Hershey: Announces Q4 and Full-Year 2012 Results

Hershey / PA. (thc) The Hershey Company announced sales and earnings for the fourth quarter ended December 31, 2012. Consolidated net sales were 1’751’035’000 USD compared with 1’567’145’000 USD for the fourth quarter of 2011. Reported net income for the fourth quarter of 2012 was 149’879’000 USD or 0,66 USD per share-diluted, compared with 142’133’000 USD or 0,62 USD per share-diluted for the comparable period of 2011. Overview:

  • Fourth quarter and full-year 2012 net sales increase 11,7 percent and 9,3 percent, respectively
  • Fourth quarter earnings per share-diluted of 0,66 USD as reported and 0,74 USD adjusted
  • Full-year 2012 earnings per share-diluted of 2,89 USD as reported and 3,24 USD adjusted
  • Outlook for 2013 net sales reaffirmed, earnings per share-diluted increased:
    • Full-year net sales expected to increase five to seven percent, driven primarily by volume
    • Reported earnings per share-diluted expected to be 3,47 USD to 3,56 USD
    • Adjusted earnings per share-diluted expected to increase ten to twelve percent and be in the 3,56 USD to 3,63 USD range, greater than the previous estimate of an eight to ten percent increase

«Hershey´s fourth quarter financial and marketplace results represent a strong finish to 2012 and validate our strategy of focusing investments in the U.S. and key international geographies», said John P. Bilbrey, President and Chief Executive Officer, The Hershey Company. «As expected, fourth quarter marketplace performance was solid and we gained market share in every category – chocolate, non-chocolate, mint and gum. We had solid seasonal growth in 2012, with retail sell-through in measured channels in line with our estimates. Additionally, for the combined four seasons and the important Halloween period, our market share gain was identical, 0,8 points. Our solid financial performance gave us flexibility in our approach to investments in global go-to-market capabilities that will benefit Hershey over the near and long-term. We´ll build on our success in 2013 and are confident that our plans will drive core brand volume growth in U.S. and international markets».

As described in the Note, for the fourth quarter of 2012, these results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included net pre-tax charges of 24,3 million USD or 0,08 USD per share-diluted. These charges included 7,9 million USD or 0,03 USD per share-diluted, related to the Project Next Century program, non-service-related pension expense (NSRPE) of 7,6 million USD or 0,02 USD per share-diluted and acquisition and integration costs related to Brookside Foods Limited (Brookside) of 1,3 million USD. Additionally, the Company recorded a non-cash impairment charge of 7,5 million USD or 0,03 USD per share-diluted, related to its 69 percent investment in Tri-USInc. of Boulder, Colorado, a company that manufactured nutritional beverages under the «mix1» brand name. As a result, reported gross margin of 43,1 percent increased 280 basis points versus last year while reported income before interest and income taxes (Ebit) margin of 14,4 percent declined 20 basis points versus 2011. For the fourth quarter of 2011, results included pre-tax charges for Project Next Century and the Global Supply Chain Transformation Program of 27,7 million USD or 0,08 USD per share-diluted and 1,0 million USD of NSRPE. Adjusted net income, which excludes these net charges, was 169’186’000 USD or 0,74 USD per share-diluted, in the fourth quarter of 2012, compared with 160’325’000 USD or 0,70 USD per share-diluted, in the fourth quarter of 2011, an increase of 5,7 percent in adjusted earnings per share-diluted.

For the full-year 2012, consolidated net sales were 6’644’252’000 USD, compared with 6’080’788’000 USD in 2011, an increase of 9,3 percent. Reported net income for 2012 was 660’931’000 USD or 2,89 USD per share-diluted, compared with 628’962’000 USD or 2,74 USD per share-diluted, for 2011. As described in the Note, for the full-years 2012 and 2011, these results, prepared in accordance with GAAP, included net pre-tax charges of 117,7 million USD and 35,0 million USD or 0,35 USD and 0,09 USD per share-diluted, respectively. Charges associated with the Project Next Century program for 2012 and 2011 were 76,3 million USD and 43,4 million USD or 0,22 USD and 0,11 USD per share-diluted, respectively. NSRPE for 2012 and 2011 was 20,6 million USD and 2,8 million USD or 0,06 USD and 0,01 USD per share-diluted, respectively.

Additionally, 2012 results were impacted by acquisition and integration costs related to the Brookside acquisition of 13,4 million USD or 0,04 USD per share-diluted and the aforementioned non-cash goodwill impairment charge of 7,5 million USD or 0,03 USD per share-diluted. Net charges in 2011 also included a pre-tax gain on the sale of non-core trademark licensing rights of 17,0 million USD or 0,05 USD per share-diluted and a 5,8 million USD or 0,02 USD per share-diluted, charge related to the Global Supply Chain Transformation Program. As described in the Note, adjusted net income for each year, which excludes these net charges, was 740’040’000 USD or 3,24 USD per share-diluted in 2012, compared with 650’706’000 USD or 2,83 USD per share-diluted in 2011, an increase of 14,5 percent in adjusted earnings per share-diluted.

