Hershey Announces Q2 Results and Increases Full Year Net Sales and EPS Outlook

July 23, 2009 - The Hershey Company today announced sales and earnings for the second quarter ended July 5, 2009.

Consolidated net sales were $1,171,183,000 compared with $1,105,437,000 for the second quarter of 2008. Net income for the second quarter of 2009 was $71,298,000 or $0.31 per share-diluted, compared with $41,467,000 or $0.18 per share-diluted, for the comparable period of 2008.

For the second quarters of 2009 and 2008, these results, prepared in accordance with generally accepted accounting principles (“GAAP”), include net pre-tax charges of $42.7 million and $39.3 million, or $0.12 and $0.11 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 $97,965,000 or $0.43 per share-diluted in the second quarter of 2009, compared with $66,952,000, or $0.29 per share-diluted in the second quarter of 2008, an increase of 48 percent in adjusted earnings per share-diluted.

For the first six months of 2009, consolidated net sales were $2,407,214,000 compared with $2,265,779,000 for the first six months of 2008. Reported net income for the first six months of 2009 was $147,192,000 or $0.64 per share-diluted, compared with $104,712,000 or $0.46 per share-diluted, for the first six months of 2008.

For the first six months of 2009 and 2008, these results, prepared in accordance with GAAP, include net pre-tax charges of $61.7 million and $69.9 million, or $0.17 and $0.20 per share, respectively. These charges were associated with the GSCT program. Adjusted net income for the first six months of 2009, which excludes these net charges, was $183,957,000, or $0.81 per share-diluted, compared with $150,867,000 or $0.66 per share-diluted in 2008, an increase of 23 percent in adjusted earnings per share-diluted.

Total GSCT program costs to date are $591.7 million. The forecast for total charges related to the program has been narrowed and is now expected to be $640 million to $665 million and includes $40 million to $65 million of non-cash pension settlement charges, discussed in prior quarters and described in Appendix A. For 2009, total GAAP charges related to the GSCT program are expected to be $85 million to $120 million, including non-cash pension settlement charges of $40 million to $50 million.

Second Quarter Performance and Outlook

“Hershey’s second quarter results reflect continued momentum in the marketplace,” said David J. West, President and Chief Executive Officer. “Investments in our core brands and retail selling capabilities have resulted in strong gains in net sales, profit and U.S. market share. Net sales increased by 5.9 percent driven by the U.S. pricing action announced in August 2008, partially offset by volume declines associated with pricing elasticity and the impact of unfavorable foreign currency exchange rates. Core brands are responding to the investments in advertising, in-store programming and merchandising. In the second quarter, advertising increased 46 percent as we were on air supporting our core brands, the Easter season and the kick-off of our annual S’mores promotion.

“U.S. retail takeaway for the 24-weeks ended June 14, 2009, which along with the comparable period in 2008 encompasses each year’s entire Easter season results, in channels that account for over 80 percent of our retail business, was up 8.9 percent. In the channels measured by syndicated data, U.S. market share in the second quarter and year-to-date periods increased an identical 0.5 points.

“Performance was balanced across all classes of trade. Where we have focused resources, particularly in the food and convenience channels, results have exceeded our expectations. In the convenience store channel, Hershey has outpaced category retail takeaway for 11 consecutive four-week periods. In the second quarter, convenience store retail takeaway was up mid-single digits.

“Adjusted income before interest and income taxes increased 19.5 percent in the second quarter, resulting in a 150 basis point margin improvement, driven by net price realization; volume trends that were better than our initial expectations, particularly for our standard and king-size bars; supply chain efficiencies; and productivity gains. Offsetting a portion of these gains were higher commodity and energy costs, employee-related costs, including pension expense, and greater levels of consumer investment spending.

“Despite the challenging economic environment, we have maintained strong momentum. As we enter the third quarter, we are well-positioned to deliver on our financial objectives. Brand-building initiatives are having the desired effect and have helped to mitigate volume declines due to price elasticity. We expect consumers to see markedly higher promoted price points in the upcoming Halloween and Holiday seasons, which represent approximately one-third of our U.S. revenues in the second half of the year. Additionally, in the fourth quarter we begin to lap the August 2008 every day price increase. We intend to make the necessary consumer investments to ensure that the category continues to perform well in the second half of the year and are closely monitoring consumer and competitor response to our pricing models. Therefore, we are planning additional increases in advertising for the full year and expect advertising expense to increase 40 to 45 percent in 2009. This investment will benefit the business in both the near term and next year. As a result, we expect full year net sales growth to be within our 3 to 5 percent long-term objective.

“While our year-over-year commodity cost increase remains significant, it will be less than our initial estimate of $175 million. We have visibility into most of the cost structure, except costs for dairy products which remain lower than our initial estimates. While there is not a developed futures market for dairy, over the remainder of the year we do not expect material price inflation for dairy products. Our first-half performance has given us the flexibility to increase full-year brand-building advertising. We’ll also make further investments in category management and global go-to-market capabilities that will benefit the Company over the long term. Considering our strong first-half performance, a good start to the third quarter, solid seasonal programming and, based on year-to-date price/volume elasticity trends, we now expect the increase in adjusted earnings per share-diluted for the full year to be slightly above 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 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 $85 million to $120 million, or $0.24 to $0.33 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.

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) (“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 six months of 2009 totaled approximately $31 million.

In addition to the settlement charges reflected above, incremental SFAS No. 88 pension settlement charges of $15 million to $34 million are included in the total GSCT program estimates based upon the current trends of employee withdrawals, with $15 million to $20 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.