|Letter to Stockholders|
The acquisition of Leaf North America enhances our overall position in the North American confectionery market, reinforces our commitment to growth in non-chocolate confectionery and positions us well in this more rapidly growing category.
We began a process of change three years ago designed to enhance our stockholders' investment by improving efficiencies and accelerating profitable growth. We made very good progress in this effort during 1996 thanks to a concentrated focus on:
Kenneth L. Wolfe
Chairman of the Board and Chief Executive Officer
Joseph P. Viviano
President and Chief Operating Officer
Equally important to adding value is an organizational structure which
can support profitable growth. We must have an organization focused directly
on quality products, efficient operations, flexible responses to the needs
Our December 1996 acquisition of Leaf North America from Huhtamèki Oy of Finland enhances our overall position in the North American confectionery market, reinforces our commitment to growth in non-chocolate confectionery and positions us well in this more rapidly growing category.
Leaf's well-known chocolate and non-chocolate brands include Good & Plenty candy, Heath toffee bar, Jolly Rancher candy, Milk Duds chocolate-covered caramels, PayDay peanut caramel bar and Whoppers malted milk balls. Gum brands include Super Bubble and Rain-Blo.
Moving forward, we expect to expand the sales of these products through integration into our sales and distribution systems and improve margins through lower overhead and improved cost-effectiveness of these operations. This is indeed a wonderful opportunity for us to profitably grow this business.
The purchase of Leaf North America follows the acquisition of the smaller Henry Heide, Inc. in December 1995. Heide products include such non-chocolate confectionery items as Jujyfruits candy, Wunderbeans jellybeans and Heide jujubes. Throughout 1996, we worked successfully to integrate the manufacturing, sales and distribution of these products into our existing operations. We expanded the sales of these brands during the year and improved their profitability.
Also contributing to our presence in the non-chocolate confectionery category was Twizzlers candy, which enjoyed another year of strong growth.
We introduced a number of successful, new products. Hershey's Sweet Escapes candy bars, our first line of reduced fat and calorie chocolate confectionery products, were shipped to customers in April 1996. Sweet Escapes has become our most successful new product introduction to date, and we expect to build further on the base we have established in this category.
Hershey's TasteTations, our first line of hard candies, were introduced in June 1996. Internally developed, the response to TasteTations has dramatically exceeded our expectations. We fully expect this new brand to be a mainstay in our non-chocolate confectionery business in the future.
We introduced Hershey's Pot of Gold boxed chocolates in August 1996, our first full-line entry into the boxed chocolate category in the United States. Pot of Gold, the leading boxed chocolate in Canada, is targeted to Christmas and Valentine's Day, the two principal holidays for boxed chocolate sales.
Hershey's Cookies 'n' Creme candy bar, a blend of crunchy chocolate cookie bits in white chocolate, was introduced in late 1995 and supplied incremental growth during 1996. Unlike many other new products in the confectionery industry, Cookies 'n' Creme did not experience softness in sales as introductory marketing support was curtailed. Instead, it continued its solid growth throughout the year.
Hershey's Nuggets chocolates - in milk chocolate, milk chocolate with almonds, Cookies 'n' Creme and Cookies 'n' Mint brands-have created significant incremental growth for the core brands they represent. This product line is just one example of Hershey's ability to recognize and meet the consumer's desire for a quality, portion-controlled chocolate in a unique shape.
In December 1995, we reluctantly increased the wholesale price of our standard candy bar and king size bar line in the United States by 11% (approximately a 4% price increase for our entire U.S. confectionery business). This was the first price increase in this line in almost five years. Although the predictable volume reductions associated with such a price increase did occur, they were more than offset by significant growth in our seasonal candy business, new product introductions, and strong, customer-oriented programs tied to successful consumer marketing promotions.
We have invested in areas which will generate future revenue and further support profitable growth. In August 1996 we initiated two new chocolate and confectionery capital projects-one for the expansion of our Stuarts Draft, Va., facility and the other for new production equipment at our Naugatuck, Conn., facility. In addition, we increased production capacity both for core and new products and continued to modernize existing plants.
