The Hershey Co. announced sales and earnings for the third quarter ended Sept.30, 2012. Consolidated net sales were $1,746,709,000 compared with $1,624,249,000 for the third quarter of 2011, an increase of 7.5 percent. Reported net income for the third quarter of 2012 was $176,716,000 or $0.77 per share-diluted, compared with $196,695,000 or $0.86 per share-diluted for the comparable period of 2011.
For the third quarter of 2012, 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). The majority of these charges, $25.8 million, or $0.07 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 $4.8 million, or $0.02 per share-diluted, and NSRPE was $4.3 million, or $0.01 per share-diluted. For the third quarter of 2011, results included pre-tax charges for Project Next Century of $13.5 million, or $0.03 per share-diluted, and a pre-tax gain of $17.0 million, or $0.05 per share-diluted, on the sale of a non-core trademark license. Adjusted net income, which excludes these net charges, was $199,451,000, or $0.87 per share-diluted, in the third quarter of 2012, compared with $193,959,000, or $0.84 per share-diluted, in the third quarter of 2011, an increase of 3.6 percent in adjusted earnings per share-diluted. See the Note for a reconciliation of GAAP and non-GAAP items.
For the first nine months of 2012, consolidated net sales were $4,893,217,000, compared with $4,513,643,000 for the first nine months of 2011. Reported net income for the first nine months of 2012 was $511,052,000, or $2.23 per share-diluted, compared with $486,829,000 or $2.12 per share-diluted, for the first nine months of 2011. As described in the Note, for the first nine months of 2012 and 2011, these results, prepared in accordance with GAAP, included net pre-tax charges of $93.4 million and $6.3 million, or $0.27 and $0.01 per share-diluted, respectively. Charges associated with the Project Next Century program for the first nine months in 2012 and 2011 were $68.4 million and $21.4 million, or $0.19 and $0.06 per share-diluted, respectively. NSRPE for the first nine months in 2012 and 2011 were $13.0 million, or $0.04 per share-diluted, and $1.9 million, respectively. Additionally, for the first nine months of 2012, acquisition and integration costs related to the Brookside acquisition were $12.0 million, or $0.04 per share-diluted. Charges in 2011 include the previously mentioned pre-tax gain on the sale of non-core trademark licensing rights. As described in the Note, adjusted net income for the first nine months of 2012, which excludes these net charges, was $570,854,000, or $2.50 per share-diluted. Adjusted net income for the first nine months of 2011, which excludes these net charges and the gain on sale, was $490,381,000, or $2.13 per share-diluted in 2011.
In 2012, the company expects reported earnings per share-diluted of $2.87 to $2.92. These results, prepared in accordance with GAAP, include business realignment charges, NSRPE and acquisition and integration costs of $0.33 to $0.35 per share-diluted. The majority of these charges, $0.23 to $0.24 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 $0.06 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 140 basis points. In 2013, the company expects reported earnings per share-diluted of $3.37 to $3.49. These results are expected to include business realignment charges, NSRPE and acquisition and integration costs of $0.09 to $0.11 per share-diluted.
As discussed last quarter, the forecasted amount for Project Next Century non-cash pension settlement charges could increase as a result of impacted employee pension fund withdrawals during the fourth quarter. Non-cash pension settlement costs are required in accordance with applicable accounting standards. As a result, the forecast for total pre-tax GAAP charges and non-recurring project implementation costs, including non-cash pension settlement costs related to the Project Next Century program, has been increased from a range of $160 million to $180 million to a range of $190 million to $200 million. The expected timing of events and estimated costs and savings is included in Appendix I, which is attached to this press release.
On Oct. 24, 2012, the board of directors of The Hershey Co. declared a quarterly dividend of $0.42 on the common stock, an increase of $0.04 per share. In addition, the board declared a dividend of $0.38 on the class B common stock, an increase of $0.036 per share. The dividends are payable Dec. 14, 2012, to stockholders of record Nov. 23, 2012.
Third Quarter Performance And Outlook
“The Hershey Co. delivered another good quarter of core brand growth driven by solid performance within key retail channels,” said John P. Bilbrey, president and chief executive officer, The Hershey Co., in a prepared statement. “Importantly, Hershey U.S. candy, mint and gum (CMG) retail takeaway for the 12 weeks ended October 6, 2012, in the expanded all outlet combined plus convenience store channels (xAOC+C-store), which accounts for approximately 90 percent of our U.S. retail business, was up 5.9 percent, resulting in a market share gain of 1.1 points. Our performance was solid in the convenience and dollar store channels with volume and unit trends positive. Overall, Hershey’s results were balanced as we gained xAOC+C-store market share within all segments of CMG. I’m particularly pleased with our chocolate marketplace performance where we gained 0.4 market share points driven by core brands and new products. Our CMG volume and unit trends at retail continue to progress and we expect sequential improvement in the fourth quarter. Additionally, Halloween sales are off to a good start with solid programming, merchandising and promotions being executed in the marketplace.
