The Globe and Mail

Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Globe Investor

News Sources

Take control of your investments with the latest investing news and analysis

Press release from Business Wire

Hershey Announces Second Quarter Results; Updates EPS Outlook for 2012

Thursday, July 26, 2012

Hershey Announces Second Quarter Results; Updates EPS Outlook for 201207:00 EDT Thursday, July 26, 2012 HERSHEY, Pa. (Business Wire) -- The Hershey Company (NYSE: HSY): ● Net sales increase 6.7%● Earnings per share-diluted of $0.59 as reported and $0.66 adjusted● Full year net sales growth reaffirmed; expected to increase 7-9%, including Brookside acquisition● Outlook for 2012 reported and adjusted earnings per share-diluted updated:- Reported earnings per share-diluted expected to be $2.88 to $2.98- Adjusted earnings per share-diluted expected to increase 12-14%, greater than the previous estimate of 10-12% The Hershey Company (NYSE: HSY) today announced sales and earnings for the second quarter ended July 1, 2012. Consolidated net sales were $1,414,444,000 compared with $1,325,171,000 for the second quarter of 2011. Reported net income for the second quarter of 2012 was $135,685,000 or $0.59 per share-diluted, compared with $130,019,000 or $0.56 per share-diluted for the comparable period of 2011. 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) of $24.9 million, or $0.07 per share-diluted. The majority of these charges, $19.0 million, or $0.05 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 $1.3 million, or $0.01 per share-diluted, and NSRPE was $4.5 million, or $0.01 per share-diluted. For the second quarter of 2011, results included Project Next Century 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. Pre-tax charges for NSRPE were $0.4 million for the second quarter of 2011. Adjusted net income, which excludes these net charges, was $151,493,000 or $0.66 per share-diluted in the second quarter of 2012, compared with $129,288,000 or $0.56 per share-diluted in the second quarter of 2011, an increase of 17.9 percent in adjusted earnings per share-diluted. See the Note for a reconciliation of GAAP and non-GAAP items. For the first six months of 2012, consolidated net sales were $3,146,508,000, compared with $2,889,394,000 for the first six months of 2011. Reported net income for the first six months of 2012 was $334,336,000 or $1.46 per share-diluted, compared with $290,134,000 or $1.26 per share-diluted, for the first six months of 2011. As described in the Note, for the first six months of 2012 and 2011, these results, prepared in accordance with GAAP, included net pre-tax charges of $58.5 million and $9.6 million, or $0.16 and $0.03 per share-diluted, respectively. Charges associated with the Project Next Century program for the first six months in 2012 and 2011 were $42.6 million and $7.9 million, or $0.12 and $0.02 per share-diluted, respectively. NSRPE for the first six months in 2012 and 2011 were $8.7 million and $1.7 million, or $0.02 and $0.01 per share-diluted, respectively. Additionally, for the first six months in 2012, acquisition and integration costs related to the Brookside acquisition were $7.2 million, or $0.02 per share-diluted. As described in the Note, adjusted net income for the first six months of 2012, which excludes these net charges, was $371,403,000, or $1.62 per share-diluted, compared with $296,422,000, or $1.29 per share-diluted in 2011, an increase of 25.6 percent in adjusted earnings per share-diluted. In 2012, the Company expects reported earnings per share-diluted of $2.88 to $2.98. These results, prepared in accordance with GAAP, include business realignment charges, NSRPE and acquisition and integration costs of $0.25 to $0.29 per share-diluted. The majority of these charges, $0.16 to $0.19 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 $0.05 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 130 basis points. The forecast for total pre-tax GAAP charges and non-recurring project implementation costs related to the Project Next Century