The Hershey Co. announced sales and earnings for the first quarter ended April 1, 2012. Consolidated net sales were $1,732,064,000 compared with $1,564,223,000 for the first quarter of 2011. Reported net income for the first quarter of 2012 was $198,651,000 or $0.87 per share-diluted, compared with $160,115,000 or $0.70 per share-diluted for the comparable period of 2011.
These results, prepared in accordance with generally accepted accounting principles (GAAP), included net pre-tax charges, as well as non-service related pension expense (NSRPE), of $33.6 million, or $0.09 per share-diluted. The majority of these charges, $23.6 million, or $0.07 per share-diluted, were related to the Project Next Century program. Additionally, acquisition and integration costs related to the Brookside acquisition were $5.9 million, or $0.01 per share-diluted, and NSRPE was $4.1 million, or $0.01 per share-diluted. For the first quarter of 2011, GAAP results included net pre-tax charges of $9.7 million, or $0.02 per share-diluted, of Project Next Century costs and $1.3 million, or $0.01 per share-diluted, related to NSRPE. Adjusted net income, which excludes these net charges, was $219,910,000 or $0.96 per share-diluted in the first quarter of 2012, compared with $167,134,000 or $0.73 per share-diluted in the first quarter of 2011, an increase of 31.5 percent in adjusted earnings per share-diluted. See the Note for a reconciliation of GAAP and non-GAAP items.
In 2012, the company expects reported earnings per share-diluted of $2.82 to $2.92. 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 Foods Ltd. 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 90 to 100 basis points. The forecast for total pre-tax GAAP charges and non-recurring project implementation costs related to the Project Next Century program remains at $150 million to $160 million.
“Hershey’s strong start to the year is the result of our continued strategy of disciplined investment in core brands in both the U.S. and key international markets,” said John P. Bilbrey, president and chief executive officer. “In the first quarter, net sales increased 10.7 percent. Net price realization was a 10.9 point benefit while volume, slightly greater than our expectations due to a solid Easter, was off 0.5 point compared with the prior year. The Brookside acquisition was a 0.7 point benefit and the foreign currency exchange rate was a 0.4 point headwind.
“U.S. retail takeaway for the 12 weeks ended March 24, 2012, was up 6.4 percent, in channels that account for over 80 percent of our retail business. This period benefited slightly from an early Easter, which was two weeks earlier than the previous season. In the channels measured by syndicated data, U.S. market share was the same as the comparable year ago period and in line with our expectations. Easter occurred on April 8, 2012, therefore, the U.S. retail takeaway for the 12 weeks ended March 24, 2012, excludes the significant two-week period prior to the holiday. Subsequently, preliminary data indicate a solid Easter sell through at retail and we expect this will result in a market share gain for the season. Importantly, while not included in syndicated U.S. market share data, we’re very pleased with the everyday and seasonal marketplace performance at our largest customer and in the fast growing value channels.
“In the second quarter, shipments of our new products will accelerate with innovation in chocolate, sugar confectionery and mints. We’ll continue with the distribution and rollout of Jolly Rancher Crunch ‘N Chew and the launch of Rolo Minis and Ice Breakers Duos. Additionally, we’re pleased to announce the launch of Hershey’s Simple Pleasures, in three flavors, milk chocolate, dark chocolate and vanilla crème, in a “Smooth & Creamy” format that has 30 percent less fat than the average leading milk chocolates.
“Advertising expense increased about 14 percent versus the year ago period. As previously announced, we expect full-year 2012 advertising to increase low double digits, on a percentage basis, versus last year. Increased advertising will support core brands in both the U.S. and international markets, new product launches and new advertising campaigns on the Jolly Rancher and Rolo brands.
“As expected, input costs were higher in the first quarter. Despite this increase, adjusted gross margin expanded due to pricing, supply chain efficiencies and productivity gains. Selling, marketing and administrative (SM&A) expenses, excluding advertising, declined as a percentage of sales versus last year, resulting in an expansion of adjusted income before interest and income taxes (EBIT) margin. However, a portion of this gain was timing related and over the remainder of the year we expect SM&A expenses, excluding advertising, to increase at a level greater than the first quarter trend as we make planned investments in marketing and go-to-market capabilities in both the U.S. and international markets.
“Strong earnings growth resulted in another solid quarter of operating cash flow. In the first quarter we repurchased $125 million of our shares against the $250 million authorization announced last year.
“We are off to a good start to the year despite the challenging economic environment. As we enter the second quarter we are well-positioned to deliver on our financial objectives. Advertising, new products, merchandising and programming, and focused in-store retail execution will continue throughout the year. This will keep us on track with our projections and help mitigate declines due to price elasticity. As stated earlier, in 2012, we expect advertising to increase low double digits, on a percentage basis versus the prior year, supporting new product launches and core brands in both the U.S. and international markets. We’re confident of our plans and expect organic volume to be up slightly for the full year. Including estimated net sales of the Brookside Foods Ltd. acquisition, about $90 million 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. This is greater than our previous estimate of a 6.5 to 8.5 percent increase.
“While still early in the year, there is no material change to our full year inflation outlook. We continue to expect that input costs in 2012 will be higher than last year. With the first quarter behind us, we have further visibility into our full-year cost structure. Given our strong start to the year and the planned productivity, cost savings and net price realization gains, we now expect adjusted gross margin to increase 90 to 100 basis points. This is greater than our previous estimate of an increase of about 75 basis points. While a portion of our adjusted gross margin gain will be offset by the aforementioned SM&A expenses, we expect full-year adjusted earnings per share-diluted growth of 10 to 12 percent. This is greater than our previous estimate of a 9 to 11 percent increase,” Bilbrey concluded.
