Hershey outlook ‘stable’ for 2012 with international expansion afoot, says rating agency

By Oliver Nieburg

- Last updated on GMT

Related tags: Cost, Hershey

Hershey outlook ‘stable’ for 2012 with international expansion afoot, says rating agency
Chocolate giant Hershey will experience improved sales and flat profit margins in 2012 and will seek out acquisitions in international markets, according to credit agency Standard & Poor’s (S&P).

Hershey’s strong position in the US chocolate market will stand it in good stead for the year ahead, said S&P, as the confectioner will profit from Easter sales and supply chain efficiency initiatives.

S&P: Sales up for 2012

“Hershey's core chocolate business provides fairly stable earnings and profitability,”​ said S&P.

“Although we expect continued volatile and rising commodity costs, we do not expect material EBITDA margin pressure in 2012, since we believe Hershey has good visibility into its cost structure,”​ it continued.

The ratings agency forecast Hershey’s 2012 net sales to grow in mid-single digits and profit margin to remain flat.

Supply chain initiatives to offset commodity costs

S&P expects Hershey to maintain its strong position in the US market in spite of volatile raw material costs

“We believe the wraparound effect of price increases, particularly as seasonal net price increases phase in at Easter 2012, and ongoing productivity improvements will largely mitigate the impact of higher input costs in 2012,”​ it said.

Hershey is currently implementing its ‘Project Next Century’​ that was announced in June 2010. The company hopes this streamlined supply chain initiative will produce $65m to $80m in cost savings by 2014.

Over the next three years, Hershey expects to incur around $155m in implementing costs for the scheme.

S&P noted that historically, Hershey had saved around 3% of manufacturing overhead annually as a result of similar initiatives.

International acquisitions

The US market currently accounts for around 85% of Hershey’s sales.

“The company is focused on geographic expansion,”​ said S&P.

“We expect any acquisitions to be small, tuck-in businesses funded through cash flow. We believe such acquisitions may occur in international markets,”​ it continued.

In 2011, Hershey net sales in international markets grew faster than the US.

US sales grew approximately 5.9% compared with 2010, while sales outside the US rose 14.5%, reflecting sales volume increases and net price realization with Mexico, Brazil, China and India the highlights.

‘Solid plans’ for China

Hershey CEO John Bilbrey said following the company’s fourth quarter results last month: “Our solid position in the US marketplace continues to give us flexibility to invest in key international markets where we gaining momentum,”

“We have a solid plan that will enable us to maintain our momentum in China,” ​he added.

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