HSY Hershey Company

The Hershey Company (NYSE: HSY):

● Net sales increase 7.5%

● Earnings per share-diluted of $0.56 as reported and adjusted

● Year-to-date retail takeaway up 8.1% in channels that account for over 80% of the Company’s U.S. business

● In 2011, net sales and adjusted EPS growth to be around 6% and 10%, respectively, greater than the previous outlook of around the top of the Company’s 3-5% and 6-8% long-term targets

The Hershey Company (NYSE: HSY) today announced sales and earnings for the second quarter ended July 3, 2011. Consolidated net sales were $1,325,171,000 compared with $1,233,242,000 for the second quarter of 2010. Reported net income for the second quarter of 2011 was $130,019,000 or $0.56 per share-diluted, compared with $46,723,000 or $0.20 per share-diluted for the comparable period of 2010.

As described in the Note, for the second quarter of 2011, these results, prepared in accordance with generally accepted accounting principles (GAAP), include credits related to the Project Next Century program announced in June 2010. In the second quarter of 2011, results included pre-tax charges of $9.4 million, or $0.02 per share-diluted, which were more than offset by an adjustment of $11.2 million, or $0.02 per share-diluted, resulting in a net credit of $1.8 million due to a reduction of previous estimates. In the second quarter of 2010, results included net pre-tax charges of $86.2 million, or $0.31 per share-diluted, comprised of Project Next Century costs of $41.5 million, or $0.11 per share-diluted, and a non-cash goodwill impairment charge of $44.7 million, or $0.20 per share-diluted, related to the Godrej Hershey Ltd. joint venture in India. As described in the Note, adjusted net income, which excludes these net charges, was $129,040,000 or $0.56 per share-diluted in the second quarter of 2011, compared with $117,047,000 or $0.51 per share-diluted in the second quarter of 2010, an increase of 9.8 percent in adjusted earnings per share-diluted.

For the first six months of 2011, consolidated net sales were $2,889,394,000 compared with $2,641,085,000 for the first six months of 2010. Reported net income for the first six months of 2011 was $290,134,000 or $1.26 per share-diluted, compared with $194,117,000 or $0.84 per share-diluted, for the first six months of 2010.

As described in the Note, for the first six months of 2011 and 2010, these results, prepared in accordance with GAAP, include net pre-tax charges of $7.9 million and $86.2 million, or $0.02 and $0.31 per share-diluted, respectively. The 2011 charges were associated with the Project Next Century program and the 2010 charges were associated with this program as well as the previously mentioned non-cash goodwill impairment charge. As described in the Note, adjusted net income for the first six months of 2011, which excludes these net charges, was $295,272,000, or $1.28 per share-diluted, compared with $264,441,000 or $1.15 per share-diluted in 2010, an increase of 11.3 percent in adjusted earnings per share-diluted.

The forecast for total pre-tax GAAP charges and non-recurring project implementation costs related to the Project Next Century program has been narrowed, due to lowering of previous estimates, and is now expected to be $140 million to $160 million. In 2011, reported gross margin, reported income before interest and income taxes (EBIT) margin and reported earnings per share-diluted will be impacted by charges associated with Project Next Century. Therefore, we expect reported earnings per share-diluted, including business realignment and impairment charges of $0.11 to $0.12 per share-diluted, to be in the $2.67 to $2.71 range. The expected timing of events and estimated costs and savings are included in Appendix I attached to this press release.

Second Quarter Performance and Outlook

“I’m pleased with Hershey’s second quarter results as solid marketplace momentum continued, resulting in strong overall financial performance,” said John P. Bilbrey, President and Chief Executive Officer. “Our business model and strategy to invest in core brands, disciplined innovation, Insights Driven Performance (IDP) and consumer capabilities remains effective and is sustainable. We’ll continue with this disciplined approach and build on these initiatives, in both domestic and international markets, as it will enable the Company to consistently meet its net sales and earnings objectives in the future.

