Hershey Announces Third Quarter Results; Updates Outlook for 2012

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Hershey Announces Third Quarter Results; Updates Outlook for 2012

  • Net sales increase 7.5%
  • Earnings per share-diluted of $0.77 as reported and $0.87 adjusted
  • Full year net sales growth range narrowed; expected to increase 8-9%, including Brookside acquisition
  • Outlook for 2012 reported and adjusted earnings per share-diluted updated:
    • Reported earnings per share-diluted expected to be $2.87 to $2.92
    • Adjusted earnings per share-diluted expected to increase 14-15% and be in the $3.22 to $3.25 range, greater than the previous estimate of a 12-14% increase
  • Quarterly dividend declared and increased 10.5% on Common Stock
  • 2013 net sales and adjusted earnings per share-diluted expected to be within the Company's long-term targets


HERSHEY, Pa.--(BUSINESS WIRE)-- The Hershey Company (NYS: HSY) today announced sales and earnings for the third quarter ended September 30, 2012. Consolidated net sales were $1,746,709,000 compared with $1,624,249,000 for the third quarter of 2011. Reported net income for the third quarter of 2012 was $176,716,000 or $0.77 per share-diluted, compared with $196,695,000 or $0.86 per share-diluted for the comparable period of 2011.

As described in the Note, for the third quarter of 2012, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included net pre-tax charges, as well as non-service-related pension expense (NSRPE). The majority of these charges, $25.8 million, or $0.07 per share-diluted, were related to the Project Next Century program. Additionally, acquisition and integration costs related to the Brookside Foods Ltd. (Brookside) acquisition were $4.8 million, or $0.02 per share-diluted, and NSRPE was $4.3 million, or $0.01 per share-diluted. For the third quarter of 2011, results included pre-tax charges for Project Next Century of $13.5 million, or $0.03 per share-diluted, and a pre-tax gain of $17.0 million, or $0.05 per share-diluted, on the sale of a non-core trademark license. Adjusted net income, which excludes these net charges, was $199,451,000, or $0.87 per share-diluted, in the third quarter of 2012, compared with $193,959,000, or $0.84 per share-diluted, in the third quarter of 2011, an increase of 3.6 percent in adjusted earnings per share-diluted. See the Note for a reconciliation of GAAP and non-GAAP items.

For the first nine months of 2012, consolidated net sales were $4,893,217,000, compared with $4,513,643,000 for the first nine months of 2011. Reported net income for the first nine months of 2012 was $511,052,000, or $2.23 per share-diluted, compared with $486,829,000 or $2.12 per share-diluted, for the first nine months of 2011. As described in the Note, for the first nine months of 2012 and 2011, these results, prepared in accordance with GAAP, included net pre-tax charges of $93.4 million and $6.3 million, or $0.27 and $0.01 per share-diluted, respectively. Charges associated with the Project Next Century program for the first nine months in 2012 and 2011 were $68.4 million and $21.4 million, or $0.19 and $0.06 per share-diluted, respectively. NSRPE for the first nine months in 2012 and 2011 were $13.0 million, or $0.04 per share-diluted, and $1.9 million, respectively. Additionally, for the first nine months of 2012, acquisition and integration costs related to the Brookside acquisition were $12.0 million, or $0.04 per share-diluted. Charges in 2011 include the previously mentioned pre-tax gain on the sale of non-core trademark licensing rights. As described in the Note, adjusted net income for the first nine months of 2012, which excludes these net charges, was $570,854,000, or $2.50 per share-diluted. Adjusted net income for the first nine months of 2011, which excludes these net charges and the gain on sale, was $490,381,000, or $2.13 per share-diluted in 2011.

