Hershey Announces Third Quarter Results; Updates Outlook for 2012

  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
 
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