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The Hershey Co.'s recently announced comprehensive, three-year supply chain transformation program is expected to enhance its manufacturing, sourcing and customer service capabilities and generate significant resources to invest in the company's growth initiatives.
Among it's plans: 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, Hershey will reduce 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. 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 United States and Canada.
"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," said Richard H. Lenny, Hershey's chairman, president and CEO. "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.
Hershey estimates 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, including core brand growth, new product innovation, selling and go-to-market capabilities and 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, the company said in a statement.
Hershey reaffirmed its long-term goals of sales growth of 3 percent to 4 percent and growth in diluted earnings per share from operations of 9 percent to 11 percent. Given the lower level of savings and higher investment profile for 2007, sales growth is projected to be within the 3 percent to 4 percent range, with growth in diluted earnings per share from operations of 7 percent to 9 percent.