Hershey Media Report 10/28/16

National Coverage

1. Hershey Is Getting Sweeter

   Oct 28, 2016 | Bloomberg

   By Tara Lachapelle
   
   
   Hey Mondelez, how does $125 a share look now?It was just two months ago that Mondelez International Inc., the $70 billion international snacks business formerly part of Kraft Foods, dropped a poorly executed attempt to acquire chocolate behemoth Hershey Co. Mondelez had made a low-ball bid of $107 a share in cash and stock, which was difficult to take seriously when Hershey -- a trust-controlled entity with deep ties to its hometown, long considered an unwilling seller -- already traded in the high $90s. It was reported at the time that Hershey would only discuss a sale to Mondelez if the price started at $125 a share. The talks never did begin.
2. In light of recent developments at Tata Sons, are trusts suited to run modern day business empires?

   Oct 28, 2016 | Economic Times

   By Vikram Doctor
   
   
   In 1961 when the Wellcome Trust first started exploring the idea of selling Burroughs Wellcome, the pharmaceutical giant it owned in full and whose profits supplied its income, the reaction from within Trust and company was not positive.
3. Hershey Revenue and Profit Rise

   Oct 28, 2016 | Wall Street Journal

   By Annie Gasparro
   
   
   Hershey Co. said Friday that Americans are snacking more, helping the chocolate maker to post higher quarterly sales and raise its profit outlook. The company, which reported a better-than-expected third-quarter profit, pointed to increased spending, despite mixed signals about consumer confidence during the quarterly earnings season and competition from rivals targeting health-conscious consumers.
4. Hershey earnings are a treat just before Halloween

   Oct 28, 2016 | CNN Money

   By Paul R. La Monia
   
   
   Hershey (HSY) gave another kiss to Wall Street with some sweet guidance as well. Shares of Hershey rose 5% in early trading on the news. And hey! It's also #NationalChocolateDay. (Maybe Hershey should buy Twitter (TWTR, Tech30)? Heh.)

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National Coverage

1. Hershey Is Getting Sweeter

   Oct 28, 2016 | Bloomberg

   By Tara Lachapelle

   Hey Mondelez, how does $125 a share look now?

   It was just two months ago that Mondelez International Inc., the $70 billion international snacks business formerly part of Kraft Foods, dropped a poorly executed attempt to acquire chocolate behemoth Hershey Co. Mondelez had made a low-ball bid of $107 a share in cash and stock, which was difficult to take seriously when Hershey -- a trust-controlled entity with deep ties to its hometown, long considered an unwilling seller -- already traded in the high $90s. It was reported at the time that Hershey would only discuss a sale to Mondelez if the price started at $125 a share. The talks never did begin.

   On Friday, Hershey shares surged about 6 percent to $101 and change after it reported better-than-expected third-quarter profit on sales that were in line with estimates. The $22 billion company is trying to show investors how it can hold up as not just candy makers, but the entire packaged-food industry faces slow-to-no growth and many consumers turn toward healthier-ish options. Hershey has cut costs including advertising spending and is ramping up innovation by introducing new versions of old favorites, such as the Reese's Pieces peanut butter cups mashup -- yet another iteration of a more than 80-year-old product.

   Hershey's recent performance could warrant another more thoughtful look from Mondelez, which is the second-biggest seller of chocolate globally thanks to its Cadbury brand but is trying to make a push into the U.S. chocolate market. (The Oreo-branded candy bars you may have noticed on your store shelves aren't just a one-off thing.) Buying Hershey, the industry leader, would be much easier.

   Mondelez, which was intended to have more of an international focus, is now realizing that because of sugar-addicted Americans, the U.S. is still probably the best place to be. That's especially true when the strong U.S. dollar is eating profit earned overseas. Hershey is still North America-centric. 

   United States of Sugar

   Hershey generates almost all of its revenue in the U.S., while more than a third of Mondelez's sales come from Europe and an additional 30% is split between Asia and Latin America

   Those points aside, the longer-term outlook for Hershey isn't so rosy that the company is above selling itself should it receive a fair offer. Aside from the boost it got when Mondelez proposed a merger, Hershey's stock has been flat for two years and only one of 21 analysts tracked by Bloomberg recommend buying the shares at these levels.

