The Hershey Co. 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.
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. 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 Ave. in Hershey, Pa.
“The Hershey Co. reported another quarter of solid marketplace and financial results,” said John P. Bilbrey, president and chief executive officer in a prepared statement. “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, 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.