In 2012, the Company expects reported earnings per share-diluted of $2.87 to $2.92. These results, prepared in accordance with GAAP, include business realignment charges, NSRPE and acquisition and integration costs of $0.33 to $0.35 per share-diluted. The majority of these charges, $0.23 to $0.24 per share-diluted, are related to the Project Next Century program. NSRPE and acquisition and integration costs related to the Brookside acquisition are expected to be $0.06 per share-diluted and $0.04 to $0.05 per share-diluted, respectively. Despite the impact of these charges in 2012, reported gross margin is expected to increase 120 to 140 basis points. In 2013, the Company expects reported earnings per share-diluted of $3.37 to $3.49. These results are expected to include business realignment charges, NSRPE and acquisition and integration costs of $0.09 to $0.11 per share-diluted.

As discussed last quarter, the forecasted amount for Project Next Century non-cash pension settlement charges could increase as a result of impacted employee pension fund withdrawals during the fourth quarter. Non-cash pension settlement costs are required in accordance with applicable accounting standards. As a result, the forecast for total pre-tax GAAP charges and non-recurring project implementation costs, including non-cash pension settlement costs related to the Project Next Century program, has been increased from a range of $160 million to $180 million to a range of $190 million to $200 million. The expected timing of events and estimated costs and savings is included in Appendix I, which is attached to this press release.

On October 24, 2012, the Board of Directors of The Hershey Company declared a quarterly dividend of $0.42 on the Common Stock, an increase of $0.04 per share. In addition, the Board declared a dividend of $0.38 on the Class B Common Stock, an increase of $0.036 per share. The dividends are payable December 14, 2012, to stockholders of record November 23, 2012.

Third Quarter Performance and Outlook

"The Hershey Company delivered another good quarter of core brand growth driven by solid performance within key retail channels," said John P. Bilbrey, President and Chief Executive Officer, The Hershey Company. "Importantly, Hershey U.S. candy, mint and gum (CMG) retail takeaway for the 12 weeks ended October 6, 2012, in the expanded all outlet combined plus convenience store channels (xAOC+C-store), which accounts for approximately 90 percent of our U.S. retail business, was up 5.9 percent, resulting in a market share gain of 1.1 points. Our performance was solid in the convenience and dollar store channels with volume and unit trends positive. Overall, Hershey's results were balanced as we gained xAOC+C-store market share within all segments of CMG. I'm particularly pleased with our chocolate marketplace performance where we gained 0.4 market share points driven by core brands and new products. Our CMG volume and unit trends at retail continue to progress and we expect sequential improvement in the fourth quarter. Additionally, Halloween sales are off to a good start with solid programming, merchandising and promotions being executed in the marketplace.

"In the third quarter, Hershey's net sales increased 7.5 percent. Net price realization was a 3.9 point benefit and volume, excluding the Brookside acquisition, was up 2.1 points. The organic volume gain was primarily driven by new products. Core brand volume trends have improved sequentially throughout the year and were slightly up in the third quarter. The Brookside acquisition was a 2.3 point benefit in the third quarter, slightly better than our initial estimates, and foreign currency exchange rates a 0.8 point headwind. For the full year, we expect the Brookside acquisition to be about a 1.75 to 2.0 point benefit to net sales as our initial supply chain analysis resulted in initiatives that enabled us to optimize product sales mix.

"Gross margin increased in the quarter, in line with our estimates, as net price realization, supply chain efficiencies and productivity gains more than offset higher input costs. Selling, marketing and administrative (SM&A) expenses, excluding advertising, increased 12 percent in the third quarter, less than our estimate of a 15 to 20 percent increase, and is up about 9 percent year-to-date. We would expect another meaningful increase, in the fourth quarter, resulting in a low double-digit percentage increase for the full year, in line with our initial estimates. These investments in go-to-market capabilities in both the U.S. and international markets will benefit the Company over the near and long term. In both the third quarter and year-to-date periods advertising is up about 12 percent versus 2011. Additionally, as communicated last quarter, the third quarter tax rate was greater than the year ago period due to the timing of certain discrete tax items. We continue to expect the full-year tax rate to be about 35 percent.

"We're growing sales and profitability despite macroeconomic challenges and have delivered on our financial commitments. The Company continues to generate substantial free cash flow and has a strong balance sheet. Therefore, we are pleased to announce an increase to our quarterly dividend. This action reflects our confidence in Hershey's marketplace position and long-term growth potential.