“In the second quarter, Hershey’s net sales increased 7.5 percent, somewhat greater than our initial expectations, driven by volume growth, primarily new products, in both U.S. and international markets, resulting in greater levels of in-store merchandising and programming versus our estimates, and earlier than expected shipments to customers due to a change in the timing of their promotional calendars. Net price realization, primarily in the U.S., was a 3 point benefit, while foreign currency exchange rates added about a half point.

“Through the first-half of the year, the U.S. CMG – candy, mint and gum – category and Hershey marketplace performance have outpaced the historical category growth rate of about 3 to 4 percent. Specifically, Hershey U.S. CMG retail takeaway for the 28 weeks ended July 9, 2011, which along with the comparable period in 2010 encompasses each year’s entire Easter season results, in channels that account for over 80 percent of our retail business, was up 8.1 percent. In the channels measured by syndicated data, U.S. market share increased 0.9 points. Our marketplace performance reflects a longer Easter season and solid sell through that resulted in a 1.0 point market share gain in this season, successful new products launches, as well as continued momentum in many of our everyday core chocolate and sweets and refreshment businesses. Brand strength was attributable to increased advertising and retail effectiveness. In the second quarter, advertising expense increased about 8 percent versus the year ago period, in line with the mid-single digit percentage increase forecasted for the full year.

“Second quarter adjusted EBIT margin was in line with last year as adjusted selling, marketing and administrative (SM&A) costs – excluding advertising – declined as a percentage of sales versus last year. Adjusted gross margin declined in the second quarter as net price realization and supply chain efficiencies and productivity were more than offset by higher input costs. As we’ve previously stated, input costs will be higher in 2011, however, there is no change to our full-year inflation outlook. We continue to make good progress against our supply chain initiatives and Project Next Century is on track. We’ll deliver meaningful cost savings over the remainder of the year and estimate that full-year adjusted gross margin will be about the same as last year.

“As we enter the third quarter, we are well-positioned to continue to increase U.S. market share and deliver on our financial objectives. In the second half of the year, consumers will begin to see higher retail price points on our everyday instant consumable and take-home packaged candy. Therefore, over the remainder of the year, we expect U.S. CMG category growth to be within the historical 3 to 4 percent growth rate. We’ll closely monitor category performance, work with our key retail partners, and make necessary consumer investments to ensure that the category continues to perform well in the second half of the year and into 2012. As stated earlier, in 2011, we expect advertising expense to increase mid-single digits on a percentage basis versus last year, supporting new product launches and core brands in both the U.S. and international markets. As a result, we expect 2011 net sales, including the impact of foreign currency exchange rates, to be greater than the Company’s long-term 3 to 5 percent objective and increase around 6 percent. For the full year, we expect adjusted SM&A – excluding advertising – to increase, but at a rate less than net sales. Combined with our strong first-half performance, solid in-store merchandising and seasonal programming, we now expect 2011 earnings per share-diluted to be greater than the Company’s long-term 6 to 8 percent objective and increase around 10 percent for the full year,” Bilbrey concluded.

Note: In this release, Hershey references income measures which are not in accordance with U.S. generally accepted accounting principles (GAAP) because they exclude business realignment and impairment charges. These non-GAAP financial measures 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. A reconciliation is provided below of results in accordance with GAAP as presented in the Consolidated Statements of Income to non-GAAP financial measures which exclude business realignment and impairment charges in 2011 and 2010 associated with Project Next Century and a non-cash goodwill impairment charge recorded in 2010.

  Second Quarter Ended   July 3, 2011   July 4, 2010 In thousands except per share amounts   Dollars  