“In the third quarter, Hershey's net sales increased 7.5 percent. Net price realization was a 3.9 point benefit and volume, excluding the Brookside acquisition, was up 2.1 points. The organic volume gain was primarily driven by new products. Core brand volume trends have improved sequentially throughout the year and were slightly up in the third quarter. The Brookside acquisition was a 2.3 point benefit in the third quarter, slightly better than our initial estimates, and foreign currency exchange rates a 0.8 point headwind. For the full year, we expect the Brookside acquisition to be about a 1.75 to 2.0 point benefit to net sales as our initial supply chain analysis resulted in initiatives that enabled us to optimize product sales mix.
“Gross margin increased in the quarter, in line with our estimates, as net price realization, supply chain efficiencies and productivity gains more than offset higher input costs. Selling, marketing and administrative (SM&A) expenses, excluding advertising, increased 12 percent in the third quarter, less than our estimate of a 15 to 20 percent increase, and is up about 9 percent year-to-date. We would expect another meaningful increase, in the fourth quarter, resulting in a low double-digit percentage increase for the full year, in line with our initial estimates. These investments in go-to-market capabilities in both the U.S. and international markets will benefit the company over the near and long term. In both the third quarter and year-to-date periods advertising is up about 12 percent versus 2011. Additionally, as communicated last quarter, the third quarter tax rate was greater than the year ago period due to the timing of certain discrete tax items. We continue to expect the full-year tax rate to be about 35 percent.
“We're growing sales and profitability despite macroeconomic challenges and have delivered on our financial commitments. The company continues to generate substantial free cash flow and has a strong balance sheet. Therefore, we are pleased to announce an increase to our quarterly dividend. This action reflects our confidence in Hershey's marketplace position and long-term growth potential.
“I'm very pleased with our quarterly and year-to-date results. We're positioned to carry our marketplace momentum into the fourth quarter and gain market share for the fourth consecutive year. Organic volume trends should continue to improve into the fourth quarter and our Halloween and Holiday seasonal businesses are off to a good start. Additionally, the Brookside acquisition will be about a 1.75 to 2.0 point benefit in 2012. Therefore, we've narrowed our full-year net sales growth outlook and expect it to increase 8 to 9 percent, including the impact of foreign currency exchange rates.
“As the year has progressed, commodity markets have remained volatile. Input costs in 2012 will be higher than last year, although our current forecast indicates that the increase will not be as much as our earlier estimate. Therefore, we now expect adjusted gross margin to increase 120 to 140 basis points. This is greater than our previous forecast of about a 100 to 120 basis point increase. We are planning an additional investment in advertising in the fourth quarter and now expect full-year 2012 advertising expense to increase 13 to 15 percent versus 2011. This is greater than our previous estimate of a low double-digit percentage increase. Additionally, the Brookside acquisition will be slightly accretive for the full year 2012. Therefore, we anticipate adjusted earnings per share-diluted for the full-year to be in the $3.22 to $3.25 range, an increase of 14 to 15 percent versus 2011. This is greater than our previous estimate of a 12 to 14 percent increase.
“As we look to 2013, we assume the economic environment for retailers and consumers will continue to be challenging. However, we believe the investments we've made have resulted in a business model that is more efficient and effective, enabling us to deliver predictable, consistent and achievable marketplace and financial performance. Therefore, we expect 2013 net sales growth to be within our 5 to 7 percent long-term target, including the impact of foreign currency exchange rates, as we continue to focus on core brands and innovation in both the U.S. and key international markets. Additionally, we'll leverage Hershey's scale at retail as we launch Brookside branded products in the broader U.S. food, drug and mass channels. As we stated earlier this year, we remain focused on gross margin. We have solid productivity and cost savings initiatives in place and, while early in the planning cycle, we don't expect input cost inflation next year. Therefore, we expect to achieve gross margin expansion in 2013 and growth in adjusted earnings per share-diluted in the 8 to 10 percent range, consistent with our long-term target,” Bilbrey concluded.