HERSHEY, Pa., July 26, 2011 — The Hershey Company (NYSE: HSY) today announced sales and earnings for the second quarter ended July 3, 2011. Consolidated net sales were $1,325,171,000 compared with $1,233,242,000 for the second quarter of 2010. Reported net income for the second quarter of 2011 was $130,019,000 or $0.56 per share-diluted, compared with $46,723,000 or $0.20 per share-diluted for the comparable period of 2010.
As described in the Note, for the second quarter of 2011, these results, prepared in accordance with generally accepted accounting principles (GAAP), include credits related to the Project Next Century program announced in June 2010. In the second quarter of 2011, results included pre-tax charges of $9.4 million, or $0.02 per share-diluted, which were more than offset by an adjustment of $11.2 million, or $0.02 per share-diluted, resulting in a net credit of $1.8 million due to a reduction of previous estimates. In the second quarter of 2010, results included net pre-tax
charges of $86.2 million, or $0.31 per share-diluted, comprised of Project Next Century costs of $41.5 million, or $0.11 per share-diluted, and a non-cash goodwill impairment charge of $44.7 million, or $0.20 per share-diluted, related to the Godrej Hershey Ltd. joint venture in India. As described in the Note, adjusted net income, which excludes these net charges, was $129,040,000 or $0.56 per share-diluted in the second quarter of 2011, compared with $117,047,000 or $0.51 per share-diluted in the second quarter of 2010, an increase of 9.8 percent in adjusted earnings per share-diluted.
For the first six months of 2011, consolidated net sales were $2,889,394,000 compared with $2,641,085,000 for the first six months of 2010. Reported net income for the first six months of 2011 was $290,134,000 or $1.26 per share-diluted, compared with $194,117,000 or $0.84 per share-diluted, for the first six months of 2010.
As described in the Note, for the first six months of 2011 and 2010, these results, prepared in accordance with GAAP, include net pre-tax charges of $7.9 million and $86.2 million, or $0.02 and $0.31 per share-diluted, respectively. The 2011 charges were associated with the Project Next Century program and the 2010 charges were associated with this program as well as the previously mentioned non-cash goodwill impairment charge. As described in the Note, adjusted net income for the first six months of 2011, which excludes these net charges, was $295,272,000, or $1.28 per share-diluted, compared with $264,441,000 or $1.15 per share-diluted in 2010, an increase of 11.3 percent in adjusted earnings per share-diluted.
The forecast for total pre-tax GAAP charges and non-recurring project implementation costs related to the Project Next Century program has been narrowed, due to lowering of previous estimates, and is now expected to be $140 million to $160 million. In 2011, reported gross margin, reported income before interest and income taxes (EBIT) margin and reported earnings per share-diluted will be impacted by charges associated with Project Next Century. Therefore, we expect reported earnings per share-diluted, including business realignment and impairment charges of $0.11 to $0.12 per share-diluted, to be in the $2.67 to $2.71 range. The expected timing of events and estimated costs and savings are included in Appendix I attached to this press release.
Second Quarter Performance and Outlook
“I’m pleased with Hershey’s second quarter results as solid marketplace momentum continued, resulting in strong overall financial performance,” said John P. Bilbrey, President and Chief Executive Officer. “Our business model and strategy to invest in core brands, disciplined innovation, Insights Driven Performance (IDP) and consumer capabilities remains effective and is sustainable. We’ll continue with this disciplined approach and build on these initiatives, in both domestic and international markets, as it will enable the Company to consistently meet its net sales and earnings objectives in the future.
“In the second quarter, Hershey’s net sales increased 7.5 percent, somewhat greater than our initial expectations, driven by volume growth, primarily new products, in both U.S. and international markets, resulting in greater levels of in-store merchandising and programming versus our estimates, and earlier than expected shipments to customers due to a change in the timing of their promotional calendars. Net price realization, primarily in the U.S., was a 3 point benefit, while foreign currency exchange rates added about a half point.
“Through the first-half of the year, the U.S. CMG – candy, mint and gum – category and Hershey marketplace performance have outpaced the historical category growth rate of about 3 to 4 percent. Specifically, Hershey U.S. CMG retail takeaway for the 28 weeks ended July 9, 2011, which along with the comparable period in 2010 encompasses each year’s entire Easter season results, in channels that account for over 80 percent of our retail business, was up 8.1 percent. In the channels measured by syndicated data, U.S. market share increased 0.9 points. Our marketplace performance reflects a longer Easter season and solid sell through that resulted in a 1.0 point market share gain in this season, successful new products launches, as well as continued momentum in many of our everyday core chocolate and sweets and refreshment businesses. Brand strength was attributable to increased advertising and retail effectiveness. In the second quarter, advertising expense increased about 8 percent versus the year ago period, in line with the mid-single digit percentage increase forecasted for the full year.
“Second quarter adjusted EBIT margin was in line with last year as adjusted selling, marketing and administrative (SM&A) costs – excluding advertising – declined as a percentage of sales versus last year. Adjusted gross margin declined in the second quarter as net price realization and
supply chain efficiencies and productivity were more than offset by higher input costs. As we’ve previously stated, input costs will be higher in 2011, however, there is no change to our full-year inflation outlook. We continue to make good progress against our supply chain initiatives and Project Next Century is on track. We’ll deliver meaningful cost savings over the remainder of the year and estimate that full-year adjusted gross margin will be about the same as last year.
“As we enter the third quarter, we are well-positioned to continue to increase U.S. market share and deliver on our financial objectives. In the second half of the year, consumers will begin to see higher retail price points on our everyday instant consumable and take-home packaged candy. Therefore, over the remainder of the year, we expect U.S. CMG category growth to be within the historical 3 to 4 percent growth rate. We’ll closely monitor category performance, work with our key retail partners, and make necessary consumer investments to ensure that the category continues to perform well in the second half of the year and into 2012. As stated earlier, in 2011, we expect advertising expense to increase mid-single digits on a percentage basis versus last year, supporting new product launches and core brands in both the U.S. and international markets. As a result, we expect 2011 net sales, including the impact of foreign currency exchange rates, to be greater than the Company’s long-term 3 to 5 percent objective and increase around 6 percent. For the full year, we expect adjusted SM&A – excluding advertising – to increase, but at a rate less than net sales. Combined with our strong first-half performance, solid in-store merchandising and seasonal programming, we now expect 2011 earnings per share-diluted to be greater than the Company’s long-term 6 to 8 percent objective and increase around 10 percent for the full year,” Bilbrey concluded.
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 2011 and 2010 associated with Project Next Century and a non-cash goodwill impairment charge recorded in 2010.