   Sugar Crash

   These past few months, Hershey has gotten the least love from analysts since the U.S. recession in 2009

   Hershey is working to drive down costs, the same strategy that helped Mondelez post profit this week nearly 20 percent above analysts' average forecast. But you can't cut costs forever to make up for a lack of growth, especially as competition intensifies. Aside from Mondelez getting into the U.S. chocolate game, earlier this month Mars Inc., the maker of M&Ms, said it was buying out Warren Buffett's $2.1 billion preferred stake in its Wrigley chewing-gum business, making it easier for Mars to combine its chocolate and gum units. 

   There are also questions about the sustainability of Hershey's gross margin and whether it's reached a peak. The company has been making bolt-on acquisitions of faster-growing brands, such as Krave jerky and BarkThins, but the catch is that these diversification efforts may run counter to its margin-expansion goals, given that snacks generally carry lower margins than its U.S. chocolate products. So Hershey may face an internal tug of war between growth and profitability, which could be easier to balance out within a broader entity.

   King-Size Margin

   After incurring costs of goods sold, Hershey has a lot left over -- but this may be as high as its gross margin can go as it adds snacks to the mix. In addition, its operating margin has room for improvement.

   Let's also not forget that Hershey CEO J.P. Bilbrey is on his way out. Bilbrey, who has been at the company for more than a decade and at the helm since May 2011, plans to step down by next summer. The board has tasked a special committee with searching for his replacement, which always brings a certain degree of uncertainty as far as future strategy.

   The timing of this, alongside a shakeup of the scandal-laden trust that controls Hershey, potentially makes a merger more feasible next year. Because the trust is legally obligated to finance the Milton Hershey School for underprivileged children, though, any acquirer would need to continue providing that support. A deal also hinges on the Pennsylvania attorney general not opposing a transaction. So there are still hurdles, but perhaps they're lessening.

   Mondelez is no doubt keeping an eye on these developments, plus it has Bill Ackman's Pershing Square Capital Management and Nelson Peltz's Trian Fund Management among its shareholder ranks and they're waiting for the company to dosomething -- eat or be eaten. Should Mondelez relent and come back with a bid proposal in the neighborhood of what Hershey's looking for, that may be good and plenty to bring the chocolate maker to the negotiating table and give investors their pay day.

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2. In light of recent developments at Tata Sons, are trusts suited to run modern day business empires?

   Oct 28, 2016 | Economic Times

   By Vikram Doctor

   In 1961 when the Wellcome Trust first started exploring the idea of selling Burroughs Wellcome, the pharmaceutical giant it owned in full and whose profits supplied its income, the reaction from within Trust and company was not positive. 

   
   It seemed to strike at the heart of the synergy envisaged by Sir Henry Wellcome, the founder of the company, when he willed its ownership to a Trust that would promote medical research. Ever since his death in 1936 the company funded the Trust, and the Trust’s reputation helped the company stand apart from the rest of the pharmaceutical sector, as well as usefully guarding it against takeover. 

   
   The history of the Wellcome Trust quotes WN Creasy, the powerful head of the American operations of Burroughs Wellcome writing: "To my mind, it would also be breaking faith with those of us in the Company, and for that matter with those outside it too, who believe and have faith in the unique character, traditions and high aims of the Company." 
   
   That ended the matter for 25 years. It was only in 1986 that the Trust cautiously took the company public and sold 30% of its shares. A second tranche went in 1992 and finally, in 1995, the Trust washed its hands of the company when it sold its balance shares to Glaxo. Burroughs Wellcome became part of GlaxoSmithKline, while the Trust is now one of the wealthiest in the world with an investment portfolio of over £18 billion and an outstanding reputation in funding medical research. 
   
   What changed the Trust's views? One theory is that it saw what happened with another once famous British company and the trust it supported. When Lord Nuffield, the British automobile engineer and entrepreneur who, among other things, designed the car that became known in India as the Ambassador, used his business interests to set up the Nuffield Foundation in 1943, it seemed like another great combination of business and philanthropy. 

