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 Business Wire HERSHEY, Pa. -- October 25, 2012 The Hershey Company (NYSE: 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 Dollars Net Sales Dollars Net Sales share amounts Gross Profit/Gross Margin $ 742,757 42.5% $ 680,181 41.9% Project Next Century charges included in cost 5,158 9,464 of sales NSRPE included in cost of 2,308 — sales Acquisition costs 3,715 — included in cost of sales Adjusted non-GAAP Gross $ 753,938 43.2% $ 689,645 42.5% Profit/Gross Margin EBIT/EBIT Margin $ 301,730 17.3% $ 321,116 19.8% Charges included in cost 11,181 9,464 of sales Project Next Century 587 1,868 charges included in SM&A NSRPE included in SM&A 2,030 200 Acquisition costs 1,082 — included in SM&A Gain on sale of trademark — (17,034 ) rights included in SM&A Business Realignment & 20,055 2,187 Impairment charges, net Adjusted non-GAAP $ 336,665 19.3% $ 317,801 19.6% EBIT/EBIT Margin Net Income/Net Margin $ 176,716 10.1% $ 196,695 12.1% Charges included in cost 11,181 9,464 of sales Charges/(credits) 3,699 (14,966 ) included in SM&A Business Realignment & 20,055 2,187 Impairment charges, net Tax impact of net charges/(credits) and (12,200 ) 579 gain Adjusted non-GAAP Net $ 199,451 11.4% $ 193,959 11.9% Income/Net Margin EPS - Diluted $ 0.77 $ 0.86 Charges included in cost 0.03 0.03 of sales Charges/(credits) 0.01 (0.05 ) included in SM&A Business Realignment & 0.06 — Impairment charges, net Adjusted non-GAAP EPS - $ 0.87 $ 0.84 Diluted Nine Months Ended September 30, 2012 October 2, 2011 Percent Percent of of In thousands except per Dollars Net Sales Dollars Net share amounts Sales Gross Profit/Gross $ 2,104,674 43.0% $ 1,900,686 42.1% Margin Project Next Century charges included in cost 38,041 23,346 of sales NSRPE included in cost 6,927 — of sales Acquisition costs included in cost of 4,137 — sales Adjusted non-GAAP Gross $ 2,153,779 44.0% $ 1,924,032 42.6% Profit/Gross Margin EBIT/EBIT Margin $ 858,531 17.5% $ 826,019 18.3% Charges included in cost 49,105 23,346 of sales Project Next Century 2,138 4,020 charges included in SM&A NSRPE included in SM&A 6,092 1,856 Acquisition costs 7,894 — included in SM&A Gain on sale of trademark rights — (17,034 ) included in SM&A Business Realignment & Impairment 28,204 (5,927 ) charges/(credits), net Adjusted non-GAAP $ 951,964 19.5% $ 832,280 18.4% EBIT/EBIT Margin Net Income/Net Margin $ 511,052 10.4% $ 486,829 10.8% Charges included in cost 49,105 23,346 of sales Charges/(credits) 16,124 (11,158 ) included in SM&A Business Realignment & Impairment 28,204 (5,927 ) charges/(credits), net Tax impact of net (33,631 ) (2,709 ) charges Adjusted non-GAAP Net $ 570,854 11.7% $ 490,381 10.9% Income/Net Margin EPS - Diluted $ 2.23 $ 2.12 Charges included in cost 0.14 0.07 of sales Charges/(credits) 0.05 (0.04 ) included in SM&A Business Realignment & Impairment 0.08 (0.02 ) charges/(credits), net Adjusted non-GAAP EPS - $ 2.50 $ 2.13 Diluted 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 — 0.04 - 0.05 0.01 charges Gain on sale of trademark licensing (0.05) — — rights Total Business Realignment and 0.13 0.23 - 0.24 0.02 - 0.04 Impairment Charges NSRPE 0.01 0.06 0.06 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) 2012 2013 2014 Realignment Charges: Cash ~ $30 $10 to $15 ~ $5 Non-Cash $35 to $40 - - - - Project Management and Start-up Costs ~ $15 - - - - Total Project Next Century Realignment Charges & Costs $80 to $85 $10 to $15 ~ $5 Project Next Century $65 to $70 $15 to $20 - - Cap-Ex Project Next Century projected savings: Annual $20 to $25 $25 to $30 $5 to $10 Cumulative $35 to $40 $60 to $70 $65 to $80 Safe Harbor Statement This release contains statements that are forward-looking. These statements are made based upon current expectations that are subject to risk and uncertainty. Because actual results may differ materially from those contained in the forward-looking statements, you should not place undue reliance on the forward-looking statements when deciding whether to buy, sell or hold the Company's securities. Factors that could cause results to differ materially include, but are not limited to: issues or concerns related to the quality and safety of our