Hershey Co. Reports 11.1 Percent Net Sales Gain In First Quarter

The Hershey Co. announced sales and earnings for the first quarter ended April 3, 2011.

Net sales increased 11.1 percent, driven primarily by volume.

Earnings per share-diluted were $0.70 as reported and $0.72 adjusted.

Consolidated net sales were $1,564,223,000 compared with $1,407,843,000 for the first quarter of 2010. Reported net income for the first quarter of 2011 was $160,115,000 or $0.70 per share-diluted, compared with $147,394,000 or $0.64 per share-diluted for the comparable period of 2010.

These results, prepared in accordance with generally accepted accounting principles (GAAP), included net pre-tax charges of $9.7 million, or $0.02 per share-diluted, which were related to the Project Next Century program announced in June 2010. Adjusted net income, which excludes these net charges, was $166,232,000 or $0.72 per share-diluted in the first quarter of 2011.

In 2011, reported gross margin, reported income before interest and income taxes (EBIT) margin and reported earnings per share-diluted will be impacted by charges associated with Project Next Century. Therefore, the company continues to expect reported earnings per share-diluted, including business realignment and impairment charges of $0.13 to $0.16 per share-diluted, to be in the $2.54 to $2.63 range. The forecast for total pre-tax GAAP charges and non-recurring project implementation costs related to the Project Next Century program remains at $140 million to $170 million.

During the first quarter, the company repurchased $100 million of common stock against the $250 million repurchase authorization that was approved in December 2006. With the conclusion of the prior authorization, on April 22, 2011, the board of directors of The Hershey Co. approved a new $250 million authorization to repurchase shares of common stock. Repurchases may take place from time to time, depending on market conditions. Acquired shares of the common stock will be held as treasury shares. This authorization is in addition to the company's policy of repurchasing shares in the open market issued in connection with our equity compensation program.

"Hershey's first quarter results represent a good start to the year, and we maintained our marketplace momentum," said David J. West, president and chief executive officer in a prepared statement. "As anticipated, first quarter net sales were strong, increasing 11.1 percent. Net sales gains were driven by core brand growth in both U.S. and international markets, new products and a seasonal shift in volume from the fourth quarter of last year to the first quarter of this year. Additionally, the first quarter benefited from a change in order patterns of certain customers.

"U.S. retail takeaway for the 12 weeks ended March 19, 2011, excluding the impact of Easter seasonal activity in the year ago and current period was up 6.7 percent, in channels that account for over 80 percent of our retail business. In the channels measured by syndicated data, U.S. market share, including Easter seasonal activity in the year ago and current period, increased 0.5 points. This performance reflects solid market share gains within our core chocolate and sugar confectionery businesses as well as the successful U.S. launches of Hershey's Drops and Reese's Minis. Preliminary data indicate strong sell through for the Easter season. Advertising expense increased about 30 percent versus the year ago period, greater than the percentage increase forecasted for the full year due to timing. This is the result of on-air support of core brands, new products, Hershey's Syrup and PayDay advertising campaigns, and programming related to a longer Easter season. As previously announced, for the full-year 2011, we expect advertising to increase mid-single digits, on a percentage basis versus last year.

"Input costs were significantly higher in the first quarter. Despite this increase, adjusted gross margin expanded slightly due to net supply chain efficiencies, some of which were related to fixed cost absorption as sales volume was greater than year ago, as well as higher levels of supply chain productivity. Selling, marketing and administrative expenses, excluding advertising, declined as a percentage of sales versus last year resulting in an expansion of adjusted EBIT margin.

"Given the Company's strong cash flow generation and balance sheet flexibility, in the first quarter we repurchased $100 million of our shares, completing the 2006 authorization. We continue to focus on working capital and operating cash flow and are pleased to announce a new $250 million share repurchase authorization. This decision reflects our confidence in Hershey's marketplace position, long-term growth potential and our ability to create value for all stockholders.

"We're very pleased with the start to 2011. The U.S. launches of Hershey's Drops and Reese's Minis are on track. Distribution of the Hershey's and Hershey's Kisses brands in select key emerging markets is progressing. In June we will launch Hershey's Air Delight, an aerated milk chocolate in both an instant consumable bar and Kisses format. The price increase announced about a month ago will not materially impact our results in 2011. Given the timing of the announcement, net price increase benefits generated this year will partially mitigate higher than initially anticipated input costs. Additionally, direct buying customers will be able to purchase transitional amounts of product into May and we do not expect seasonal net price realization until Easter 2012. Therefore, we expect the majority of the financial benefit from this pricing action to impact our earnings in 2012. We will work with our retail customers this year, and into 2012, to ensure that the implementation of the price increase is supported with customer trade promotions and merchandising that continues to grow the category. As stated earlier, in 2011 we expect advertising expense to increase mid-single digits, on a percentage basis versus last year, supporting new product launches and core brands in both the U.S. and international markets. Despite commodity market volatility, we have visibility into our cost structure this year. While we anticipate meaningfully higher input costs, productivity and cost savings initiatives, as well as the pricing action we recently announced, are in place and we estimate that full-year adjusted gross margin will be about the same as last year. We expect 2011 net sales, including the impact of foreign currency exchange rates, and adjusted earnings per share-diluted growth to be around the top of the Company's long-term 3 to 5 percent and 6 to 8 percent objectives, respectively," West concluded.

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