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Hershey's growth not without its costs

By Peter Stiff , 26-Jan-2006

New products and seasonal success may have given Hershey increased 2005 sales, but income for the confectionery colossus remains blighted by the cost of reorganisation.

Hershey yesterday announced record sales and earnings from its fourth quarter ending 31 December 2005 however sales growth for the full year has not come without its costs.

The confectioner has also revealed that new products will lead growth in 2006 and that rising commodity costs are not expected to be a problem.

Net sales for the company's fourth quarter were $1.4 billion (€1.1bn), an increase of 6.7 per cent on the 2004's final period.

Net income was $181 million (€148m) for the fourth quarter, up 10.4 per cent.

This figure, however, does not include business realignment charges of $17.6 million (€14m) for the fourth quarter.

Hershey last year announced extensive realignment plans to streamline particular segments of its business with the aim of boosting profits.

When taking into account the pre-tax charges the company's income stands at $172 million (€140m), up from $167 million (€136m) in the fourth quarter of 2004.

Hershey's full year 2005 sales were $4.8 billion (€3.9bn), an increase of 9.2 percent on the 2004 figure of $4.4 billion (€2.9bn).

Net income, however, suffered a decrease due to the realignment charges.

Income for 2005 was $483 million (€294m), compared to the $578 million (€471.6m) achieved in 2004.

Management attributed the fall to the costs of reorganisation amounting to $119 million (€97m). Income in 2004 was boosted by a one off $61 million (€50m) reduction in income tax, they said.

Management said the company's fourth quarter sales growth was a result of new products and strong seasonal shipments.

"Sales growth for the quarter of 6.7 per cent was driven by organic sales growth of nearly four per cent from new products and strong seasonal shipment," said Hershey Chairman, Richard Lenny.

Later in a press conference he attributed strong seasonal sales to the early shipments of this year's Easter and Valentines Day related products.

When referring to the full year Lenny also cited solid seasonal performance along with innovation and price increases as the source of organic growth of six per cent.

Lenny also claimed that Hershey was the fastest growing company in both the US confectionery and US snack markets in terms of market share gains.

Looking forward Lenny said:

"As we enter 2006, Hershey's value-enhancing stategy remains relevant and sustainable. Product news across the portfolio including limited editions, new platforms, and benefit upgrades to existing brands will be the key driver of our sales growth."

At the press conference after the announcement of the results management said they expected five to 10 per cent of annual shipments to be new products.

However, rising costs will continue for the company.

The remainder of costs relating to business realignment will be recorded in the first half of 2006.

So far the scheme has set Hershey back $119 million (€97m) and the total cost is expected to climb to $140-150 million.

Management, however, do not seem to be too troubled by rising input costs, despite prices for valuable confectionery commodities such as cocoa and sugar reaching record highs.

Answering questions from the floor, management noted the company anticipated the volatile environment in commodities to increase in 2006.

As ever the political situation in the Ivory Coast was cited as the major concern in the cocoa market.

The company acknowledged that sugar prices were still being impacted by reduced refinery capacities as a result of last year's hurricanes in the US.

Management said its strategic hedging of commodities meant the effects of price fluxations would be minimized.

The degree to which sugar and cocoa had been hedged was not revealed to protect strategy.

Management said commodity hedging was no more or less than it had been historically and that Hershey had always taken a long-term view on sugar.

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