   But the Foundation had not looked outside the company as the British auto industry went into long term decline, and Nuffield's company was absorbed into British Leyland, which went through various attempts at rescue and revival before finally going into administration in 2005. (One of the parts finally spun out of that was Jaguar Land Rover, which was bought by the Tata Group). The Nuffield Foundation is estimated to have lost 90% of its value in the process. 

   Another company that has struggled with this issue is the American chocolate maker Hershey. In 1905 the founder Milton S Hershey set up the Hershey Trust Company to run the Milton Hershey School he had founded. Since then the Trust has tried to figure what it should do with this ownership, and never come to a clear conclusion. 

   At a time when the food industry is merging for greater synergies, Hershey has rebuffed offers from Cadbury's and Kraft (the latter then took over the former). At a time when American brands have gone global and become huge, Hershey remains relatively small and American only (the rather peculiar tasting chocolate it makes is part of the problem). It has also been accused by former trustees of misusing its assets, for example by buying a golf course. An investigation by the Pennsylvania attorney general’s department agreed not to press charges against the Trust, as long as it cleaned up its act. 
   
   In all the drama going on at Tata Sons, a key issue seems to be the demands of the Trusts that control a majority of Tata Sons shares. As with the Wellcome Trust back in 1961, this ownership is touted as a matter of great pride for Tata group companies. The fact that their profits – if they exist – go to support the Trusts' charitable schemes gives the whole group an aura of a philathropic organisation. 

   In their dealings with British steel sector unions, for example, this fact has been trotted out to suggest that Tata is somehow different and committed to the public good, and hence should be treated by a different, more indulgent standard than the average global multinational. The actions of Mr. Mistry in trying to reduce debt and realise the value of group assets is being criticised for going against the group's image, which ultimately derives from the Trusts and their sense of being above business.

   
   But why? As the contrasting fortunes of the Wellcome and Nuffield trusts shows, if Trusts are being honest to their missions, rather than just sustaining comfortable but non-performing bureaucracies, then taking hard decisions about debt and assets is very much in their interests. And they might well conclude that in the long run it really makes little sense yoking philanthropic and business interests, with their vastly different concerns. 
   
   A great deal is being made about the performance of Tata companies, but perhaps it's time for some scrutiny of the Trusts activities as well. As the developmental sector as a whole has professionalised it has had to adopt wider standards of efficiency and be judged against others in the same field. Has this sort of analysis and comparison been done for the Tata Trusts activities? 
   
   Could this lead to questions being asked about their stewardship of Tata Sons? And was the prospect of someone actually doing this, and maybe reaching the sort of conclusion the Wellcome Trust did, part of what triggered what seems like a profoundly backward looking attempt at ending a much needed debate on the future of the Trusts and the Company? 
   

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3. Hershey Revenue and Profit Rise

   Oct 28, 2016 | Wall Street Journal

   By Annie Gasparro

   Hershey Co. said Friday that Americans are snacking more, helping the chocolate maker to post higher quarterly sales and raise its profit outlook.

   The company, which reported a better-than-expected third-quarter profit, pointed to increased spending, despite mixed signals about consumer confidence during the quarterly earnings season and competition from rivals targeting health-conscious consumers.

   “I think we can see that there’s firming in the category,” Chief Executive J.P. Bilbrey said on a call Friday with analysts. “We think people are, across all income cohorts, beginning to spend a little more confidently than they have before.”

   The company rejected a takeover approach from Oreo cookie maker Mondelez International Inc. earlier this year.

   Mr. Bilbrey is to step down in July. Michele Buck, promoted last summer to chief operating officer and a likely CEO candidate, is taking on such challenges as an increased presence of health-focused snacks at checkout lanes and rival chocolate brands upping their game.

   “There has been a bit more competition” from healthy items, Ms. Buck said Friday.

   Hershey, which also makes Reese’s Peanut Butter Cups and Jolly Ranchers, reported a 46% rise in third-quarter profit as sales rose 2.2% from a year earlier to $2 billion.

   Hershey now expects full-year earnings, adjusted to exclude certain items, of $4.28 to $4.32 a share; that is four cents higher than its previous estimate.