In 2013, the Company expects reported earnings per share-diluted of 3,47 to 3,56 USD. This projection, prepared in accordance with GAAP, assumes business realignment charges and NSRPE costs of 0,07 USD to 0,09 USD per share-diluted. Charges associated with the Project Next Century program are expected to be 0,03 USD to 0,05 USD per share-diluted while NSRPE is expected to be 0,04 USD per share-diluted. Despite the impact of these charges in 2013, reported gross margin is expected to increase 250 to 270 basis points.

Fourth Quarter Performance

Hershey´s fourth quarter net sales increased 11,7 percent. As expected, organic core brand volume trends sequentially improved driven by the U.S. business. Specifically, volume, excluding the Brookside acquisition, was a 7,0 point benefit as everyday and seasonal product volume was more than double the contribution from new products. Net price realization and foreign currency exchange rates were a 2,3 point and 0,3 point benefit, respectively. For the fourth quarter and full year, the Brookside acquisition was a 2,1 point and 1,9 point benefit, respectively.

Hershey´s U.S. candy, mint and gum (CMG) retail takeaway for the twelve weeks and year ended December 29, 2012, in the expanded all outlet combined plus convenience store channels (xAOC+C-store), which accounts for approximately 90 percent of the Company´s U.S. retail business, was up 7,0 percent and 5,7 percent, resulting in market share gains of 1,2 points and 0,6 points, respectively. U.S. CMG volume and unit trends at retail continued to progress in the fourth quarter and that is the expectation for 2013.

Fourth quarter adjusted gross margin increased 140 basis points driven by net price realization and supply chain productivity and cost savings initiatives, partially offset by higher input costs. Selling, marketing and administrative (SM+A) expenses, excluding advertising, increased about 19 percent in the fourth quarter, slightly greater than initial estimates, driven by planned investments in global go-to-market capabilities, selling and marketing costs and other employee-related expenses. As a result, adjusted Ebit increased 7,4 percent generating adjusted Ebit margin of 15,8 percent, a 60 basis point decline versus last year. For the fourth quarter and full year, advertising increased 27 percent and 16 percent, respectively, supporting new product launches as well as core U.S. and international brands.

Outlook

The Company expects 2013 net sales growth of five to seven percent, including the impact of foreign currency exchange rates. Net sales will be driven primarily by core brand volume growth, the U.S. launch of the Brookside product line in the food, drug and mass channels, as well as innovation such as Kit Kat mini´s, Twizzlers Bites, Jolly Rancher Bites and yet to be announced products. In key international markets such as China, the Company will extend the portfolio with the introduction of Hershey´s Kisses Deluxe and build on the fourth quarter launch of Hershey´s solid chocolate products in instant consumable and take home pack types. In Brazil, new capacity was installed to support geographic expansion of Hershey´s Mais chocolate.

As stated in October, gross margin is expected to increase in 2013, driven by productivity, cost savings initiatives and overall input cost deflation. Therefore, the Company expects 2013 adjusted gross margin expansion of 180 to 200 basis points. Given this financial flexibility, in 2013 the Company will accelerate some SM+A investments. Advertising is expected to increase approximately 20 percent versus last year resulting in an advertising-to-sales ratio of about eight percent. Advertising spending on core U.S. brands is expected to be about in line with last year´s increase. Incremental advertising in 2013 will support the Brookside launch and innovation in both the U.S. and international markets, including a broader advertising campaign of the Hershey´s brand in China. SM+A expenses, excluding advertising, are expected to increase at a rate greater than net sales. These investments will build on the go-to-market capabilities established over the last few years, as well as the consumer insights work underway in key international markets for the five global brands – Hershey´s, Reese´s, Hershey´s Kisses, Jolly Rancher and Ice Breakers – that the Company believes can transcend borders around the world. Additionally, the Company will continue to support its Insights Driven Performance initiative, invest in international selling and marketing functions and support new products with increased levels of consumer promotion and sampling to drive trial and repeat. As a result, the Company anticipates adjusted earnings per share-diluted growth for the full year to be in the ten to twelve percent range. This is greater than the previous estimate of an eight to ten percent increase.

«Hershey had a solid 2012 and we expect to build on our success in 2013», continued Bilbrey. «In 2012 we opened one of the most technologically advanced chocolate manufacturing facilities in our hometown of Hershey, Pa, initiated and completed construction of a new innovation center in Shanghai, successfully integrated the Brookside business and increased market share in key geographies as well as across all channels in our U.S. business. While the macroeconomic environment remains challenging, we are well positioned to succeed in the marketplace and deliver on our commitments in 2013», Bilbrey concluded.

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