Hershey Announces Second Quarter Results

Hershey delivered solid results in the second quarter driven by our strategy of increasing advertising, consumer investment and U.S. retail coverage on our core brands," said David J. West, President and Chief Executive Officer.

Jul 23 2010 --- The Hershey Company announced sales and earnings for the second quarter ended July 4, 2010. Consolidated net sales were $1,233,242,000 compared with $1,171,183,000 for the second quarter of 2009. Net income for the second quarter of 2010 was $46,723,000 or $0.20 per share-diluted, compared with $71,298,000 or $0.31 per share-diluted, for the comparable period of 2009.

As described in the Note, for the second quarter of 2010, these results, prepared in accordance with generally accepted accounting principles (GAAP), included net pre-tax charges of $86.2 million, or $0.31 per share-diluted. Charges associated with the Project Next Century program announced in June 2010, were $41.5 million, or $0.11 per share-diluted. Additionally, 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 India. There was no tax benefit associated with the non-cash goodwill impairment charge. While the joint venture has achieved growth, it has been less than initial expectations due to slower realization of development plans and changes in input costs, as well as the macroeconomic environment which has delayed distribution expansion and the implementation of new price points. The India market in which the Godrej Hershey Ltd. joint venture competes remains a strategic growth market for the Company. Despite the business realignment and goodwill impairment charges, reported income before interest and income taxes increased 6.6 percent. For the second quarter of 2009, GAAP results included net pre-tax charges of $42.7 million, or $0.12 per share-diluted. These charges related to the Global Supply Chain Transformation (GSCT) program completed in December 2009. As described in the Note, adjusted net income, which excludes these net charges, was $117,047,000 or $0.51 per share-diluted in the second quarter of 2010, compared with $97,965,000, or $0.43 per share-diluted in the second quarter of 2009, an increase of 19 percent in adjusted earnings per share-diluted.

For the first six months of 2010, consolidated net sales were $2,641,085,000 compared with $2,407,214,000 for the first six months of 2009. Reported net income for the first six months of 2010 was $194,117,000 or $0.84 per share-diluted, compared with $147,192,000 or $0.64 per share-diluted, for the first six months of 2009.

As described in the Note, for the first six months of 2010 and 2009, these results, prepared in accordance with GAAP, include net pre-tax charges of $86.2 million and $61.7 million, or $0.31 and $0.17 per share, respectively. The 2010 charges are associated with the Project Next Century program announced in June and the non-cash goodwill impairment charge associated with the Godrej Hershey Ltd. joint venture, while the 2009 charges are related to the GSCT program completed in December 2009. As described in the Note, adjusted net income for the first six months of 2010, which excludes these net charges, was $264,441,000, or $1.15 per share-diluted, compared with $183,957,000 or $0.81 per share-diluted in 2009, an increase of 42 percent in adjusted earnings per share-diluted.

In 2010, reported gross margin, reported income before interest and income taxes (EBIT) margin and reported earnings per share-diluted will be impacted by the start-up of Project Next Century and the non-cash goodwill impairment charge associated with Godrej Hershey Ltd. As a result, reported earnings per share-diluted, including restructuring and impairment charges of $0.40 to $0.43 per share-diluted, is expected to be in the $2.04 to $2.12 range.

The forecast for total pre-tax GAAP charges and non-recurring project implementation costs related to the Project Next Century program remains at $140 million to $170 million. The Company now expects to record $75 million to $85 million in program charges in 2010. Total program estimates include $120 million to $150 million in pre-tax business realignment and impairment charges and approximately $20 million in project implementation and start-up costs. The cash portion of the total charge is estimated to be $95 million to $110 million, including project implementation and start-up costs. At the conclusion of the program in 2014, ongoing annual savings are expected to be approximately $60 million to $80 million. The expected timing of events and estimated costs and savings, provided in Appendix I attached to this press release, reflects the aforementioned updated estimates.

Second Quarter Performance and Outlook

"Hershey delivered solid results in the second quarter driven by our strategy of increasing advertising, consumer investment and U.S. retail coverage on our core brands," said David J. West, President and Chief Executive Officer. "Net sales increased by 5.3 percent driven by volume, including improvements in our international business, an approximate one point benefit from foreign currency exchange rates, as well as some net price realization.

"In the second quarter, advertising expense increased about 50 percent as we were on air supporting our core brands, the kick-off of our annual Hershey's S'mores promotion and the launch of Hershey's Special Dark, Almond Joy and York Pieces new products. Advertising, as well as greater levels of in-store selling, merchandising and programming has resulted in strong marketplace performance.

"U.S. retail takeaway for the 12 weeks ended June 12, 2010, in channels that account for over 80 percent of our retail business, including the Easter seasonal period, was up 4.0 percent. Easter was April 4, 2010, one week earlier than 2009, and didn't materially impact our second quarter marketplace performance. In the channels measured by syndicated data, U.S. market share in both the second quarter and year-to-date periods increased 0.3 points. We gained market share in all measured channels, except the drug class-of-trade, which improved sequentially. The mid-single digit percentage increase in U.S. retail takeaway of our standard loose bar instant consumable format for the 12 weeks ended June 12, 2010 was particularly solid. Despite continued macroeconomic challenges, the confectionery category remains resilient with year-to-date U.S. category growth of 3.9 percent in the channels measured by syndicated data. This is at the top end of the category's historical growth rate of 3 to 4 percent. I'm pleased with Hershey's performance during this period as we have gained market share on a quarterly and year-to-date basis.

"Adjusted income before interest and income taxes increased 32.2 percent in the second quarter driven by volume trends and mix related to the instant consumable product line; supply chain efficiencies; and productivity gains. Offsetting a portion of these gains were higher marketing and selling expenses, commodity costs, as well as other employee-related administrative and legal costs.

"In the second half of the year we expect to maintain our momentum and look for full-year 2010 net sales to increase about 7 percent, including an approximate one point benefit from foreign currency exchange rates. For the full-year, we have good visibility into our cost structure and expect adjusted gross margin and adjusted EBIT margin to expand, although not at the rate achieved in first half of the year due to the items discussed last quarter. Specifically, we have completely lapped the August 2008 price increase; realized all of the targeted GSCT savings; will have a seasonal shift in orders out of the fourth quarter of 2010 into the first quarter of 2011 due to the timing and refinement of logistical requirements; and we don't expect year-end LIFO inventory to be favorable in 2010 as it was in 2009. Furthermore, we are planning additional increases in advertising for the full-year and expect advertising expense to increase about 45 to 50 percent in 2010. This is greater than our previous estimate of a 35 to 40 percent increase. Due to timing, the majority of this advertising will not be broadcast until later in the year and we expect its effect on net sales to occur primarily in 2011. Lower trade promotion rates versus our initial expectations and earlier-than-expected achievement of a portion of the productivity savings discussed at the CAGNY conference in February will offset a portion of the additional 2010 advertising investment. Therefore, adjusted earnings per share-diluted is expected to be in the $2.47 to $2.52 range, an increase of low-to-mid-teens, on a percentage basis, versus 2009."