Candy-maker continues its reducing regimen

The Hershey Co. took the third step yesterday in its quest to slim down under chief executive officer Richard H. Lenny, announcing a major restructuring that would bring total charges to $1 billion since October 2001.

The new plan calls for the largest U.S. candy-maker to take a charge of between $525 million and $575 million over the next three years to cut 1,500 jobs, or 11 percent of its workforce; eliminate more than a third of its production lines; outsource cheaper items; and build a plant in Mexico.

Hershey, which employs about 6,500 at its headquarters, five plants and other facilities in Pennsylvania, did not say which plants would be affected by the production-line cut.

Lenny said the goal of the restructuring was to develop "a truly global footprint for Hershey's iconic brands" and to deliver a flexible supply chain that would provide ongoing savings of $170 million to $190 million annually by 2010.

The catch for analysts was that Hershey said it would use "a portion" of the savings for growth initiatives.

Christopher R. Growe, who follows Hershey for A.G. Edwards & Sons Inc., estimated that Hershey would use $60 million of the annual savings for marketing, new-product development, and other efforts to boost sales.

"While we applaud the increased investment likely to occur here, we still believe it will fall short of the total investment needed to accomplish materially improved growth momentum," Growe said in a note to investors.

John M. McMillin, an analyst at Prudential Equity Group L.L.C., praised Hershey for trying to create "a leaner, meaner candy machine," but said "the company needs to commit to reinvesting those dollars rather than saying 'a portion.' "

Analysts are looking for Hershey to boost its industry-low spending on advertising and take other steps to reverse the weak-sales trends that plagued the company last year. From 2000 to 2005, Hershey's advertising bill fell 20 percent, to $125 million from $156 million, according to its 2005 annual report.

Just a couple of years ago, it would have seemed far-fetched to talk about the need for a turnaround at Hershey, which was posting stellar numbers both in the stock market and on its financial statements.

Hershey's shares more than doubled from March 2001, when Lenny became chief executive, to nearly $67 in May 2005. But then the momentum slowed.

After a four-year run of gaining market share from rivals Mars Inc., Nestle S.A. and smaller companies, the company last year found itself losing ground, though it still had 43 percent of the U.S. chocolate-candy market, according to a report last month by Citigroup Inc.'s David Driscoll.

Pablo E. Zuanic, an equity analyst with JPMorgan Chase & Co., called yesterday's restructuring plan a positive for the stock. But if Hershey is to keep its relatively high valuation, he said, management has to convince analysts and investors that the new plans will help it regain market share.

Yesterday, Hershey's shares gained 80 cents, or 1.56 percent, to close at $52.10 on the New York Stock Exchange.

Under its realignment effort, the company said products would come from fewer facilities, implying that it would shut some plants. The company has three factories in Hershey, and one each in Lancaster, Reading and Hazleton.

In a 2001 restructuring, Hershey closed factories in Palmyra, Pa., and in the northern Montgomery County town of Pennsburg. A gum factory in Puerto Rico was closed in the 2005 restructuring.

But the company is not only closing plants this time. It is also building a factory in Monterrey, Mexico. That plant would reduce the amount of production in the United States and Canada from 90 percent now to about 80 percent three years from now.