Focus on core brands delivers improved marketplace momentum
HERSHEY, Pa., Jan. 27 /PRNewswire-FirstCall/ --
-- Fourth quarter and full-year 2008 net sales increase 2.6% and 3.8%
-- Fourth quarter earnings per share-diluted of $0.36 as reported and
$0.59 from operations
-- Full-year 2008 reported earnings per share-diluted of $1.36 as
reported and $1.88 from operations
-- FDMxC marketplace performance improves; retail takeaway and market
share increased 5.2% and 0.5 points, respectively, in the fourth
quarter
-- Outlook for 2009 growth in net sales 2-3%, with earnings per
share-diluted from operations to increase, but less than long-term
objective of 6-8%
The Hershey Company (NYSE: HSY) today announced sales and earnings for the
fourth quarter and year ended December 31, 2008. Consolidated net sales were
$1,377,380,000 compared with $1,342,222,000 for the fourth quarter of 2007.
Reported net income for the fourth quarter of 2008 was $82,155,000 or $0.36
per share-diluted, compared with $54,343,000 or $0.24 per share-diluted, for
the comparable period of 2007.
For the fourth quarter of 2008, these results, prepared in accordance with
generally accepted accounting principles ("GAAP"), included net pre-tax
charges of $79.7 million, or $0.23 per share-diluted. Charges associated with
the Global Supply Chain Transformation program announced in February 2007 were
$34.0 million, or $0.10 per share-diluted. Additionally, as part of the
Company's annual review of intangible assets a non-cash impairment charge of
$45.7 million, or $0.13 per share-diluted, was recorded related to trademark
values, primarily Mauna Loa. This resulted from an in-depth market structure
and portfolio review which led to a re-evaluation of the role and level of
investment of the Mauna Loa brand.
For the fourth quarter of 2007, GAAP results include net pre-tax charges
of $95.9 million, or $0.30 per share-diluted. The majority of these charges
were associated with the Global Supply Chain Transformation program announced
in February 2007.
Net income adjusted to exclude these net charges, which is referred to in
this release as "net income from operations," was $133,842,000 or $0.59 per
share-diluted in the fourth quarter of 2008, compared with $124,120,000 or
$0.54 per share-diluted in the fourth quarter of 2007, an increase of 9.3
percent in earnings per share-diluted.
For the full year 2008, consolidated net sales were $5,132,768,000
compared with $4,946,716,000 in 2007, an increase of 3.8 percent. Reported net
income for 2008 was $311,405,000 or $1.36 per share-diluted, compared with
$214,154,000, or $0.93 per share-diluted for 2007.
For the full years 2008 and 2007, these results, prepared in accordance
with GAAP, include net pre-tax charges of $180.7 million and $412.6 million,
or $0.52 and $1.15 per share-diluted, respectively. The 2008 charges of $134.9
million, or $0.39 per share-diluted, are primarily associated with the Global
Supply Chain Transformation program and $45.7 million in non-cash impairment
charges related to intangible trademark values, primarily Mauna Loa. The
majority of the 2007 charges were associated with the Global Supply Chain
Transformation program.
Net income from operations, which is adjusted to exclude the net charges
for the full years 2008 and 2007, was $430,522,000 or $1.88 per share-diluted
in 2008, compared with $481,807,000, or $2.08 per share-diluted in 2007, a
decrease of 9.6 percent in earnings per share-diluted.
Cumulative charges to-date for the Global Supply Chain Transformation
program were $530.0 million. The forecast for total project charges related to
the initial program remains within but at the high end of the $550 million to
$575 million range. As discussed last quarter, the forecast amount for
non-cash pension settlement charges could increase as a result of impacted
employee pension fund withdrawals combined with declines in the financial
markets. Non-cash pension settlement costs are required in accordance with
applicable accounting standards and are described further in Appendix A. These
non-cash charges could increase the forecast by up to $65 million.
During the fourth quarter of 2008, the scope of the Global Supply Chain
Transformation program increased modestly to include the closure of two
subscale manufacturing facilities of Artisan Confections Company, a wholly
owned subsidiary, and consolidation of the associated production into existing
U.S. facilities, along with rationalization of other select items. These
initiatives, which will be completed in 2009, increase the expected total cost
and savings of the Global Supply Chain Transformation program by approximately
$25 million and $5 million, respectively. Approximately $15 million of the
increased costs are non-cash charges.
Cumulative savings for the Global Supply Chain Transformation program are
approximately $81 million and the estimate for total ongoing annual savings by
2010 is $175 million to $195 million.
