February 15, 2007
Hershey Announces Global Supply Chain Transformation
HERSHEY, Pa., Feb. 15 /PRNewswire-FirstCall/ -- The Hershey Company today announced a comprehensive, three-year supply chain transformation program. When completed, this program will greatly enhance Hershey's manufacturing, sourcing and customer service capabilities, and will generate significant resources to invest in the company's growth initiatives. These initiatives include accelerated marketplace momentum within the company's core U.S. business, creation of innovative new product platforms to meet consumer and customer needs, and disciplined global expansion.
Under the program, which will be implemented in stages over the next three years, Hershey will:
- Significantly increase manufacturing capacity utilization by reducing the number of production lines by more than one-third; - Outsource production of low value-added items; and, - Construct a flexible, cost-effective production facility in Monterrey, Mexico to meet current and emerging marketplace needs.
The transformation program will result in a flexible, global supply chain capable of delivering Hershey's iconic brands, in a wide range of affordable items and assortments, across retail channels in the company's priority markets. Finished products will be sourced from fewer facilities, each one a center of excellence specializing in Hershey's proprietary product technologies. Increased access to borderless sourcing will further leverage the company's manufacturing scale within a lower overall cost structure.
Hershey has developed a phased, three-year plan to ensure smooth implementation and to maintain product quality and customer service. The program will result in a total net reduction of approximately 1,500 positions across Hershey's supply chain over the next three years. When completed, manufacturing of approximately 80 percent of the company's production volume will take place in the U.S. and Canada.
Richard H. Lenny, Chairman, President and Chief Executive Officer, The Hershey Company, in announcing the global supply chain transformation program, said, "Hershey has delivered superior marketplace and financial performance since launching its value-enhancing strategy in 2001. The changing marketplace presents both challenges and exciting opportunities for our company. In order for Hershey to remain competitive, we are implementing a comprehensive strategic agenda focused on increasing our North American marketplace leadership and developing a truly global footprint for Hershey's iconic brands.
"When completed," continued Lenny, "the transformation program will deliver a flexible, advantaged supply chain designed to meet a diverse range of consumer and customer needs while generating significant resources available to invest behind our strategic growth initiatives. We recognize this will involve considerable change over the next three years, and intend to make this transformation of our supply chain as smooth as possible for our employees and customers. We will work closely with those affected by the program to assist them with the transition."
The company estimates the program will incur pre-tax charges and non- recurring project implementation costs of $525 million to $575 million over the next three years. This estimate includes $475 million to $525 million in pre-tax business realignment charges and approximately $50 million in project implementation costs. These charges will be incurred primarily in 2007 and 2008, with approximately $300 million expected in 2007. The cash portion of the total charge is estimated to be $275 million to $300 million.
As a result of the program, Hershey estimates that its gross margin should improve significantly, with ongoing annual savings of approximately $170 million to $190 million generated by 2010. A portion of these savings will be invested in the company's strategic growth initiatives, in such areas as core brand growth, new product innovation, selling and go-to-market capabilities, and disciplined global expansion. The amount and timing of this investment will be contingent upon market conditions and the pace of the company's innovation and global expansion.
"This supply chain program," said David J. West, Executive Vice President, Chief Operating Officer, "was developed following an extensive assessment of Hershey's manufacturing capabilities, future growth expectations, and the investment needed to achieve these expectations. We expect to make steady progress with the program over the next three years. The long-term benefits will include a significant, sustainable increase in investment behind Hershey's iconic brands and new product innovation, as well as targeted, profitable international expansion. We recently announced a manufacturing joint venture in China with Lotte Confectionery Company, another step in our disciplined global expansion."
Hershey reaffirmed its long-term goals of sales growth of 3-4 percent and growth in diluted earnings per share from operations of 9-11 percent. Given the lower level of savings and higher investment profile for 2007, sales growth is projected to be within the 3-4 percent range, with growth in diluted earnings per share from operations of 7-9 percent.
Further details of the Global Supply Chain Transformation can be found on the Investor Relations section of the company's website at http://www.thehersheycompany.com/ir/ .
Safe Harbor Statement
This release contains statements which are forward-looking. These statements are made based upon current expectations which are subject to risk and uncertainty. Actual results may differ materially from those contained in the forward-looking statements. Factors which could cause results to differ materially include, but are not limited to: our ability to implement and generate expected ongoing annual savings from the initiatives to transform our supply chain and advance our value-enhancing strategy; changes in raw material and other costs and selling price increases; our ability to execute our supply chain transformation within the anticipated timeframe in accordance with our cost estimates; the impact of future developments related to the recent product recall and temporary plant closure in Canada including our ability to recover costs we incurred for the recall and plant closure from responsible third-parties; pension cost factors, such as actuarial assumptions, market performance and employee retirement decisions; changes in our stock price, and resulting impacts on our expenses for incentive compensation, stock options and certain employee benefits; market demand for our new and existing products; changes in our business environment, including actions of competitors and changes in consumer preferences; changes in governmental laws and regulations, including taxes; risks and uncertainties related to our international operations; and such other matters as discussed in our Annual Report on Form 10-K for 2005.
About The Hershey Company
The Hershey Company is the largest North American manufacturer of quality chocolate and sugar confectionery products. With revenues of nearly $5 billion and more than 13,000 employees worldwide, The Hershey Company markets such iconic brands as Hershey's, Reese's, Hershey's Kisses, and Ice Breakers. Hershey is the leader in the fast-growing dark and premium chocolate segment, with such brands as Hershey's Special Dark, Hershey's Extra Dark and Cacao Reserve by Hershey's. Hershey's Ice Breakers franchise delivers refreshment across a variety of mint and gum flavors and formats. In addition, Hershey leverages its iconic brands, marketplace scale and confectionery and nut expertise to develop and deliver substantial snacks, including Hershey's and Reese's single-serve cookies and brownies, and value- added snack nuts, including Hershey's Milk Chocolate Covered Almonds and Hershey's Special Dark Chocolate Covered Almonds. Hershey also offers a range of products to address the health and well-being needs of today's consumer. Hershey's and Reese's Snacksters offer consumers great-tasting snacks in portion-controlled servings, while Hershey's dark chocolate offerings provide the benefits of flavanol antioxidants. In addition, Artisan Confections Company, a wholly owned subsidiary of The Hershey Company, markets such premium chocolate offerings as Scharffen Berger, known for its high-cacao dark chocolate products, Joseph Schmidt, recognized for its fine, handcrafted chocolate gifts, and Dagoba, known for its high-quality natural and organic chocolate bars. Visit us at http://www.hersheynewsroom.com/.
The Hershey Company
CONTACT: MEDIA CONTACT: Kirk Saville, +1-717-534-7641, or FINANCIALCONTACT: Mark Pogharian, +1-717-534-7556, both of The Hershey Company
Web site: http://www.thehersheycompany.com/irhttp://www.hersheynewsroom.com/