Percent ofNet Sales

    Dollars  

Percent ofNet Sales

    Gross Profit/Gross Margin $ 564,320 42.6 % $ 546,538 44.3 % Charges included in cost of sales   7,023     976   Adjusted non-GAAP Gross Profit/Gross Margin $ 571,343   43.1 % $ 547,514   44.4 %   EBIT/EBIT Margin $ 228,354 17.2 % $ 124,424 10.1 % Charges included in cost of sales 7,023 976 Charges included in SM&A 1,138 123 Business Realignment & Impairment (credits)/charges, net   (9,952 )   85,134   Adjusted non-GAAP EBIT/EBIT Margin $ 226,563   17.1 % $ 210,657   17.1 %   Net Income/Net Margin $ 130,019 9.8 % $ 46,723 3.8 % Charges included in cost of sales 7,023 976 Charges included in SM&A 1,138 123 Business Realignment & Impairment (credits)/charges, net (9,952 ) 85,134 Tax impact of charges   812     (15,909 ) Adjusted non-GAAP Net Income/Net Margin $ 129,040   9.7 % $ 117,047   9.5 %   EPS - Diluted $ 0.56 $ 0.20 Charges included in cost of sales

0.02

— Charges included in SM&A — — Business Realignment & Impairment (credits)/charges, net  

(0.02

)   0.31   Adjusted non-GAAP EPS - Diluted $ 0.56   $ 0.51     Six Months Ended   July 3, 2011 July 4, 2010 In thousands except per share amounts   Dollars  

Percent ofNet Sales

    Dollars  

Percent ofNet Sales

  Gross Profit/Gross Margin $ 1,220,505 42.2 % $ 1,140,518 43.2 % Charges included in cost of sales   13,882     976   Adjusted non-GAAP Gross Profit/Gross Margin $ 1,234,387   42.7 % $ 1,141,494   43.2 %   EBIT/EBIT Margin $ 504,903 17.5 % $ 377,758 14.3 % Charges included in cost of sales 13,882 976 Charges included in SM&A 2,152 123 Business Realignment & Impairment (credits)/charges, net   (8,114 )   85,134   Adjusted non-GAAP EBIT/EBIT Margin $ 512,823   17.7 % $ 463,991   17.6 %   Net Income/Net Margin $ 290,134 10.0 % $ 194,117 7.3 % Charges included in cost of sales 13,882 976 Charges included in SM&A 2,152 123 Business Realignment & Impairment (credits)/charges, net (8,114 ) 85,134 Tax impact of charges   (2,782 )   (15,909 ) Adjusted non-GAAP Net Income/Net Margin $ 295,272   10.2 % $ 264,441   10.0 %   EPS - Diluted $ 1.26 $ 0.84 Charges included in cost of sales 0.04 — Charges included in SM&A — — Business Realignment & Impairment (credits)/charges, net   (0.02 )   0.31   Adjusted non-GAAP EPS - Diluted $ 1.28   $ 1.15    

In 2010, the Company recorded GAAP charges of $53.9 million, or $0.14 per share-diluted, attributable to the Project Next Century program. Additionally, in the second quarter of 2010, the Company recorded a non-cash goodwill impairment charge of $44.7 million, or $0.20 per share-diluted, related to the Godrej Hershey Ltd. joint venture. In 2011, the Company expects to record total GAAP charges of about $38 million to $43 million, or $0.11 to $0.12 per share-diluted, attributable to Project Next Century. Below is a reconciliation of GAAP and non-GAAP items to the Company’s 2010 adjusted earnings per share-diluted and projected adjusted earnings per share-diluted for 2011:

   

2010

2011 (Projected)

Reported EPS-Diluted $2.21 $2.67 - $2.71 Total Business Realignment and Impairment Charges $0.34 $0.11 - $0.12 Adjusted EPS-Diluted *

$2.55

$2.79 - $2.82

  *Excludes business realignment and impairment charges.  

Appendix I

  The Hershey Company Project “Next Century” Expected Timing of Costs and Savings ($m)

 

 

2011

 

 

2012

 

 

2013

 

 

2014

Realignment Charges:                 Cash ~$5 $20 to $30 ~$5 - - Non-Cash $25 to $30 ~$15 - - - -  

Project Management and Start-up Costs

 

 

~$8

 

 

$10  

to

  $15     -    

-

-

 

Total “Next Century” Realignment Charges & Costs $38 to $43 $45 to $60 $5 to $5 - -

 

“Next Century” Cap-Ex $190 to $200 $40 to $55 $5 to $10 - -

 

