The Hershey Company : Hershey Announces Second Quarter Results; Updates EPS Outlook for 2012
07/26/2012| 07:05am US/Eastern
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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 Ended
July 1, 2012
July 3, 2011
Percent
Percent
of Net
of Net
In 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 Ended
July 1, 2012
July 3, 2011
Percent
Percent
of Net
of Net
In 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:
2011
2012 (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 - $3.23
Appendix I
The Hershey Company
Project Next Century
Expected Timing of Costs and Savings ($m)
2012
2013
2014
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 Company
Summary of Consolidated Statements of Income
for the periods ended July 1, 2012 and July 3, 2011
(in thousands except per share amounts)
Second Quarter
Six Months
2012
2011
2012
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 Company
Consolidated Balance Sheets
as 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 Company FINANCIAL CONTACT: Mark
Pogharian, 717-534-7556 or MEDIA CONTACT: Leigh
Horner, 717-508-1247
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