program has been increased from a range of $150 million to $160 million to a range of $160 million to $180 million, due to revised estimates of possible higher disposition costs for the Company's century-old facility at 19 East Chocolate Avenue in Hershey, Pennsylvania. The expected timing of events and estimated costs and savings is included in Appendix I, attached to this press release. Second Quarter Performance and Outlook “The Hershey Company reported another quarter of solid marketplace and financial results,” said John P. Bilbrey, President and Chief Executive Officer. “The investments we have made in our business over the last few years have enabled us to deliver predictable, profitable and sustainable growth, despite the challenging global macroeconomic conditions that continue to exist. In the second quarter, Hershey's net sales increased 6.7 percent. Net price realization was a 6.6 point benefit, slightly better than we expected, and volume, excluding the Brookside acquisition, was off 1.1 points due to volume elasticity associated with the pricing action taken last year. The Brookside acquisition was a 2.4 point benefit in the quarter and foreign currency exchange rate a 1.2 point headwind. Over the remainder of the year, excluding the benefit of the Brookside acquisition, we expect the organic net sales contribution from net price realization and volume to be more balanced. “Through the first half of the year, the U.S. candy, mint and gum (CMG) category and Hershey marketplace performance has outpaced the historical category growth rate. Specifically, Hershey U.S. CMG retail takeaway for the 24 weeks ended June 16, 2012, in the expanded All Outlet Combined plus convenience store channels (xAOC+C), which accounts for approximately 90 percent of our U.S. retail business, was up 6.1 percent, resulting in a market share gain of 0.3 points. Our marketplace performance reflects a good Easter season sell through that resulted in a 0.9 point market share gain in this season, successful new product launches, strong performance by our sweets and refreshment product line and a sequential improvement in everyday chocolate. Results have been solid where we have focused resources, with Hershey U.S. CMG retail takeaway and market share up across virtually all measured channels. In the second quarter, advertising expense increased about 10 percent versus the year ago period. For the first six months of 2012, advertising is up about 12 percent versus 2011 and in line with the low-double digits percentage increase forecasted for the full year. “Input costs were higher in the second quarter and in line with our estimates. Despite this increase, gross margin expanded due to net price realization, supply chain efficiencies and productivity gains. As expected, selling, marketing and administrative (SM&A) expenses, excluding advertising, increased mid-teens on a percentage basis versus last year. Over the remainder of the year we expect SM&A expenses, excluding advertising, to increase at about the same rate as we continue to make planned investments in marketing and go-to-market capabilities in both the U.S. and international markets. Additionally, certain tax items were concluded in the second quarter that we thought would occur in the second half of the year. We continue to expect the full-year tax rate to be about 35 percent. “As we enter the third quarter, we are well-positioned to deliver on our financial objectives. We have good visibility into the orders for the upcoming Halloween and Holiday seasons where consumers will see higher price points. Seasonal specific advertising in the second half of the year will be greater than last year. For the full-year 2012, we expect advertising to increase low-double digits on a percentage basis versus the prior year, supporting seasons, new product launches and core brands in both the U.S. and international markets. We'll also continue with the distribution and rollout of Jolly Rancher Crunch ‘N Chew candy, Ice Breakers Duo mints, Rolo Minis and Hershey's Simple Pleasures