HERSHEY, Pa., October 21, 2010 — The Hershey Company (NYSE: HSY) today announced sales and earnings for the third quarter ended October 3, 2010. Consolidated net sales were $1,547,115,000 compared with $1,484,118,000 for the third quarter of 2009. Net income for the third quarter of 2010 was $180,169,000 or $0.78 per share-diluted, compared with $162,023,000 or $0.71 per share-diluted, for the comparable period of 2009.
As described in the attached Note, for the third quarter of 2010, these results, prepared in accordance with generally accepted accounting principles (GAAP), included net pre-tax charges of $4.5 million, or $0.01 per share-diluted, which were related to the Project Next Century program announced in June 2010. For the third quarter of 2009, GAAP results included net pre-tax charges of $11.0 million, or $0.02 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 $182,918,000 or $0.79 per share-diluted in the third quarter of 2010, compared with $168,508,000, or $0.73 per share-
diluted in the third quarter of 2009, an increase of 8.2 percent in adjusted earnings per share-diluted.
For the first nine months of 2010, consolidated net sales were $4,188,200,000 compared with $3,891,332,000 for the first nine months of 2009. Reported net income for the first nine months of 2010 was $374,286,000 or $1.63 per share-diluted, compared with $309,215,000 or $1.35 per share-diluted, for the first nine months of 2009.
As described in the Note, for the first nine months of 2010 and 2009, these results, prepared in accordance with GAAP, included net pre-tax charges of $90.7 million and $72.7 million, or $0.31 and $0.19 per share, respectively. The 2010 charges were associated with the Project Next Century program and a non-cash goodwill impairment charge recorded in the second quarter, while the 2009 charges were related to the GSCT program completed in December 2009. As described in the Note, adjusted net income for the first nine months of 2010, which excludes these net charges, was $447,359,000, or $1.94 per share-diluted, compared with $352,465,000 or $1.54 per share-diluted in 2009, an increase of 26 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 Project Next Century and the previously mentioned non-cash goodwill impairment charge. 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 $2.09 to $2.16 range. In 2011, reported gross margin and reported EBIT margin will be impacted by Project Next Century. As a result, reported earnings per share-diluted, including restructuring charges of $0.09 to $0.12 per share-diluted, is expected to be in the $2.55 to $2.67 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 expected timing of events and estimated costs and savings is included in Appendix I attached to this press release.
Third Quarter Performance and Outlook
“Hershey maintained its momentum in the third quarter, resulting in solid overall performance,” said David J. West, President and Chief Executive Officer. “While global economic uncertainty and challenges persist, confectionery remains one of the better-performing snack categories. In the third quarter, Hershey’s net sales increased 4.2 percent, driven primarily by U.S. core brand volume growth, including new products, and growth in our emerging market businesses, which continues to increase at rates greater than the Company’s overall long-term target. As we exited the quarter, the timing of some seasonal shipments dampened third quarter net sales by approximately one point. However, these shipments occurred in early October. Therefore, our fourth quarter net sales will b e greater than our previous estimate, still resulting in full-year net sales growth of about 7 percent. Our investments in core brands and improved inventory management have resulted in lower levels of customer returns and markdown allowances. This, combined with the benefit of a price increase in Canada implemented in July, 2009, generated net price realization which contributed about one point to net sales growth in the third quarter. Additionally, foreign currency exchange rates were an approximate 0.5 point benefit.
“Hershey U.S. CMG - candy, mint and gum - retail takeaway in the third quarter, in channels that account for over 80 percent of our retail business continues to grow within the historical growth rate of the category. In the channels measured by syndicated data, Hershey U.S. CMG market share is up for the year-to-date period and flat in third quarter. Our overall marketplace performance throughout the year has been relatively in-line with our expectations.
“Third quarter adjusted EBIT margin increased due to improvements in adjusted gross margin. The adjusted gross margin gain was driven by favorable supply chain efficiencies, including greater productivity, favorable sales mix and lower levels of obsolescence. Input costs were about flat in the quarter and favorable versus our previous estimate. Offsetting a portion of the adjusted gross margin gain were higher marketing and selling expenses, including advertising, up 46 percent; spending on the implementation of go-to-market strategies; and other employee-related expenses.
“We are executing Halloween-specific seasonal promotions, merchandising and advertising which we believe will ensure solid category sell through at the retail level. While Halloween is
off to a good start, we’ll continue to work closely with key customers over the next 10 days to monitor consumer reaction and shopping behavior. Our objectives for the remainder of 2010 are to maintain Hershey’s marketplace momentum as well as ensuring the successful launch of our new products, including Hershey’s Drops and Reese’s Mini’s.
“I’m very pleased with our quarterly and year-to-date results. We’re growing sales and improving margins despite macroeconomic challenges. Our financial and marketplace performance has enabled us to be flexible in the timing of further investments in the fourth quarter related to advertising, Insights Driven Performance and additional go-to-market strategies in both the U.S. and other markets around the world. Some of these fourth quarter increases are incremental and were not included in our previous estimates. Similar to last year, we believe these additional investments will enable us to get off to a good start in 2011. Specifically, advertising expense for the full year is expected to increase 50 to 60 percent versus prior year. This is greater than our previous estimate of a 45 to 50 percent increase. Additionally, we still believe we’ll see some shifting of 2011 seasonal 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. As a result, we reiterate our full-year 2010 net sales outlook of about a 7 percent increase, including an approximate one-point benefit from foreign currency exchange rates. For the full year, we have good visibility into our cost structure, and while input costs will be higher in the fourth quarter, we expect adjusted gross margin and adjusted EBIT margin to expand for the full year. Therefore, we have increased our full-year adjusted earnings per share-diluted outlook and expect it to be in the $2.52 to $2.56 range, an increase of mid-to-high-teens on a percentage basis versus 2009, and greater than our previously estimated range of $2.47 t o $2.52.
“As we look to 2011, we’ll continue to focus on our core brands and leverage Hershey’s scale at retail. Advertising expense is expected to increase in 2011, however, the year-over-year percentage increase will be lower than in the previous two years. As a result, our current expectation for 2011 is for net sales growth to be within our 3 to 5 percent long-term target. While we anticipate higher input costs in 2011, productivity and cost savings initiatives are in place to help mitigate the impact. Therefore, we expect 2011 growth in adjusted earnings per share-diluted to be in the 6 to 8 percent range, consistent with our current long-term target.”
Note: In this release, Hershey references income measures which are not in accordance with U.S. generally accepted accounting principles (GAAP) because they exclude business realignment and impairment charges.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 results in accordance with GAAP as presented in the Consolidated Statements of Income to non-GAAP financial measures which exclude business realignment and impairment charges in 2010 associated with Project Next Century and the goodwill impairment charge for Godrej Hershey Ltd. and charges in 2009 related to the GSCT program.