"I'm very pleased with our quarterly and year-to-date results. We're positioned to carry our marketplace momentum into the fourth quarter and gain market share for the fourth consecutive year. Organic volume trends should continue to improve into the fourth quarter and our Halloween and Holiday seasonal businesses are off to a good start. Additionally, the Brookside acquisition will be about a 1.75 to 2.0 point benefit in 2012. Therefore, we've narrowed our full-year net sales growth outlook and expect it to increase 8 to 9 percent, including the impact of foreign currency exchange rates.

"As the year has progressed, commodity markets have remained volatile. Input costs in 2012 will be higher than last year, although our current forecast indicates that the increase will not be as much as our earlier estimate. Therefore, we now expect adjusted gross margin to increase 120 to 140 basis points. This is greater than our previous forecast of about a 100 to 120 basis point increase. We are planning an additional investment in advertising in the fourth quarter and now expect full-year 2012 advertising expense to increase 13 to 15 percent versus 2011. This is greater than our previous estimate of a low double-digit percentage increase. Additionally, the Brookside acquisition will be slightly accretive for the full year 2012. Therefore, we anticipate adjusted earnings per share-diluted for the full-year to be in the $3.22 to $3.25 range, an increase of 14 to 15 percent versus 2011. This is greater than our previous estimate of a 12 to 14 percent increase.

"As we look to 2013, we assume the economic environment for retailers and consumers will continue to be challenging. However, we believe the investments we've made have resulted in a business model that is more efficient and effective, enabling us to deliver predictable, consistent and achievable marketplace and financial performance. Therefore, we expect 2013 net sales growth to be within our 5 to 7 percent long-term target, including the impact of foreign currency exchange rates, as we continue to focus on core brands and innovation in both the U.S. and key international markets. Additionally, we'll leverage Hershey's scale at retail as we launch Brookside branded products in the broader U.S. food, drug and mass channels. As we stated earlier this year, we remain focused on gross margin. We have solid productivity and cost savings initiatives in place and, while early in the planning cycle, we don't expect input cost inflation next year. Therefore, we expect to achieve gross margin expansion in 2013 and growth in adjusted earnings per share-diluted in the 8 to 10 percent range, consistent with our long-term target," Bilbrey concluded.

Note: In this release, Hershey references income measures that are not in accordance with U.S. generally accepted accounting principles (GAAP) because they exclude business realignment and impairment charges, business acquisition closing and integration costs, certain gains and losses, and non-service-related pension costs. 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 earnings per share-diluted in accordance with GAAP as presented in the Consolidated Statements of Income to non-GAAP financial measures, which exclude business realignment and impairment charges as well as non-service-related pension expense for the third quarter and first nine months in 2012 and 2011, closing and integration costs primarily related to the Brookside acquisition in 2012 and a gain on the sale of trademark licensing rights recorded in the third quarter of 2011.

 Third Quarter Ended
September 30, 2012 October 2, 2011
 Percent of Percent of
In thousands except per share amountsDollars Net SalesDollars Net Sales
 
Gross Profit/Gross Margin$742,75742.5%$680,18141.9%

Project Next Century charges included in cost of sales

5,1589,464
NSRPE included in cost of sales2,308
Acquisition costs included in cost of sales 3,715   
Adjusted non-GAAP Gross Profit/Gross Margin$753,938 43.2%$689,645 42.5%
 
EBIT/EBIT Margin$301,73017.3%$321,11619.8%
Charges included in cost of sales11,1819,464
Project Next Century charges included in SM&A5871,868
NSRPE included in SM&A2,030200
Acquisition costs included in SM&A1,082
Gain on sale of trademark rights included in SM&A(17,034)
Business Realignment & Impairment charges, net 20,055  2,187 
Adjusted non-GAAP EBIT/EBIT Margin$336,665 19.3%$317,801 19.6%
 