chocolates. Brand building initiatives are having the desired effect and have helped mitigate volume declines due to price elasticity. Our plans are on track and we expect organic volume growth to accelerate in the second half of the year and be up for the full-year 2012. Therefore, including estimated net sales of the Brookside acquisition, about a 1.5 point benefit at current exchange rates, we expect full-year net sales growth of about 7 to 9 percent, including the impact of foreign currency exchange rates. “We continue to expect that input costs in 2012 will be higher than last year and there is no material change to our full-year inflation outlook. As previously mentioned, due to greater net price realization we now expect adjusted gross margin to increase 100 to 120 basis points. This is greater than our previous estimate of about a 90 to 100 basis point increase. As previously mentioned, SM&A costs, including advertising, are on track. As a result, we expect full-year adjusted earnings per share-diluted growth of 12 to 14 percent. This is greater than our previous estimate of a 10 to 12 percent increase,” 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 second quarter and first six 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.   Second Quarter EndedJuly 1, 2012   July 3, 2011   Percent   Percentof Netof NetIn thousands except per share amounts   Dollars   Sales     Dollars   Sales   Gross Profit/Gross Margin $ 618,521 43.7 % $ 564,320 42.6 % Project Next Century charges included in cost of sales 13,429 7,023 NSRPE included in cost of sales 2,443 — Acquisition (credits) costs included in cost of sales   (166 )   —   Adjusted non-GAAP Gross Profit/Gross Margin $ 634,227   44.8 % $ 571,343   43.1 %   EBIT/EBIT Margin $ 222,271 15.7 % $ 228,354 17.2 % Charges included in cost of sales 15,706 7,023 Project Next Century charges included in SM&A 738 1,138 NSRPE included in SM&A 2,087 357 Acquisition costs included in SM&A 1,481 — Business Realignment & Impairment charges/(credits), net   4,845     (9,952 ) Adjusted non-GAAP EBIT/EBIT Margin $ 247,128   17.5 % $ 226,920   17.1 %   Net Income/Net Margin $ 135,685 9.6 % $ 130,019 9.8 % Charges included in cost of sales 15,706 7,023 Charges included in SM&A 4,306 1,495 Business Realignment & Impairment charges/(credits), net 4,845 (9,952 ) Tax impact of net charges/(credits)   (9,049 )   703   Adjusted non-GAAP Net Income/Net Margin $ 151,493   10.7 % $ 129,288   9.8 %   EPS-Diluted $ 0.59 $ 0.56 Charges included in cost of sales 0.05 0.02 Charges included in SM&A 0.01 — Business Realignment & Impairment charges/(credits), net   0.01     (0.02 ) Adjusted non-GAAP EPS-Diluted $ 0.66   $ 0.56     Six Months EndedJuly 1, 2012   July 3, 2011   Percent   Percentof Netof NetIn thousands except per share amounts   Dollars   Sales     Dollars   Sales   Gross Profit/Gross Margin $ 1,361,917 43.3 % $ 1,220,505 42.2 % Project Next Century charges included in cost of sales 32,883 13,882 NSRPE included in cost of sales 4,619 — Acquisition costs included in cost of sales   422     —   Adjusted non-GAAP Gross Profit/Gross Margin $ 1,399,841   44.5 % $ 1,234,387   42.7 %   EBIT/EBIT Margin $ 556,801 17.7 % $ 504,903 17.5 % Charges included in cost of sales 37,924 13,882 Project Next Century charges included in SM&A 1,551 2,152 NSRPE included in SM&A 4,062 1,656 Acquisition costs included in SM&A 6,812 — Business Realignment & Impairment charges/(credits), net   8,149     (8,114 ) Adjusted non-GAAP EBIT/EBIT Margin $ 615,299   19.6 % $ 514,479   17.8 %   Net Income/Net Margin $ 334,336 10.6 % $ 290,134 10.0 % Charges included in cost of sales 37,924 13,882 Charges included in SM&A 12,425 3,808 Business Realignment & Impairment charges/(credits), net 8,149 (8,114 ) Tax impact of net charges   (21,431 )   (3,288 ) Adjusted non-GAAP Net Income/Net Margin $ 371,403   11.8 % $ 296,422   10.3 %   EPS-Diluted $ 1.46 $ 1.26 Charges included in cost of sales 0.10 0.04 Charges included in SM&A 0.04 0.01 Business Realignment & Impairment charges/(credits), net   0.02     (0.02 ) Adjusted non-GAAP EPS-Diluted $ 1.62   $ 1.29     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 $55 million to $65 million, or $0.16 to $0.19 per share-diluted, attributable to Project Next Century and $19.0 million, or $0.05 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:       20112012 (Projected) Reported EPS-Diluted $2.74 $2.88 - $2.98   Acquisition closing & integration charges — 0.04 - 0.05   Gain on sale of trademark licensing rights (0.05) —   Total Business Realignment and Impairment Charges 0.13 0.16 - 0.19   NSRPE 0.01 0.05   Adjusted EPS-Diluted $2.83 $3.17 - $3.23                 Appendix IThe Hershey CompanyProject Next CenturyExpected Timing of Costs and Savings ($m)     201220132014     Realignment Charges: Cash $25 to $30 $0 to $5 $10 to $20 Non-Cash $25 to $30 - - - -   Project Management and Start-up Costs ~   $5     -       - -       -   Total Project Next Century Realignment Charges & Costs $55 to $65 $0 to $5 $10 to $20       Project Next Century Cap-Ex $65 to $70 $15 to $20 - -       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; the ability to implement our supply chain realignment initiatives within the anticipated timeframe in accordance with our cost estimates and our ability to achieve the expected ongoing annual savings from these 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 July 26, 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 8:00 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 CompanySummary of Consolidated Statements of Incomefor the periods ended July 1, 2012 and July 3, 2011(in thousands except per share amounts)     Second Quarter   Six Months2012   20112012   2011   Net Sales $ 1,414,444   $ 1,325,171   $ 3,146,508   $ 2,889,394     Costs and Expenses: Cost of Sales 795,923 760,851 1,784,591 1,668,889 Selling, Marketing and Administrative 391,405 345,918 796,967 723,716 Business Realignment and Impairment Charges/(Credits), net 4,845   (9,952 ) 8,149   (8,114 )   Total Costs and Expenses 1,192,173   1,096,817   2,589,707   2,384,491     Income Before Interest and Income Taxes (EBIT) 222,271 228,354 556,801 504,903 Interest Expense, net 24,344   23,351   48,368   47,828     Income Before Income Taxes 197,927 205,003 508,433 457,075 Provision for Income Taxes 62,242   74,984   174,097   166,941     Net Income $ 135,685   $ 130,019   $ 334,336   $ 290,134     Net Income Per Share - Basic - Common $ 0.62   $ 0.59   $ 1.52   $ 1.31   - Basic - Class B $ 0.56   $ 0.53   $ 1.38   $ 1.19   - Diluted - Common $ 0.59   $ 0.56   $ 1.46   $ 1.26     Shares Outstanding - Basic - Common 165,021   166,302   164,810   166,372   - Basic - Class B 60,630   60,632   60,630   60,657   - Diluted - Common 228,853   230,301   228,752   230,243     Key Margins: Gross Margin 43.7 % 42.6 % 43.3 % 42.2 % EBIT Margin 15.7 % 17.2 % 17.7 % 17.5 % Net Margin 9.6 % 9.8 % 10.6 % 10.0 %   The Hershey CompanyConsolidated Balance Sheetsas of July 1, 2012 and December 31, 2011(in thousands of dollars)Assets   2012   2011   Cash and Cash Equivalents $ 589,782 $ 693,686 Accounts Receivable - Trade (Net) 353,337 399,499 Deferred Income Taxes 121,192 136,861 Inventories 791,805 648,953 Prepaid Expenses and Other 237,457 167,559   Total Current Assets 2,093,573 2,046,558   Net Plant and Property 1,583,304 1,559,717 Goodwill 589,464 516,745 Other Intangibles 219,028 111,913 Deferred Income Taxes 28,072 38,544 Other Assets 154,531 138,722   Total Assets $ 4,667,972 $ 4,412,199   Liabilities and Stockholders' Equity   Loans Payable $ 486,668 $ 139,673 Accounts Payable 388,472 420,017 Accrued Liabilities 569,902 612,186 Taxes Payable 1,930 1,899   Total Current Liabilities 1,446,972 1,173,775   Long-Term Debt 1,498,669 1,748,500 Other Long-Term Liabilities 608,664 617,276 Deferred Income Taxes 27,696 —   Total Liabilities 3,582,001 3,539,551   Total Stockholders' Equity 1,085,971 872,648   Total Liabilities and Stockholders' Equity $ 4,667,972 $ 4,412,199 The Hershey CompanyFINANCIAL CONTACT:Mark Pogharian, 717-534-7556orMEDIA CONTACT:Leigh Horner, 717-508-1247