program estimates based upon the current trends of employee withdrawals, with approximately $30 million of this amount projected for 2009.

The GSCT program is expected to result in total pre-tax charges and non-recurring project implementation costs of $640 million to $665 million, including estimated pension settlement charges in 2009 and 2010.

Safe Harbor Statement

This release contains statements that are forward-looking. These statements are made based upon current expectations that are subject to risk and uncertainty. Actual results may differ materially from those contained in the forward-looking statements. Factors that could cause results to differ materially include, but are not limited to: issues or concerns related to the quality and safety of our products, ingredients or packaging; changes in raw material and other costs and selling price increases, including volume declines associated with pricing elasticity; market demand for our new and existing products; increased marketplace competition; political, economic, and/or financial market conditions; changes in governmental laws and regulations, including taxes; risks and uncertainties related to our international operations; the impact of future developments related to the investigation by government regulators of alleged pricing practices by members of the confectionery industry, including risks of subsequent litigation or further government action; pension cost factors, such as actuarial assumptions, market performance and employee retirement decisions; our ability to achieve expected ongoing annual savings from our supply chain transformation and the implementation of our supply chain transformation within the anticipated timeframe in accordance with our cost estimates; and such other matters as discussed in our Annual Report on Form 10-K for 2008. All information in this press release is as of October 22, 2009. The Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company’s expectations.

Live Web Cast

As previously announced, the Company will hold a conference call with analysts today at 8:30 a.m. Eastern Time. The conference call will be web cast live via Hershey’s corporate website www.hersheys.com. Please go to the Investor Relations section of the website for further details.

  The Hershey Company Summary of Consolidated Statements of Income for the periods ended October 4, 2009 and September 28, 2008 (in thousands except per share amounts)       Third Quarter   Nine Months     2009 2008 2009 2008   Net Sales $ 1,484,118 $ 1,489,609 $ 3,891,332 $ 3,755,388   Costs and Expenses: Cost of Sales 895,020 988,380 2,408,716 2,495,196 Selling, Marketing and Administrative 301,466 272,401 874,632 788,962

Business Realignment and Impairment Charges, net

8,008 8,877 58,750 34,748   Total Costs and Expenses 1,204,494 1,269,658 3,342,098 3,318,906   Income Before Interest and Income Taxes (EBIT) 279,624 219,951 549,234 436,482 Interest Expense, net 22,302 24,915 68,932 72,911   Income Before Income Taxes 257,322 195,036 480,302 363,571 Provision for Income Taxes 95,299 70,498 171,087 134,321   Net Income $ 162,023 $ 124,538 $ 309,215 $ 229,250  

Net Income Per Share

- Basic - Common

$ 0.73 $ 0.56 $ 1.39 $ 1.03

 

- Basic - Class B

$ 0.66 $ 0.51 $ 1.26 $ 0.93

 

- Diluted - Common

$ 0.71 $ 0.54 $ 1.35 $ 1.00  

Shares Outstanding

- Basic - Common

167,299 166,682 166,980 166,696

 

- Basic - Class B

60,709 60,784 60,710 60,798

 

- Diluted - Common

229,553 228,670 228,784 228,757   Key Margins: Gross Margin 39.7% 33.6% 38.1% 33.6% EBIT Margin 18.8% 14.8% 14.1% 11.6% Net Margin 10.9% 8.4% 7.9% 6.1%     The Hershey Company Pro Forma Summary of Consolidated Statements of Income for the periods ended October 4, 2009 and September 28, 2008 (in thousands except per share amounts)     Third Quarter Nine Months   2009 2008 2009 2008   Net Sales $ 1,484,118 $ 1,489,609 $ 3,891,332 $ 3,755,388   Costs and Expenses: Cost of Sales

893,695

(a)

968,415

(d)

2,400,224

(a)

2,435,050

(d)

Selling, Marketing and Administrative

299,783

(b)

270,213

(e)

869,195

(b)

