Hershey announces modernization program to enhance supply chain

The Hershey Company on June 14 announced project Next Century as part of the company's ongoing efforts to create an advantaged supply chain and competitive cost structure. The Next Century capital investment includes a $200 million to $225 million plant expansion of the existing West Hershey facility and approximately $50 million to $75 million in distribution and administrative facilities located in Hershey, Pa. This investment will create a more cost-effective, efficient supply chain that will enable the company to continue to produce the world's best chocolate for years to come. The program grew out of the Company's previously announced supply chain assessment and was unanimously approved by the company's board of directors.

As part of the project, production will transition from the company's century-old facility at 19 East Chocolate Avenue in Hershey, Pa., to a planned expansion of the West Hershey facility, which was built in 1992. Production from the 19 East Chocolate Avenue plant, as well as a portion of the workforce, will be relocated to the West Hershey facility. This change is expected to result in the reduction of approximately 500 to 600 jobs as investments in technology and automation result in enhanced efficiency in the new building.

"Next Century will ensure that we continue to make the world's best chocolate and are well-positioned in the marketplace," said David J. West, president and chief executive officer, The Hershey Company. "Our investment will create a highly flexible, cost-effective manufacturing facility that will enable us to remain competitive with global players while satisfying the needs of retail customers and consumers. The 19 East Chocolate Avenue factory is a proud part of the company's heritage, but the facility is more than 100 years old, and simply cannot be modernized to meet the manufacturing needs of a 21st-century business. Our employees at the facility have worked hard, and we are pleased that many of them will transition to the new facility, continuing to make Hershey's syrup, Hershey's milk chocolate and milk chocolate with almond bars, and Hershey's Kisses brand milk chocolates, as they have for many years. We operate in an ever-changing global marketplace and will continue to make the difficult decisions necessary for our business to succeed over the long term. Additionally, we are committed to assisting all of the impacted Hershey employees during the transition."

To preserve the distinctive heritage of downtown Hershey, the company will continue to occupy a significant portion of office space within the historic 19 East Chocolate Avenue facility, including consolidating several local headquarters offices into the vacated space. The company will endeavor to ensure that the remainder of the facility is developed in a way that complements downtown Hershey.

The company estimates that the Next Century program will incur pre-tax charges and non-recurring project implementation costs of $140 million to $170 million over the next three years. This estimate includes $120 million to $150 million in pre-tax business realignment and impairment charges and approximately $20 million in project implementation and start-up costs. The cash portion of the total charge is estimated to be $95 million to $110 million, including project implementation and start-up costs. Total capital expenditures related to the program are expected to be $250 million to $300 million. At the conclusion of the program in 2014, ongoing annual savings are expected to be approximately $60 million to $80 million.

"Our recent marketplace performance has been driven by the investments we have made in our brands and our global capabilities, fueled by our strategic focus on supply chain efficiency and effectiveness," West said. "Savings from project Next Century will enable us to continue making investments that will deliver core business growth and position us for long-term success in the global confectionery marketplace. We must continue to look at all options that provide us the flexibility to make the investments necessary to ensure that Hershey is as successful in this century as it was in the past century."

The company expects 2010 net sales to increase 6 to 7 percent, including an approximate one point benefit from foreign currency exchange rates. Reported gross margin, reported income before interest and income taxes (EBIT) margin and reported earnings per share-diluted will be impacted in 2010 by accelerated depreciation and other costs related to the start-up of project Next Century. As a result, full year reported earnings per share-diluted, including project Next Century charges of $0.14 to $0.16 per share-diluted, is expected to be in the $2.31 to $2.38 range. The company expects to achieve adjusted gross margin and adjusted EBIT margin expansion that will result in adjusted earnings per share-diluted in the $2.47 to $2.52 range, an increase of low-to-mid-teens, on a percentage basis, versus 2009. Operational savings from project Next Century will not begin to be realized until very late 2011 and will be fully achieved in 2014.

Note: In this release, Hershey references income measures which are not in accordance with U.S. generally accepted accounting principles (GAAP) because they exclude business realignment and impairment charges. These non-GAAP financial measures are used in evaluating results of operations for internal purposes. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP. Rather, the company believes exclusion of such items provides additional information to investors to facilitate the comparison of past and present operations.

In 2009, the company recorded GAAP charges, including non-cash pension settlement charges, of $99.1 million, or $0.27 per share-diluted, attributable to the Global Supply Chain Transformation (GSCT) program. Except for possible non-cash pension settlement charges, the company does not expect any significant charges related to the GSCT program in 2010.

In 2010, the company expects to record total GAAP charges of about $50 million to $60 million, or $0.14 to $0.16 per share-diluted, attributable to project Next Century.

Below is a reconciliation of GAAP and non-GAAP items to the company's 2009 and projected 2010 adjusted earnings per share-diluted: