Hershey Reports 30% Net Income Increase

22 October 2009 - The Hershey Company today announced sales and earnings for the third quarter ended October 4, 2009. Consolidated net sales were $1,484,118,000 compared with $1,489,609,000 for the third quarter of 2008. Reported net income for the third quarter of 2009 was $162,023,000 or $0.71 per share-diluted, compared with $124,538,000 or $0.54 per share-diluted, for the comparable period of 2008.

For the third quarters of 2009 and 2008, these results, prepared in accordance with generally accepted accounting principles (GAAP), include net pre-tax charges of $11.0 million and $31.0 million, or $0.02 and $0.10 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 $168,508,000 or $0.73 per share-diluted in the third quarter of 2009, compared with $145,813,000, or $0.64 per share-diluted in the third quarter of 2008, an increase of 14.1 percent in adjusted earnings per share-diluted.

For the first nine months of 2009, consolidated net sales were $3,891,332,000 compared with $3,755,388,000 for the first nine months of 2008. Reported net income for the first nine months of 2009 was $309,215,000 or $1.35 per share-diluted, compared with $229,250,000 or $1.00 per share-diluted, for the first nine months of 2008.

For the first nine months of 2009 and 2008, these results, prepared in accordance with GAAP, include net pre-tax charges of $72.7 million and $101.0 million, or $0.19 and $0.30 per share, respectively. These charges were associated with the GSCT program. Adjusted net income for the first nine months of 2009, which excludes these net charges, was $352,465,000, or $1.54 per share-diluted, compared with $296,680,000 or $1.30 per share-diluted in 2008, an increase of 18.5 percent in adjusted earnings per share-diluted.

Total GSCT program costs to date are $602.7 million. The forecast for total charges related to the program remains $640 million to $665 million and includes the non-cash pension settlement charges discussed in prior quarters and described in Appendix A. In 2009, the Company expects to record total GAAP charges, including possible non-cash pension settlement charges, of about $0.26 to $0.32 per share-diluted, generating expected GAAP earnings of $1.80 to $1.88 per share-diluted (see “Note” for GAAP to adjusted earnings per share-diluted reconciliation).

Third Quarter Performance and Outlook

“I’m pleased with Hershey’s third quarter results, which were driven by core brand growth, solid performance within key retail channels and strong productivity gains,” said David J. West, President and Chief Executive Officer. “Net sales, down slightly in the quarter versus the prior year, were in-line with our expectations as we’re lapping the buy-in related to the August 2008 price increase. Importantly, U.S. retail takeaway for the 12-weeks ended October 3, 2009, in channels that account for over 80 percent of our U.S. retail business, was up 4.8 percent. In the channels measured by syndicated data, U.S. market share was flat for the 12-weeks ended October 3, 2009, and up 0.3 points year-to-date. These results were driven by the investments we have made behind our core brands, including advertising, up about 50 percent in the third quarter.

“Increased levels of in-store programming and merchandising, as well as outstanding execution at the retail level, continue to drive our positive marketplace results in the food, convenience and mass classes of trade. We’ll continue to invest in our brands and business capabilities and anticipate a solid finish to the year.

“As anticipated, in the third quarter, net sales gains from the U.S. pricing action were offset by volume declines associated with pricing elasticity, the impact of unfavorable foreign currency exchange rates and previously communicated 2009 mid-year actions to discontinue certain premium chocolate products. Overall, the investments we made in selling capabilities were successful in the quarter and contributed to consumer acceptance of the new higher everyday, promoted and seasonal price points.

“Adjusted income before interest and income taxes increased 15.8 percent in the third quarter, slightly greater than our expectations, and resulted in a 280 basis point margin improvement. The increase was driven by net price realization, supply chain efficiencies and productivity gains. Offsetting a portion of these gains were higher commodity and employee-related costs, including pension expense. Additionally, our earnings growth, as well as our focus on improving net trading capital, generated strong operating cash flow in the quarter.

“We are working closely with retail customers and are monitoring category and Hershey brand performance given the higher promoted price points of seasonal candy. We’ll make the necessary consumer investments in the coming weeks and months to ensure a healthy category and Halloween and Holiday sell through at the retail level. Halloween-specific seasonal promotions, merchandising and advertising are currently being executed in the marketplace. We are also planning an additional increase in advertising in the fourth quarter and expect full-year 2009 advertising expense to increase about 50 percent versus 2008. This investment will benefit our everyday and seasonal business in the near term and into next year, as well as the December launches of Hershey’s Bliss white chocolate and the introduction of Hershey’s Special Dark, Almond Joy and York Pieces. These Hershey favorites, in a crunchy candy shell, are an expansion of the popular Reese’s Pieces format and will be available in take-home, resealable, standup pouches. These two launches represent the type of close-in innovation on our iconic brands that we believe resonate with consumers in this challenging environment.

“In the fourth quarter, gains from pricing will not be as significant as the Holiday season is smaller than Halloween. Additionally, due to timing, we expect shipments of Valentine’s and Easter seasonal product to be lower in the fourth quarter of 2009 versus 2008. Based on the year-to-date price/volume elasticity trends and brand-building and marketplace initiatives for the remainder of the year, we expect 2009 net sales growth to be within our 3 to 5 percent long-term objective. Over the balance of the year, we’re accelerating domestic and international investments in consumer capabilities, customer insights and category management techniques that will benefit the Company over the long term. Therefore, we anticipate adjusted earnings per share-diluted for the full-year to be in the $2.12 to $2.14 range.

“As we look to 2010, we assume the economic environment for consumers in the U.S. and international markets will continue to be challenging. We’ll continue to focus on and make appropriate investments in our core brands and expect 2010 net sales growth to be within our 3 to 5 percent long-term objective. The sell through at retail for Halloween will be greatly affected by the remaining days in the season and will determine our approach to the upcoming Holiday, Valentine’s and Easter seasons, all of which we expect will be at the higher seasonal promoted price points. While still early, for 2010, given our current views of our investments, marketplace performance and cost structure, we expect growth in adjusted earnings per share-diluted to be within 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 the impairment of 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 $100 million to $120 million, or $0.26 to $0.32 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.

Below is a reconciliation of GAAP and non-GAAP items to the Company’s adjusted earnings per share-diluted outlook:

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