782,897

(e)

Business Realignment and Impairment Charges, net

—

(c)

—

(f)

—

(c)

—

(f)

  Total Costs and Expenses 1,193,478 1,238,628 3,269,419 3,217,947   Income Before Interest and Income Taxes (EBIT) 290,640 250,981 621,913 537,441 Interest Expense, net 22,302 24,915 68,932 72,911   Income Before Income Taxes 268,338 226,066 552,981 464,530 Provision for Income Taxes 99,830 80,253 200,516 167,850   Adjusted Net Income $ 168,508 $ 145,813 $ 352,465 $ 296,680   Adjusted Net Income Per Share

 

- Basic - Common

$ 0.76 $ 0.66 $ 1.59 $ 1.34

 

- Basic - Class B

$ 0.68 $ 0.59 $ 1.43 $ 1.21

 

- Diluted - Common

$ 0.73 $ 0.64 $ 1.54 $ 1.30  

Shares Outstanding

- Basic - Common

167,299 166,682 166,980 166,696

 

- Basic - Class B

60,709 60,784 60,710 60,798

 

- Diluted - Common

229,553 228,670 228,784 228,757   Key Margins: Adjusted Gross Margin 39.8% 35.0% 38.3% 35.2% Adjusted EBIT Margin 19.6% 16.8% 16.0% 14.3% Adjusted Net Margin 11.4% 9.8% 9.1% 7.9%  

 

(a)   Excludes business realignment and impairment charges of $1.3 million pre-tax or $.8 million after-tax for the third quarter and $8.5 million pre-tax or $5.0 million after-tax for the nine months. (b) Excludes business realignment and impairment charges of $1.7 million pre-tax or $.9 million after-tax for the third quarter and $5.4 million pre-tax or $3.2 million after-tax for the nine months. (c) Excludes business realignment and impairment charges of $8.0 million pre-tax or $4.8 million after-tax for the third quarter and $58.8 million pre-tax or $35.1 million after-tax for the nine months. (d) Excludes business realignment and impairment charges of $20.0 million pre-tax or $13.9 million after-tax for the third quarter and $60.1 million pre-tax or $41.3 million after-tax for the nine months. (e) Excludes business realignment and impairment charges of $2.2 million pre-tax or $1.4 million after-tax for the third quarter and $6.1 million pre-tax or $3.7 million after-tax for the nine months. (f) Excludes business realignment and impairment charges of $8.9 million pre-tax or $6.0 million after-tax for the third quarter and $34.7 million pre-tax or $22.4 million after-tax for the nine months.     The Hershey Company Consolidated Balance Sheets as of October 4, 2009 and December 31, 2008 (in thousands of dollars)          

Assets

2009 2008   Cash and Cash Equivalents $ 119,253 $ 37,103 Accounts Receivable - Trade (Net) 567,609 455,153 Deferred Income Taxes 31,164 70,903 Inventories 559,318 592,530 Prepaid Expenses and Other 185,293 189,256   Total Current Assets 1,462,637 1,344,945   Net Plant and Property 1,412,818 1,458,949 Goodwill 567,163 554,677 Other Intangibles 125,345 110,772 Deferred Income Taxes 24,776 13,815 Other Assets 180,368 151,561   Total Assets $ 3,773,107 $ 3,634,719  

Liabilities and Stockholders' Equity

  Loans Payable $ 243,021 $ 501,504 Accounts Payable 285,231 249,454 Accrued Liabilities 546,425 504,065 Taxes Payable 33,652 15,189   Total Current Liabilities 1,108,329 1,270,212   Long-Term Debt 1,503,435 1,505,954 Other Long-Term Liabilities 481,105 504,963 Deferred Income Taxes 42,721 3,646   Total Liabilities 3,135,590 3,284,775   Total Stockholders' Equity 637,517 349,944   Total Liabilities and Stockholders' Equity $ 3,773,107 $ 3,634,719