The Hershey Co. announced sales and earnings for the fourth quarter and year ended Dec. 31, 2011. Consolidated net sales were $1,567,145,000 compared with $1,482,809,000 for the fourth quarter of 2010. Reported net income for the fourth quarter of 2011 was $142,133,000 or $0.62 per share-diluted, compared with $135,513,000 or $0.59 per share-diluted for the comparable period of 2010.
These results, prepared in accordance with U.S. generally accepted accounting principles (GAAP), included net pre-tax charges of $27.7 million or $0.08 per share-diluted. These charges were primarily related to the Project Next Century program announced in June 2010. As a result, reported gross margin and reported income before interest and income taxes (EBIT) margin of 40.3 percent and 14.6 percent, declined 150 basis points and 80 basis points versus last year, respectively.
For the fourth quarter of 2010, GAAP results included net pre-tax charges of $7.9 million, or $0.02 per share-diluted, which were related to Project Next Century. Adjusted net income, which excludes these net charges, was $159,636,000 or $0.70 per share-diluted in the fourth quarter of 2011, compared with $140,375,000 or $0.61 per share-diluted in the fourth quarter of 2010, an increase of 14.8 percent in adjusted earnings per share-diluted.
For the full year 2011, consolidated net sales were $6,080,788,000 compared with $5,671,009,000 in 2010, an increase of 7.2 percent. Reported net income for 2011 was $628,962,000 or $2.74 per share-diluted, compared with $509,799,000 or $2.21 per share-diluted for 2010.
For the full years 2011 and 2010, these results, prepared in accordance with GAAP, included net pre-tax charges of $32.1 million and $98.6 million, or $0.08 and $0.34 per share-diluted, respectively. The 2011 charges were primarily associated with Project Next Century and a gain on sale of non-core trademark licensing rights recorded in the third quarter. The 2010 charges were associated with Project Next Century and a non-cash goodwill impairment charge.
Adjusted net income for each year, which excludes these net charges, was $648,728,000 or $2.82 per share-diluted in 2011, compared with $587,734,000 or $2.55 per share-diluted in 2010, an increase of 10.6 percent in adjusted earnings per share-diluted.
“In 2011, Hershey continued to make good progress against its business model and strategy of investing in core brands and capabilities in the U.S. and key international markets,” said John P. Bilbrey, president and chief executive officer in a prepared statement. “Our success is reflected in our solid net sales growth and market share gains, giving us flexibility to make broad-based investments while delivering on our earnings objectives.
“Hershey’s fourth quarter represents a solid finish to 2011 and we expect to carry our momentum into 2012. In the fourth quarter, net sales increased 5.7 percent. Net price realization, primarily in the U.S., was a 5.9 point benefit. As expected, volume improved from last quarter, slightly greater than our expectations, increasing 0.4 points. New product introductions in the U.S. and our international markets, along with seasonal volume gains, were partially offset by volume declines, in line with our modeling, due to price elasticity. The impact of unfavorable foreign currency exchange rates in the quarter was about 0.6 points.
“For both the quarterly and year-to-date periods, U.S. CMG – candy, mint and gum – category and Hershey marketplace performance continued to outpace the historical category growth rate of about 3 to 4 percent. Specifically, Hershey U.S. CMG retail takeaway for the 12-weeks and year ended Dec. 31, 2011, in channels that account for over 80 percent of our retail business, was up 6.5 percent and 7.8 percent, respectively. In the channels measured by syndicated data, U.S. market share for the fourth quarter and year increased 0.4 points and 0.8 points, respectively.
“In the fourth quarter we achieved our productivity and cost savings goals. However, these initiatives and the net price realization were more than offset by higher input and supply chain costs. Specifically, to support the greater than anticipated fourth-quarter sales volume, purchases of certain raw materials occurred at prices that resulted in higher input costs. Additionally, year end last-in, first-out (LIFO) inventory impacts and discounts and allowances were slightly greater than our previous estimates. As a result, adjusted gross margin declined in the fourth quarter and full year by 50 basis points and 40 basis points, respectively.
