Hershey: announces «Next Century» modernization

Hershey / PA. (thc) The Hershey Company 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 USD to 225 million USD plant expansion of the existing West Hershey facility and approximately 50 million USD to 75 million USD in distribution and administrative facilities located in Hershey, Pennsylvania. 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. Summary:

• Company to make 250 million USD to 300 million USD capital investment
• Production to transition from a century-old facility to modernized and expanded facility in Hershey, PA
• Program expected to generate annualized savings of approximately 60 to 80 million USD, enabling further investment in brand-building and global capabilities
• Realignment charges and start-up costs expected to be 140 to 170 million USD
• 2010 net sales outlook of six to seven percent growth
• Outlook for 2010 adjusted earnings per share-diluted in the 2,47 to 2,52 USD range, an increase of low-to-mid-teens, on a percentage basis, versus 2009

As part of the project, production will transition from the Company´s century-old facility at 19 East Chocolate Avenue in Hershey, Pennsylvania, 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 over 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 endeavour 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 to 170 million USD over the next three years. This estimate includes 120 to 150 million USD in pre-tax business realignment and impairment charges and approximately 20 million USD in project implementation and start-up costs. The cash portion of the total charge is estimated to be 95 to 110 million USD, including project implementation and start-up costs. Total capital expenditures related to the program are expected to be 250 to 300 million USD. At the conclusion of the program in 2014, ongoing annual savings are expected to be approximately 60 to 80 million USD.

«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 six to seven 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 USD per share-diluted, is expected to be in the 2,31 to 2,38 USD 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 USD 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.