We continue to evaluate our international business and focus our efforts in areas where we can achieve profitable growth and a reasonable return on our investment. Concurrent with the Leaf acquisition, Huhtamèki Oy acquired our European confectionery companies, German praline manufacturer Gubor Schokoladen and the Italian confectionery company Sperlari Srl. Our businesses in Russia and China are proceeding according to plan, and we continue to press forward with the development of these markets. Licensing programs with our partners throughout the Far East continue to perform well.
We made a number of organizational changes designed to support our goal of profitable growth. As appropriate, we are moving to develop corporation-wide shared service functions throughout Hershey Foods. We believe this organizational structure will facilitate improved customer service at a lower cost in all our businesses. We also integrated our Hershey Pasta and Hershey Grocery businesses into one business unit-Hershey Pasta and Grocery Group-to realize improved efficiencies, cash flows and returns.
We have made a major commitment to upgrade our information systems, enhancing our ability to more efficiently and profitably service our customers and consumers.
The corporation's excellent performance in 1996 added significant value for stockholders through the increase in the price of its Common Stock. These results could not have been achieved without the commitment and dedicated performance of our employees. Accordingly, effective December 3, 1996, our Board of Directors approved a one-time stock option program for eligible employees. Under this program, each eligible employee will be awarded a grant of options to purchase 100 shares of our stock in accordance with provisions of the program. We believe that by working together as owners with a focused goal of improved performance, both our employees and the corporation will benefit through the creation of increased stockholder value.
An Outstanding Year
Sales reached $3,989,308,000, up 8% as a result of confectionery volume growth including new product introductions, effective pricing and the Heide acquisition, offset somewhat by the divestiture of the Planters nut and Life Savers hard roll candy businesses in Canada and the OZF Jamin business in Europe.
Net income from operations was $308,538,000, up 10% excluding the fourth quarter charge of $35,352,000 for the disposal of our European businesses and the 1995 restructuring activities. There was no tax benefit associated with the loss.
Earnings per share of $1.77 were up 4%. Excluding the impact of the loss on the disposal of businesses in 1996 and restructuring activities in 1995, earnings per share from operations were $2.00, up 18% as a result of the strong business performance and a lower number of shares outstanding.
Our stock price increased 35%, well ahead of the S&P 500 which grew at 20% and the S&P Food Group which grew at 16%.
Higher earnings, strong free cash flow and improved return on investment were further amplified by our stock repurchase programs which additionally enhanced stockholder returns.
In September 1996, the dividend paid on the Common Stock was increased by 11%. This was the 22nd annual increase in the Common Stock dividend. At the same time, the corporation's stock was split two-for-one, placing the stock in a more popular price range and enhancing its trading liquidity.
Our Quality Through Excellence (QTE) initiative drove many activities throughout the corporation in 1996. We cannot overemphasize the critical role our employees play in our quality enhancement, cost control and productivity improvement efforts. Their contributions support the corporation's success, allowing us to offer our customers and consumers quality products at a reasonable price with first-class services.
Management and Director Changes
Effective January 1, 1997, Raymond Brace, formerly Vice President, Manufacturing, Hershey Chocolate North America, became Vice President, Operations. This new, corporation-wide shared service function includes logistics, procurement, engineering and information technology integration.
Effective April 30, 1996, three members of the corporation's board of directors retired. Francine I. Neff, Vice President and Director, NETS Inc., a privately-held investment corporation, served on Hershey's board for 18 years. Sybil C. Mobley, Ph.D., Dean, School of Business and Industry, Florida A&M University, served on Hershey's board for 13 years. Howard O. Beaver, Jr., former Chairman and Chief Executive Officer, Carpenter Technology Corporation, served on our board for 12 years. Hershey benefited greatly from their vast experience and solid advice, and we thank them for their contributions and service to the corporation.
Also effective April 30, 1996, two new directors were elected to Hershey's board: C. McCollister Evarts, M.D., Chief Executive Officer of The Milton S. Hershey Medical Center, Senior Vice President for Health Affairs and Dean of the College of Medicine, The Pennsylvania State University; and Mackey J. McDonald, President and Chief Executive Officer, VF Corporation. We welcome the wealth of knowledge and experience they bring to the corporation.