“Adjusted EBIT increased 8.9 percent in the fourth quarter resulting in adjusted EBIT margin of 16.4 percent, a 50 basis point increase versus last year. During the quarter we were on air advertising many of our core brands, although as expected, advertising declined in the fourth quarter compared with the significant step-up investment in the fourth quarter of 2010. For the full year 2011, advertising increased about 6 percent, slightly less than our previous estimate as we shifted spending to market research, primarily supporting additional investments related to our Insights Driven Performance initiative.
“Earnings growth resulted in another good year of operating cash flow generation. Therefore, earlier this morning we announced a 10 percent increase in our quarterly dividend. The increase in our dividend rate reflects the confidence we have in our ability to continually generate solid cash flows.
“On Jan. 19, 2012, we completed the acquisition of Brookside Foods Ltd., a privately held confectionery company based in Canada. The business complements Hershey’s position in North America as the Brookside product line is primarily sold in the U.S. and Canada in a take home resealable pack type. In our full-year 2012 consolidated results, we expect Brookside to generate net sales of approximately $90 million at current exchange rates. During the year we’ll make investments in capabilities, conduct market research and increase manufacturing capacity that will enable us to grow this business in the future.
“During the first half of 2012, we’ll continue with the distribution and rollout of Hershey’s Air Delight and expand the Pieces and Minis platforms to include Hershey’s Milk Chocolate with Almond Pieces and Rolo Minis. Other new product launches include Ice Breakers Duos and Jolly Rancher Crunch ‘N Chew. Additionally, as we announced on Monday, Hershey’s Bliss will be produced with cocoa that is certified by the Rainforest Alliance.
“Throughout the year we’ll remain focused on building brands in both the U.S. and key international markets. In the U.S., we have planned merchandising and programming events and will work closely with retail customers and monitor category and Hershey brand performance, given the higher price points for seasonal candy in 2012. In the second half of the year our Asia research and development center will open in Shanghai. This will enable our key international markets to quickly develop and test new products in the marketplace. We’ll support our innovation in key markets with relevant brand support and will continue to increase our selling and go-to-market capabilities to drive growth. In 2012, we expect advertising to increase low double digits on a percentage basis versus the prior year, supporting new product launches, core brands in both the U.S. and international markets, and new advertising campaigns on the Jolly Rancher and Rolo brands. We’re confident of our plans and, excluding the Brookside acquisition, expect volume to be slightly up for the full year 2012, resulting in net sales growth of about 5 to 7 percent, including the impact of foreign currency exchange rates.”
In 2012, the company expects reported earnings per share-diluted of $2.79 to $2.89. This forecast includes business realignment and impairment charges of $0.16 to $0.19 per share-diluted related to Project Next Century. Reported gross margin, reported EBIT margin and reported earnings per share-diluted will be impacted by these charges. The forecast for total pre-tax GAAP charges and non-recurring project implementation costs related to Project Next Century has been narrowed and is now $150 million to $160 million. The reported outlook also includes acquisition closing and integration costs related to the Brookside acquisition of $0.04 to $0.05 per share-diluted.
In 2011, the actual return on pension plan assets and discount rates were below plan assumptions resulting in higher non-service related pension expenses in 2012. Therefore, the outlook for 2012 reported earnings per share-diluted reflects non-service related pension expenses of $19 million, or $0.05 per share-diluted. These expenses include interest on plan participants’ previously earned account balances offset by expected earnings on plan assets, actuarial gains or losses resulting from interest rate changes and variations in pension asset performance, and settlement costs, which accelerate the recognition of actuarial gains and losses when participants withdraw funds from the plans.
The company’s defined benefit plans are well funded and have been closed to new entrants since 2007 and 2008. This results in ongoing service costs that are stable and predictable compared to the non-service related expenses which can be very volatile. The company believes that adjusted net income and earnings per share-diluted, excluding non-service related pension expenses, will provide investors with a better understanding of the underlying profitability of the ongoing business and will therefore exclude them beginning in 2012. The historical details are available on the company's website within the investors section.
Bilbrey further stated, “We have good visibility into our full-year cost structure and, despite higher input costs in 2012, we expect adjusted gross margin to increase about 75 basis points driven by productivity and cost savings as well as net price realization. Therefore, we have increased our full-year adjusted earnings per share-diluted outlook and, including the aforementioned adjustment to exclude non-service related pension expenses, expect it to increase 9 to 11 percent,” Bilbrey concluded.