Fourth Quarter Performance and Outlook
"Hershey's strong fourth quarter results represent a solid end to the year
and further validate our strategy of focusing investment on core brands," said
David J. West, President and Chief Executive Officer. "Net sales increased by
2.6 percent driven primarily by pricing, offset somewhat by the impact of
unfavorable foreign currency exchange rates and sales volume declines
primarily in the U.S. The results were also dampened by the shift of about 2
percentage points of net sales growth into the third quarter due to the timing
of a buy-in related to the August price increase. Core brand strength was
attributable to increased advertising and retail effectiveness, with U.S.
advertising expense up 26 percent in the fourth quarter. Focused investment
behind the Reese's and Hershey's brands delivered an 8 percent gain on retail
takeaway for these franchises, in the channels that account for over 80
percent of our retail business.
"Fourth quarter profitability was slightly ahead of our expectations. We
benefited from net price realization, better-than-expected volume and mix
trends compared to our initial estimates associated with the August price
increase, and supply chain savings. These gains were substantially offset by
higher input costs and greater levels of investment spending in the U.S. and
key international markets.
"U.S. retail takeaway in the fourth quarter increased 5.2 percent in
channels that account for over 80 percent of our retail business. The gain was
identical in channels measured by syndicated data and resulted in a market
share gain of 0.5 points in these channels. This performance reflects solid
market share gains in both the Halloween and Holiday seasons. Importantly,
trends improved sequentially throughout the year in all channels and we exited
2008 with marketplace momentum.
"In 2008, the commodity and financial markets were volatile. In August, we
estimated that our 2009 commodity cost basket would increase by about $225
million. As the year progressed, commodity costs declined somewhat, reducing
this projected increase to about $175 million, or roughly $0.50 per
share-diluted. This decline is more than offset by a year-over-year increase
in 2009 pension expense of approximately $70 million, or about $0.20 per
share-diluted, resulting from the significant decline in the fair value of
our pension assets. Our primary pension plans continue to be well-funded
versus the projected benefit obligations.
"The financial market and credit crisis has not had a material effect on
our business operations or liquidity, to date. However, the increase in our
cost structure and uncertainties in the financial markets and in the broader
economy present challenges as we head into 2009. Despite these issues, we'll
continue to invest in our core brands in the U.S. and key international
markets to build on our momentum. Specifically, advertising is expected to
increase $30 million to $35 million, or about $0.08 to $0.10 per share-diluted
in 2009. These cost increases will be more than offset by higher net pricing,
savings from the Global Supply Chain Transformation program and on-going
operating productivity improvement.
"For 2009, we expect net sales growth of 2-3 percent as our pricing
actions, as well as core brand sales growth, will be partially offset by lower
volumes and the impact of unfavorable foreign currency exchange rates. As
we've stated since last June, 2009 earnings per share-diluted from operations
is expected to increase, however, due to the unprecedented commodity and
pension cost increases, higher levels of core brand investment spending and
current macroeconomic conditions, we expect growth to be at a rate below our
long-term objective of 6-8 percent," West concluded.
Note: In this release, Hershey has provided income measures excluding
certain items described above, in addition to net income determined in
accordance with GAAP. These non-GAAP financial measures, as shown in the
attached pro forma summary of consolidated statements of income, 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.
In 2007, the Company recorded GAAP charges related to the Global Supply
Chain Transformation (GSCT) program announced in February 2007, of $400.0
million, or $1.10 per share-diluted. Additionally, in the fourth quarter of
2007 the Company recorded business realignment and impairment charges of $12.6
million, or $0.05 per share-diluted, related to its business in Brazil.
In 2008, the Company recorded GAAP charges of $130.0 million, or $0.38 per
share-diluted, attributable to the GSCT program and $45.7 million, or $0.13
per share-diluted, related to intangible trademark values, primarily Mauna
Loa, recorded in the fourth quarter of 2008. Additionally, the Company
recorded business realignment and impairment charges of $4.9 million, or $0.01
per share-diluted, related to the business realignment in Brazil.
In 2009, the Company expects to record total GAAP charges of about $45
million to $70 million, or $0.13 to $0.20 per share-diluted, primarily related
to the GSCT program, excluding possible pension settlement charges.
The GSCT program is expected to result in total pre-tax charges and
non-recurring project implementation costs of $575 million to $600 million,
excluding possible pension settlement charges in 2009 and 2010. Total charges
include project management and start-up costs of approximately $60 million.
