The Hershey Company announced a three-year supply chain transformation program. When completed, Hershey says the program will enhance its manufacturing, sourcing and customer service capabilities, and generate resources to invest in the company's growth initiatives.
The initiatives include accelerated marketplace momentum within the company's core U.S. business, creation of new product platforms and 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 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 CEO, The Hershey Company, said, "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. 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, COO, "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.