“Next Century” Projected Annual Savings:

Current Year

$10 to $15 $20 to $25 $25 to $30 $5 to $10 Cumulative $10 to $15 $30 to $40 $55 to $70 $60 to $80  

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; selling price increases, including volume declines associated with pricing elasticity; market demand for our new and existing products; increased marketplace competition; disruption to our supply chain; failure to successfully execute acquisitions, divestitures and joint ventures; changes in governmental laws and regulations, including taxes; political, economic, and/or financial market conditions; risks and uncertainties related to our international operations; disruptions, failures or security breaches of our information technology infrastructure; 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 and funding requirements; the ability to implement our supply chain realignment initiatives within the anticipated timeframe in accordance with our cost estimates and our ability to achieve the expected ongoing annual savings from these initiatives; and such other matters as discussed in our Annual Report on Form 10-K for 2010.

All information in this press release is as of July 26, 2011. 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.thehersheycompany.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 July 3, 2011 and July 4, 2010 (in thousands except per share amounts)     Second Quarter   Six Months     2011 2010 2011 2010   Net Sales $ 1,325,171   $ 1,233,242   $ 2,889,394   $ 2,641,085     Costs and Expenses: Cost of Sales 760,851 686,704 1,668,889 1,500,567 Selling, Marketing and Administrative 345,918 336,980 723,716 677,626 Business Realignment and Impairment (Credits)/Charges, net (9,952 ) 85,134   (8,114 ) 85,134     Total Costs and Expenses 1,096,817   1,108,818   2,384,491   2,263,327     Income Before Interest and Income Taxes (EBIT) 228,354 124,424 504,903 377,758 Interest Expense, net 23,351   22,780   47,828   46,529     Income Before Income Taxes 205,003 101,644 457,075 331,229 Provision for Income Taxes 74,984   54,921   166,941   137,112     Net Income $ 130,019   $ 46,723   $ 290,134   $ 194,117    

Net Income Per Share

- Basic - Common

$ 0.59   $ 0.21   $ 1.31   $ 0.87  

 

- Basic - Class B

$ 0.53   $ 0.19   $ 1.19   $ 0.79  

 

- Diluted - Common

$ 0.56   $ 0.20   $ 1.26   $ 0.84    

Shares Outstanding

- Basic - Common

166,302   166,882   166,372   167,079  

 

- Basic - Class B

60,632   60,708   60,657   60,708  

 

- Diluted - Common

230,301   230,324   230,243   229,946     Key Margins: Gross Margin 42.6 % 44.3 % 42.2 % 43.2 % EBIT Margin 17.2 % 10.1 % 17.5 % 14.3 % Net Margin 9.8 % 3.8 % 10.0 % 7.3 %   The Hershey Company Consolidated Balance Sheets as of July 3, 2011 and December 31, 2010 (in thousands of dollars)    

Assets

2011 2010   Cash and Cash Equivalents $ 790,297 $ 884,642 Accounts Receivable - Trade (Net) 296,946 390,061 Deferred Income Taxes 69,714 55,760 Inventories 659,224 533,622 Prepaid Expenses and Other 175,895 141,132   Total Current Assets 1,992,076 2,005,217   Net Plant and Property 1,493,537 1,437,702 Goodwill 527,724 524,134 Other Intangibles 122,057 123,080 Deferred Income Taxes 14,202 21,387 Other Assets 163,157 161,212   Total Assets $ 4,312,753 $ 4,272,732  

Liabilities and Stockholders' Equity

  Loans Payable $ 293,929 $ 285,480 Accounts Payable 399,841 410,655 Accrued Liabilities 527,742 593,308 Taxes Payable 301 9,402   Total Current Liabilities 1,221,813 1,298,845   Long-Term Debt 1,541,388 1,541,825 Other Long-Term Liabilities 503,858 494,461   Total Liabilities 3,267,059 3,335,131   Total Stockholders' Equity 1,045,694 937,601   Total Liabilities and Stockholders' Equity $ 4,312,753 $ 4,272,732