Appendix A
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits (as amended) ("SFAS
No. 88") requires pension settlement charges to be recorded if withdrawals
from pension plans in a calendar year exceed a certain level.
Pension settlement charges are non-cash charges for the Company. Such
charges accelerate the recognition of pension expenses related to actuarial
gains and losses resulting from interest rate changes and differences in
actual versus assumed returns on pension assets. The Company normally
amortizes actuarial gains and losses over a period of about 14 years.
The Global Supply Chain Transformation program charges recorded in 2007
and 2008 included pension settlement charges of approximately $25 million as
employees leaving the Company under the program have withdrawn lump sums from
the defined benefit pension plans. These charges are included in the current
Global Supply Chain Transformation program estimates of $575 million to $600
million.
In addition to the settlement charges reflected above, incremental SFAS
No. 88 pension settlement charges of up to $65 million may be incurred
depending on decisions of impacted employees to withdraw funds during 2009 and
2010. The amount of the potential charges has increased significantly because
of recent declines in financial markets.
The likely range of possible additional charges for 2009 is zero to $50
million. There would be no charge if withdrawals by hourly employees are below
the SFAS No. 88 settlement threshold level and approximately $50 million based
on current market conditions if they are above the threshold level.
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. Actual results may differ materially from those contained in
the forward-looking statements. Factors that could cause results to differ
materially include, but are not limited to: our ability to implement and
generate expected ongoing annual savings from the initiatives to transform our
supply chain and advance our value-enhancing strategy; our ability to execute
our supply chain transformation within the anticipated timeframe in accordance
with our cost estimates; changes in raw material and other costs and selling
price increases; the impact of future developments related to the product
recall and temporary plant closure in Canada in the fourth quarter of 2006,
including our ability to recover costs we incurred for the recall and plant
closure from responsible third-parties; 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; changes in our stock price, and resulting impacts on our expenses
for incentive compensation, stock options and certain employee benefits;
market demand for our new and existing products; changes in our business
environment, including actions of competitors, changes in consumer preferences
and behavior, and the impact of political, economic and financial market
conditions on our customers, suppliers, consumers and lenders; changes in
governmental laws and regulations, including taxes; risks and uncertainties
related to our international operations; and such other matters as discussed
in our Annual Report on Form 10-K for 2007. All information in this press
release is as of January 27, 2009. 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 Webcast
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 webcast
live via Hershey's corporate website www.hersheys.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 December 31, 2008 and December 31, 2007
(in thousands except per share amounts)
Fourth Quarter Twelve Months
-------------- -------------
2008 2007 2008 2007
---- ---- ---- ----
Net Sales $1,377,380 $1,342,222 $5,132,768 $4,946,716
Costs and Expenses:
Cost of Sales 879,854 924,745 3,375,050 3,315,147
Selling, Marketing
and Administrative 284,057 232,762 1,073,019 895,874
Business Realignment
and Impairment
Charges, net 60,053 57,552 94,801 276,868
Total Costs and
Expenses 1,223,964 1,215,059 4,542,870 4,487,889
Income Before
Interest and
Income Taxes (EBIT) 153,416 127,163 589,898 458,827
Interest Expense, net 24,965 28,062 97,876 118,585
Income Before
Income Taxes 128,451 99,101 492,022 340,242
Provision for
Income Taxes 46,296 44,758 180,617 126,088
Net Income $82,155 $54,343 $311,405 $214,154
Net Income Per Share
- Basic - Common $0.37 $0.24 $1.41 $0.96
- Basic - Class B $0.33 $0.22 $1.27 $0.87
