10-K: Tootsie Roll Industries Reports Mixed Results in 2024 Amidst Rising Costs and Sales Decline

Tootsie Roll Industries experienced a decrease in net product sales for 2024, while navigating rising input costs and managing its multi-employer pension plan obligations.

Summary

• Tootsie Roll Industries reported net product sales of $715.53 million for 2024, a decrease of 6.3% compared to $763.25 million in 2023, primarily due to lower sales volumes.
• The company's product cost of goods sold decreased by 8.4% to $468.06 million, with adjusted costs decreasing from 66.8% to 65.3% of net product sales.
• Selling, marketing, and administrative expenses decreased by 1.5% to $152.68 million, but increased as a percentage of net product sales from 18.4% to 19.2%.
• Earnings from operations decreased slightly to $100.51 million, with adjusted earnings from operations decreasing by 0.4% to $116.83 million.
• Net earnings attributable to Tootsie Roll Industries, Inc. were $86.83 million, or $1.22 per share, compared to $91.91 million, or $1.28 per share, in 2023.
• The company's effective income tax rate was 31.6% for 2024, compared to 23.4% in 2023, impacted by a non-cash tax charge of $11.01 million related to deferred tax assets.
• Cash flows from operating activities increased to $138.89 million, driven by a lower investment in net working capital.
• The company is pursuing a plant expansion expected to cost approximately $100 million over the next seven years.
• Tootsie Roll Industries participates in a multi-employer union pension plan that is in critical and declining status, with potential withdrawal liabilities.
• The company's largest customers, McLane, Wal-Mart and Dollar Tree, accounted for approximately 37% of net product sales in 2024.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While the company is facing challenges such as declining sales and rising costs, it is also taking steps to address these issues, such as investing in a plant expansion and implementing price increases. The sentiment is neutral overall.

Positives

• Product cost of goods sold decreased as a percentage of net product sales.
• Cash flows from operating activities increased significantly.
• The company is investing in a plant expansion to meet future demand.
• The company has a strong financial position with significant cash and investments.
• The company's union labor agreement at its Chicago plant was negotiated and executed in 2023 and expires in September 2027.
• The company concluded negotiations with its labor union at its Canadian plant in first quarter 2024 and is now operating under a contract with the labor union in Canada that expires in January 2029.

Negatives

• Net product sales decreased by 6.3% in 2024.
• Selling, marketing, and administrative expenses increased as a percentage of net product sales.
• Net earnings and earnings per share decreased.
• The company's effective income tax rate increased due to a non-cash tax charge.
• The company participates in a multi-employer union pension plan that is in critical and declining status, with potential withdrawal liabilities.
• The company's Spanish subsidiary is experiencing losses.

Risks

• Changes in the price and availability of ingredients and raw materials could impact profitability.
• Increased competition and discounting pressures could affect operating margins.
• Changes in consumer preferences and tastes could impact sales.
• Economic conditions could affect consumer purchases.
• Labor stoppages or shortages could disrupt operations.
• Operational interruptions relating to computer software or hardware failures, including cyber-attacks, could negatively impact sales and profits.
• Climate change and other environmental impacts and regulations could negatively affect the business.
• The company's dependence on large customers could result in decreased sales if any of these customers are lost or decrease their purchases.
• The multi-employer pension plan's critical and declining status could result in significant withdrawal liabilities.
• The company is exploring a variety of programs to increase sales and profitability of its Spanish subsidiary, which is experiencing losses.

Future Outlook

The company expects to experience even higher cocoa and chocolate costs in 2025 as many of its older supply contracts expire and new contracts at higher costs become effective. Management believes that operating losses at its Spanish subsidiary are expected to continue beyond 2025 and that these future losses, as well as some capital expenditures, will likely require additional cash financing. The Company expects that this plant expansion will take place over the next seven years, however, most of the actual expenditures are expected to occur in 2025 and 2026.

Management Comments

• The sales decline in fourth quarter and twelve months 2024 was driven primarily by lower sales volumes.
• The Company faced a more challenging market in 2024 as customers and consumers became more resistant to higher prices for our products. which were implemented to help restore our margins.
• Although we made progress in restoring our margins in 2024, cocoa and chocolate costs have moved significantly higher in the markets this year, and we expect to experience even higher cocoa and chocolate costs in 2025 as many of our older supply contracts expire and new contracts at higher costs become effective.
• Although the Company continues to monitor its input costs, we are mindful of the effects and limits when passing on the above-discussed higher input costs to our customers as well as the final consumers of our products.

Industry Context

The domestic confectionery business is highly competitive, with the main forms of competition comprising brand recognition, retail shelf space, and price. Many companies in the consumer products industry have increased selling prices in response to increases in input costs.

Comparison to Industry Standards

• The document does not provide enough information to make a detailed comparison to industry standards.
• Without specific competitor data or industry benchmarks, it's difficult to assess Tootsie Roll's performance relative to its peers.
• However, the document mentions that many companies in the consumer products industry have increased selling prices in response to increases in input costs, suggesting that Tootsie Roll's actions are in line with industry trends.

Management Changes

Legal Proceedings

• In the ordinary course of business, the Company is, from time to time, subject to a variety of active or threatened legal proceedings and claims.

Stakeholder Impact

• Shareholders may be concerned about the decline in sales and earnings.
• Employees may be affected by the company's efforts to control costs and improve efficiency.
• Customers may be affected by price increases and product weight changes.
• Suppliers may be affected by the company's efforts to manage input costs.

Next Steps

• The company plans to continue to issue quarterly cash dividends and the annual stock dividend.
• The company is continuing to make investments in plant manufacturing operations to meet new consumer and customer product demands, achieve product quality improvements, expand capacity in certain product lines, and increase operational efficiencies in order to provide genuine value to consumers.

Key Dates