products, ingredients or packaging; changes in raw material and other costs; selling price increases, including volume declines associated with pricing elasticity; market demand for our new and existing products; increased marketplace competition; disruption to our supply chain; failure to successfully identify, execute and integrate acquisitions, divestitures and joint ventures; changes in governmental laws and regulations, including taxes; political, economic, and/or financial market conditions; risks and uncertainties related to our international operations and related growth targets; disruptions, failures or security breaches of our information technology infrastructure; the impact of future developments related to the investigation by government regulators of alleged pricing practices by members of the confectionery industry, including risks of subsequent litigation or further government action; pension cost factors, such as actuarial assumptions, market performance and employee retirement decisions and funding requirements; our ability to achieve ongoing annual savings from supply chain realignment initiatives; and such other matters as discussed in our Annual Report on Form 10-K for 2011. All information in this press release is as of October 25, 2012. The Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations. Live Web Cast As previously announced, the Company will hold a conference call with analysts today at 8:30 a.m. Eastern Time. The conference call will be web cast live via Hershey's corporate website www.thehersheycompany.com. Please go to the Investor Relations section of the website for further details. The Hershey Company Summary of Consolidated Statements of Income for the periods ended September 30, 2012 and October 2, 2011 (in thousands except per share amounts) Third Quarter Nine Months 2012 2011 2012 2011 Net Sales $ 1,746,709 $ 1,624,249 $ 4,893,217 $ 4,513,643 Costs and Expenses: Cost of Sales 1,003,952 944,068 2,788,543 2,612,957 Selling, Marketing and 420,972 356,878 1,217,939 1,080,594 Administrative Business Realignment and Impairment 20,055 2,187 28,204 (5,927 ) Charges/(Credits), net Total Costs and 1,444,979 1,303,133 4,034,686 3,687,624 Expenses Income Before Interest and 301,730 321,116 858,531 826,019 Income Taxes (EBIT) Interest Expense, 24,535 23,041 72,903 70,869 net Income Before 277,195 298,075 785,628 755,150 Income Taxes Provision for 100,479 101,380 274,576 268,321 Income Taxes Net Income $ 176,716 $ 196,695 $ 511,052 $ 486,829 Net Income - Basic - $ 0.80 $ 0.89 $ 2.33 $ 2.20 Per Share Common - - Basic Class $ 0.73 $ 0.81 $ 2.11 $ 2.00 B - - $ 0.77 $ 0.86 $ 2.23 $ 2.12 Diluted Common Shares - Basic - 164,686 165,917 164,766 166,223 Outstanding Common - - Basic Class 60,630 60,632 60,630 60,649 B - - 228,608 229,849 228,701 230,114 Diluted Common Key Margins Gross 42.5 % 41.9 % 43.0 % 42.1 % Margin EBIT Margin 17.3 % 19.8 % 17.5 % 18.3 % Net Margin 10.1 % 12.1 % 10.4 % 10.8 % The Hershey Company Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (in thousands of dollars) Assets 2012 2011 Cash and Cash Equivalents $ 466,235 $ 693,686 Accounts Receivable - Trade (Net) 649,328 399,499 Deferred Income Taxes 103,438 136,861 Inventories 726,492 648,953 Prepaid Expenses and Other 190,462 167,559 Total Current Assets 2,135,955 2,046,558 Net Plant and Property 1,618,178 1,559,717 Goodwill 594,854 516,745 Other Intangibles 220,223 111,913 Deferred Income Taxes 13,727 38,544 Other Assets 154,845 138,722 Total Assets $ 4,737,782 $ 4,412,199 Liabilities and Stockholders' Equity Loans Payable $ 460,081 $ 139,673 Accounts Payable 435,283 420,017 Accrued Liabilities 644,959 612,186 Taxes Payable 12,631 1,899 Total Current Liabilities 1,552,954 1,173,775 Long-Term Debt 1,515,757 1,748,500 Other Long-Term Liabilities 636,339 617,276 Deferred Income Taxes 35,770 — Total Liabilities 3,740,820 3,539,551 Total Stockholders' Equity 996,962 872,648 Total Liabilities and Stockholders' Equity $ 4,737,782 $ 4,412,199 Contact: The Hershey Company FINANCIAL CONTACT: Mark Pogharian, 717-534-7556 or MEDIA CONTACT: Leigh Horner, 717-508-1247
Hershey Announces Third Quarter Results; Updates Outlook for 2012
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