   Shares rose 7.2% to $102.40 in Friday trading.

   Over the summer, Mondelez made an offer, but Hershey’s board wanted more money for the iconic company. In August, Mondelez announced an end to its pursuit, leaving Hershey to pursue alone an expansion overseas and into the snack aisle.

   Over the past couple of years, Hershey has bought Krave beef jerky, created a line of protein bars and squeeze pouches called SoFit, and come out with snack mixes of chocolate, pretzels and nuts, in an effort to broaden its reach.

   Meanwhile, M&M’s maker Mars Inc. is merging operations with its Wrigley gum division, giving it more leverage with retailers. And Mondelez is bringing its European chocolate brand Milka to the U.S., with its Oreo chocolate bar coming out around the same time as Hershey’s Cookie Layer Crunch.

   Hershey reported profit of $227.4 million, or $1.06 a share in the latest quarter, compared with $154.8 million, or 70 cents a share, a year prior. Excluding certain one-time factors, earnings were $1.29 a share, up 10% from the prior year and topping analysts’ estimate of $1.18 a share, according to Thomson Reuters.

   Hershey’s relatively new Chinese business contributed to the performance with a 15% rise in sales during the quarter in local currency terms.

   In North America, which accounts for nearly 90% of sales, revenue rose 1.8% to $1.76 billion.

   India and Canada were trouble spots, though, with sales falling 7.7% in Canada and 21% in India in local currency terms.

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4. Hershey earnings are a treat just before Halloween

   Oct 28, 2016 | CNN Money

   By Paul R. La Monia

   Hershey (HSY) gave another kiss to Wall Street with some sweet guidance as well. Shares of Hershey rose 5% in early trading on the news. And hey! It's also #NationalChocolateDay. (Maybe Hershey should buy Twitter (TWTR, Tech30)? Heh.)

   This is the first earnings report for Hershey since Cadbury owner Mondelez (MDLZ) abandoned its plan to buy Hershey for $23 billion.

   Hershey rejected the bid repeatedly. And a hostile takeover of the company is virtually impossible: The Hershey Trust owns nearly all the company's special Class B shares, which have extra voting rights. The Hershey Trust owns 34% of the overall company.

   So the strong results could be viewed as vindication for Hershey. The stock is up nearly 10% this year.

   Still, Hershey's shares, trading around $100, remain a bit below the $107 that Mondelez offered in its takeover bid. There has been some speculation that Mondelez may eventually come back with another bid.

   But Mondelez didn't mention Hershey once in its earnings call with analysts when it reported its latest results earlier this week. And as long as Hershey continues to prove to Wall Street that it can do fine on its own, it may not face renewed pressure to sell.

   Hershey's overall revenue rose more than 2% in the quarter, to $2 billion. Sales are growing faster overseas than in its home market -- more than 5% internationally compared with just under 2% in North America.

   The company also boosted its profit outlook for all of 2016.

   So Hershey may be able to fend off any unwanted takeover offers if it keeps putting up numbers like this. If anything, Hershey may be looking to do more deals of its own. Hersey has expanded beyond the core candy business lately..

   Hershey acquired jerky maker Krave last year and followed that up this year with the purchase of Bark Thins, a company that makes healthier chocolate snacks that use fair trade cocoa and no GMOs, artificial flavors or preservatives.

   But Hershey, famous for its namesake candy bars as well as Kit Kat bars and E.T.'s favorite snack -- Reese's Pieces -- is still looking to innovate in the world of chocolate as well.

   Hershey has a big product launch that it is aggressively marketing: Hershey's Cookie Layer Crunch bars.

   The company said that consumer test scores for the new bars, which come in caramel, vanilla crème and mint flavor, are among the highest in its history. Caramel is the new black for candy, apparently. Mars just introduced caramel M&M's.

   But if Cookie Layer Crunch bars start flying off the shelves, that could lead to even tastier earnings and sales growth ahead.

   It may be time for Wall Street to start singing some Sammy Davis Jr. -- or Gene Wilder as Willy Wonka: "Who can take a sunrise, sprinkle it with dew? The Candy Man can." And that's to the delight of both chocolate connoisseurs and Hershey investors.

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