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Hershey to Acquire Premium Dark Chocolate Business

The Hershey Co. has entered into an agreement to acquire Scharffen Berger Chocolate Maker Inc., one of the fastest-growing premium dark chocolate companies in the United States.

Based in Berkeley, Calif., Scharffen Berger is known for its high-cacao content, signature dark chocolate bars and baking products sold online and in a broad range of outlets, including specialty retailers, natural food stores and gourmet centers across the country. Scharffen Berger also owns and operates three specialty stores located in New York City, Berkeley and San Francisco.

"The premium chocolate segment represents a strategic opportunity for Hershey based on increasing consumer demand for distinctive, high-end chocolate and for the antioxidant benefits of dark chocolate," said Richard H. Lenny, Hershey's chairman, president and CEO. "Scharffen Berger's exceptional, on-trend products and entrepreneurial spirit have made it one of the fastest-growing companies in the $1.7 billion premium chocolate segment. We look forward to leveraging our extensive distribution network and technology to broaden consumer reach and expand our leadership position in the confectionery market."

The acquisition is expected to be completed during the third quarter of 2005 and is subject to the customary closing conditions.

In other company news, Hershey reported record sales for the second quarter and first half ended July 3, 2005.

Consolidated net sales for the second quarter were up 10.6 percent from the quarter the year before, to $988,447,000. For the first six months of 2005, consolidated net sales were $2,114,861,000, an increase of 10.9 percent.

"A combination of solid sales growth and improved leverage across the business system delivered record profitability, with earnings per share-diluted from operations increasing by 18.2 percent compared with the same period a year ago," Lenny said. "Organic sales growth of 7.6 percent represented a good balance between higher net price realization and continued new product innovation both within core confectionery and our snack platforms. The recently acquired Mauna Loa and Grupo Lorena businesses contributed 3 percent to the quarter's 10.6-percent sales growth.

"Hershey's performance has been very healthy through the first half of 2005," he continued. "We've delivered above-trend organic sales growth of 8 percent, strengthened our marketplace leadership, and delivered earnings per share-diluted growth from operations of 16.2 percent compared with the first half of last year. These results have been driven by broad-based innovation, superior retail execution and solid cost control."

The company expects 2005 net sales to increase at a rate somewhat above its long-term goal of 3 to 4 percent, with diluted earnings per share from operations increasing slightly above its long- term range of 9 to 11 percent.

Hershey also laid out plans to increase profits. The program includes voluntary workforce reduction, through an early retirement program and an enhanced mutual separation program; streamlining and creating new capabilities in Hershey's North American operations; and closure of the company's under-used Las Piedras, Puerto Rico manufacturing facility. Employees at this facility will receive severance support as well as assistance with career decisions and transition leading up to the plant closing in late 2005.

Hershey estimates that the cost to implement the program will result in a pre-tax charge of approximately $140 million to $150 million. The cash portion of the charge is $85 million to $90 million. The program, when fully implemented, is expected to generate ongoing annual savings of approximately $45 million to $50 million. A substantial portion of these savings will be invested in key growth efforts in the U.S. snack market, as well as in selected international markets principally through global customer alliances.

"The changes announced today are necessary for Hershey to remain competitive in the years ahead," Lenny said. "They will enable us to streamline our business, increase the investment in our consumer and customer initiatives, and build new organization capabilities.

"Based on our 2005 expected performance and the impact of today's announcement, we believe that, in 2006, net sales will increase at a rate somewhat above our 3- to 4-percent expectations."
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