Net Income/Net Margin$176,71610.1%$196,69512.1%
Charges included in cost of sales11,1819,464
Charges/(credits) included in SM&A3,699(14,966)
Business Realignment & Impairment charges, net20,0552,187
Tax impact of net charges/(credits) and gain (12,200) 579 
Adjusted non-GAAP Net Income/Net Margin$199,451 11.4%$193,959 11.9%
 
EPS - Diluted$0.77$0.86
Charges included in cost of sales0.030.03
Charges/(credits) included in SM&A0.01(0.05)

Business Realignment & Impairment charges, net

 0.06   
Adjusted non-GAAP EPS - Diluted$0.87 $0.84 
 
 Nine Months Ended
September 30, 2012 October 2, 2011
 Percent of Percent of
In thousands except per share amountsDollars Net SalesDollars Net Sales
 
Gross Profit/Gross Margin$2,104,67443.0%$1,900,68642.1%
Project Next Century charges included in cost of sales38,04123,346
NSRPE included in cost of sales6,927
Acquisition costs included in cost of sales 4,137   
Adjusted non-GAAP Gross Profit/Gross Margin$2,153,779 44.0%$1,924,032 42.6%
 
EBIT/EBIT Margin$858,53117.5%$826,01918.3%
Charges included in cost of sales49,10523,346
Project Next Century charges included in SM&A2,1384,020
NSRPE included in SM&A6,0921,856
Acquisition costs included in SM&A7,894
Gain on sale of trademark rights included in SM&A(17,034)
Business Realignment & Impairment charges/(credits), net 28,204  (5,927)
Adjusted non-GAAP EBIT/EBIT Margin$951,964 19.5%$832,280 18.4%
 
Net Income/Net Margin$511,05210.4%$486,82910.8%
Charges included in cost of sales49,10523,346
Charges/(credits) included in SM&A16,124(11,158)
Business Realignment & Impairment charges/(credits), net28,204(5,927)
Tax impact of net charges (33,631) (2,709)
Adjusted non-GAAP Net Income/Net Margin$570,854 11.7%$490,381 10.9%
 
EPS - Diluted$2.23$2.12
Charges included in cost of sales0.140.07
Charges/(credits) included in SM&A0.05(0.04)
Business Realignment & Impairment charges/(credits), net 0.08  (0.02)
Adjusted non-GAAP EPS - Diluted$2.50 $2.13 
 

In 2011, the Company recorded GAAP charges of $43.4 million, or $0.11 per share-diluted, attributable to Project Next Century and $5.8 million, or $0.02 per share-diluted, related to the Global Supply Chain Transformation (GSCT) program and $2.8 million, or $0.01 per share-diluted, of non-service-related pension expense (NSRPE). Additionally, in the third quarter of 2011, the Company recorded a pre-tax gain on the sale of certain trademark licensing rights of $17.0 million, or $0.05 per share-diluted. In 2012, acquisition closing and integration costs related to the Brookside acquisition are expected to be $0.04 to $0.05 per share-diluted. Additionally, the Company expects to record total GAAP charges of about $80 million to $85 million, or $0.23 to $0.24 per share-diluted, attributable to Project Next Century and $20.8 million, or $0.06 per share-diluted of NSRPE in 2012.

Below is a reconciliation of earnings per share-diluted in accordance with GAAP to non-GAAP adjusted earnings per share-diluted:

  2012 2013
2011(Projected)(Projected)
Reported EPS - Diluted$2.74$2.87 - $2.92$3.37 - $3.49
Acquisition closing & integration charges0.04 - 0.050.01
Gain on sale of trademark licensing rights(0.05)

Total Business Realignment and Impairment Charges

0.130.23 - 0.240.02 - 0.04
NSRPE0.010.060.06
Adjusted EPS - Diluted$2.83$3.22 - $3.25$3.48 - $3.58
 
         Appendix I 
The Hershey Company
Project Next Century
Expected Timing of Costs and Savings ($m)
 
201220132014

 

Realignment Charges:
Cash~$30$10to$15~$5
Non-Cash$35to$40----
 
Project Management and
Start-up Costs~ $15  -   --   -
 
Total Project Next Century Realignment Read Full Story

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