Hershey Third-Quarter Profits Down

19/10/07 The Hershey Company has  announced sales and earnings for the third quarter ended September 30, 2007. Consolidated net sales were $1,399,469,000 compared with $1,416,202,000 for the third quarter of 2006. Net income for the third quarter of 2007 was $62,784,000 or $0.27 per share-diluted, compared with $185,121,000, or $0.78 per share-diluted, for the comparable period of 2006.

For the third quarters of 2007 and 2006, these results include net pre-tax charges of $151.9 million, or $0.41 per share, and $1.7 million, respectively. The 2007 charges are associated with the Global Supply Chain Transformation plan announced in February, while the 2006 charges primarily relate to the completed business realignment initiatives announced in July 2005. Net income from operations, which excludes the net charges for the third quarters of 2007 and 2006, was $157,230,000 or $0.68 per share-diluted in 2007, compared with $186,234,000 or $0.78 per share-diluted in 2006.

"Throughout 2007, our top priority has been to restore momentum within the U.S.," said Richard H. Lenny, Chairman and Chief Executive Officer. "Against a backdrop of severe commodity cost pressures and strong competitive activity, we're maintaining this focus. In the third quarter we experienced improvements in key aspects of our portfolio. Importantly, our seasonal programs got off to a solid start, and increased consumer investment resulted in a 3.5 percent gain in U.S. retail takeaway with improvements occurring in all classes of trade. In our core chocolate business, retail takeaway was up almost 6 percent, roughly twice that of the year-to-date period. This above-trend gain was led by Hershey's top four chocolate brands, which had a combined gain of better than 8 percent, including strong growth within dark chocolate, and improved retail execution. This performance resulted in a sequential improvement in chocolate market share during the quarter. Total company market share, off 1.1 share points, was adversely impacted by increased category innovation, particularly in premium chocolate and refreshment, and aggressive competitive programs at select retailers.

"Reported net sales for the quarter were down 1 percent, primarily driven by the timing of seasonal shipments and a significant reduction in inventory levels at distributors. This reduction is the result of slower-than- anticipated improvement in the convenience store class of trade and tighter credit conditions for these distributors. Importantly, Hershey's international business continued to gain traction behind our joint ventures in emerging markets. Third quarter profitability was curtailed by lower sales, including increased trade promotion, and the impact of higher dairy costs."

For the first nine months of 2007, consolidated net sales were $3,604,494,000, compared with $3,607,621,000 for the first nine months of 2006. Reported net income for the first nine months of 2007 was $159,811,000 or $0.69 per share-diluted, compared with $405,489,000, or $1.69 per share- diluted, for the first nine months of 2006. For the first nine months of 2007 and 2006, these results, prepared in accordance with GAAP, include net pre-tax charges of $316.7 million and $6.0 million, or $0.85 and $0.01 per share, respectively. The 2007 charges are associated with the Global Supply Chain Transformation plan announced in February, while the 2006 charges primarily relate to the completed business realignment initiatives announced in July 2005.

Net income from operations, which excludes the net charges for the first nine months of 2007 and 2006, was $357,687,000, or $1.54 per share-diluted, compared with $409,627,000 or $1.70 per share-diluted in 2006, a decrease of 9.4 percent in earnings per share-diluted.

"One of the key enablers of our long-term performance is the Global Supply Chain Transformation initiative announced in February," Lenny said. "This effort remains on track and is scheduled to deliver savings of about $15 million by the end of the year with a significant step-up in 2008. These funds will provide the necessary means for investment in our brands and selling capabilities.

"During the fourth quarter, our investment in consumer and customer programming will be up markedly when compared to both the just-completed third quarter and the fourth quarter of 2006. The focus will be on Hershey's iconic brands, new products, such as Cacao Reserve and Reese's Whipps, customer- specific events and expanded retail coverage.

"We do expect a sequential improvement in marketplace performance in the fourth quarter. However, continued competitive activity as well as a tightening of inventory levels at select distributors will dampen sales performance in the fourth quarter. Therefore, organic net sales for 2007 are expected to decrease about 1 percent. Profitability will be impacted by higher dairy costs and increased business investment. As a result, we anticipate full-year diluted earnings per share from operations to be in the $2.08 to $2.12 range," Lenny concluded.

"In 2008, we'll build on recent marketplace momentum in core chocolate as we broaden our participation in the premium segment," said David J. West, President. "Today we are pleased to announce the introduction of Hershey's Bliss. This product delivers a smooth, creamy and rich-tasting chocolate experience, satisfying consumers' desire for indulgence. Hershey's Bliss will complement our line-up of premium and dark chocolate, including Cacao Reserve, Scharffen Berger and Starbucks.

"We'll support our premium initiatives as well as continued investment behind core brands, global expansion, and our retail sales force, with savings generated from our Global Supply Chain Transformation. In addition, we are evaluating alternatives to improve our consumer and customer value propositions throughout the entire portfolio. This ongoing work, combined with input cost volatility, makes for a challenging operating environment. In January, we'll provide details of the Company's 2008 expectations," West concluded.