- Diluted - Common $0.36 $0.24 $1.36 $0.93
Shares Outstanding
- Basic - Common 166,734 166,873 166,709 168,050
- Basic - Class B 60,713 60,808 60,777 60,813
- Diluted - Common 228,504 229,722 228,697 231,449
Key Margins:
Gross Margin 36.1% 31.1% 34.2% 33.0%
EBIT Margin 11.1% 9.5% 11.5% 9.3%
Net Margin 6.0% 4.0% 6.1% 4.3%
The Hershey Company
Pro Forma Summary of Consolidated Statements of Income
for the periods ended December 31, 2008 and December 31, 2007
(in thousands except per share amounts)
Fourth Quarter Twelve Months
-------------- -------------
2008 2007 2008 2007
---- ---- ---- ----
Net Sales $1,377,380 $1,342,222 $5,132,768 $4,946,716
Costs and Expenses:
Cost of Sales 862,233(a) 890,273(d) 3,297,283(a) 3,192,057(d)
Selling, Marketing
and
Administrative 282,020(b) 228,867(e) 1,064,917(b) 883,251(e)
Business
Realignment and
Impairment Charges,
net ---(c) ---(f) ---(c) ---(f)
Total Costs and
Expenses 1,144,253 1,119,140 4,362,200 4,075,308
Income Before
Interest and
Income Taxes
(EBIT) 233,127 223,082 770,568 871,408
Interest Expense,
net 24,965 28,062 97,876 118,585
Income Before
Income Taxes 208,162 195,020 672,692 752,823
Provision for
Income Taxes 74,320 70,900 242,170 271,016
Adjusted Net Income $133,842 $124,120 $430,522 $481,807
Adjusted Net Income
Per Share
- Basic - Common $0.60 $0.56 $1.94 $2.16
- Basic - Class B $0.54 $0.50 $1.75 $1.95
- Diluted - Common $0.59 $0.54 $1.88 $2.08
Shares Outstanding
- Basic - Common 166,734 166,873 166,709 168,050
- Basic - Class B 60,713 60,808 60,777 60,813
- Diluted - Common 228,504 229,722 228,697 231,449
Key Margins:
Adjusted Gross
Margin 37.4% 33.7% 35.8% 35.5%
Adjusted EBIT
Margin 16.9% 16.6% 15.0% 17.6%
Adjusted Net
Margin 9.7% 9.2% 8.4% 9.7%
(a) Excludes business realignment and impairment charges of $17.6
million pre-tax or $12.1 million after-tax for the fourth quarter
and $77.8 million pre-tax or $53.4 million after-tax for the twelve
months.
(b) Excludes business realignment and impairment charges of $2.0
million pre-tax or $1.3 million after-tax for the fourth quarter
and $8.1 million pre-tax or $4.9 million after-tax for the twelve
months.
(c) Excludes business realignment and impairment charges of $60.1
million pre-tax or $38.3 million after-tax for the fourth quarter
and $94.8 million pre-tax or $60.8 million after-tax for the twelve
months.
(d) Excludes business realignment and impairment charges of $34.5
million pre-tax or $24.3 million after-tax for the fourth quarter
and $123.1 million pre-tax or $80.9 million after-tax for the
twelve months.
(e) Excludes business realignment and impairment charges of $3.9
million pre-tax or $2.5 million after-tax for the fourth quarter
and $12.6 million pre-tax or $7.8 million after-tax for the twelve
months.
(f) Excludes business realignment and impairment charges of $57.6
million pre-tax or $43.0 million after-tax for the fourth quarter
and $276.9 million pre-tax or $178.9 million after-tax for the
twelve months.
The Hershey Company
Consolidated Balance Sheets
as of December 31, 2008 and December 31, 2007
(in thousands of dollars)
Assets 2008 2007
------ ---- ----
Cash and Cash Equivalents $37,103 $129,198
Accounts Receivable - Trade (Net) 455,153 487,285
Deferred Income Taxes 70,903 83,668
Inventories 592,530 600,185
Prepaid Expenses and Other 189,256 126,238
Total Current Assets 1,344,945 1,426,574
Net Plant and Property 1,458,949 1,539,715
Goodwill 554,677 584,713
Other Intangibles 110,772 155,862
Deferred Income Taxes 13,815 -
Other Assets 151,561 540,249
Total Assets $3,634,719 $4,247,113
Liabilities, Minority Interest and
Stockholders' Equity
---------------------
Loans Payable $501,504 $856,392
Accounts Payable 249,454 223,019
Accrued Liabilities 504,065 538,986
Taxes Payable 15,189 373
Total Current Liabilities 1,270,212 1,618,770
Long-Term Debt 1,505,954 1,279,965
Other Long-Term Liabilities 504,963 544,016
Deferred Income Taxes 3,646 180,842
Total Liabilities 3,284,775 3,623,593
Minority Interest 31,745 30,598
Total Stockholders' Equity 318,199 592,922
Total Liabilities, Minority Interest
and Stockholders' Equity $3,634,719 $4,247,113
SOURCE The Hershey Company
CONTACT: FINANCIAL, Mark Pogharian, +1-717-534-7556 or, MEDIA, Kirk
Saville, +1-717-534-7641, both of The Hershey Company
Web Site: http://www.hersheys.com /
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