Hershey CEO weighs next steps in China

HERSHEY, Pennsylvania Tue Sep 18, 2012 2:36pm EDT

Hershey's candy bars are displayed at a gas station in Phoenix, Arizona October 27, 2011. REUTERS/Joshua Lott

Hershey's candy bars are displayed at a gas station in Phoenix, Arizona October 27, 2011.

Credit: Reuters/Joshua Lott

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HERSHEY, Pennsylvania (Reuters) - Hershey Co's (HSY.N) CEO is deciding on his next step in China, but expects the U.S. candy maker to remain with its partner there even after it took sole ownership of its joint venture in India.

Hershey owns a factory in China with South Korea's Lotte Shopping Co Ltd (023530.KS). The two companies sell enough products to run their plant at about 90 percent capacity, and Hershey Chief Executive Officer John Bilbrey sees it needing more space very soon.

"We're looking now at what do we do next," Bilbrey said in an interview at company headquarters in Hershey, Pennsylvania, ahead of a new factory opening. "Do we joint venture again on an additional factory or do we build our own factory? Do we do it in Southeast Asia? We haven't answered that question."

Hershey, whose shares rose more than 1 percent, just spent $300 million to modernize and double the size of a plant less than two miles from where its founder Milton Hershey opened his first chocolate factory in 1905.

The updated factory, which officially opened on Tuesday, can make 70 million Hershey's Kisses a day, up from roughly 40 million before.

As for China, Bilbrey said another option is to move into Lotte's other factories there, if space permits.

"I think we know enough to build (a factory) on our own, but that may not be the most financially viable way to do it," Bilbrey said. He expects to make a decision in the next 12 to 18 months.

Another option is to acquire Lotte's confectionary business, according to Bernstein Research analyst Alexia Howard.

In a research note last week, Howard wondered whether Lotte's recent deal with electronics retailer Hi-mart Co (071840.KS) signaled a shift of focus away from candy. If so, the candy business would be a good fit for Hershey, she said.

Bilbrey declined to comment on any upcoming acquisitions, but he did affirm the company's intention to do deals.

"That definitely could be in the cards," said Morningstar analyst Erin Lash. While she expects Hershey to pursue acquisitions, she said one consideration was Hershey's control by a trust whose main objective, in her opinion, is to preserve strong cash flow.

When asked about the trust, which has a 30 percent economic interest in the company but 80 percent of the voting rights, Bilbrey said it was "very supportive" of the company's strategy.

TO GO IT ALONE OR NOT?

Many international joint ventures are structured with eventual exit plans, so Bilbrey said it was no surprise when Hershey moved earlier this month to buy out its Indian partner, Godrej Consumer Products (GOCP.NS).

"We learned a lot from them," he said. "They were good partners, but food is not a core competency for them. We got ourselves to where it would be better for us to go on our way."

Just because Hershey bought out its Indian partner does not mean it will buy out all its partners, Bilbrey said.

"This is not about 'do you always walk away from them,'" he said, adding that he expects Hershey to continue to partner with Lotte, for example.

Referring to a Brazilian venture Hershey has with Bauducco Foods, he said he had no reason to believe that relationship will change.

"That may go on in perpetuity because it's good for them," Bilbrey said. Since business is seasonal for the Brazilian maker of panettone, an Italian holiday cake, it benefits from having a partner to share the factory's costs, he said.

Along the same lines, Hershey is building a distribution center in Canada with Italy's Ferrero.

Hershey has forecast 2012 sales of about $6.5 billion, with about 15 percent of that coming from international markets. By 2017, the company expects revenue of about $10 billion, with international sales accounting for about 20 percent.

Growth of the company's existing brands, such as Reese's, Kit Kat, Twizzlers and Jolly Rancher, should bring the company to about $9.3 billion, Bilbrey said. The remainder should come from acquisitions.

Acquisition targets could include brands in international markets or in the United States, in candy or in adjacent categories such as snack bars or other nutritional products, he said.

"We actively look all the time," said Bilbrey, whose favorite candy bars are Hershey's Milk Chocolate with Almonds and PayDay.

In December 2011, Hershey agreed to acquire Canada's Brookside Foods, which makes chocolate-covered jelly candies.

Those candies, made with fruits like acai and pomegranate, are sold only in Canada and in U.S. Costco Wholesale Corp (COST.O) stores. But Hershey plans to roll them out widely across the United States, starting in January.

Hershey shares were up 1.1 percent at $71.09 on Tuesday afternoon on the New York Stock Exchange. The wider market, as measured by the Standard & Poor's 500 index .SPX, was down 0.3 percent.

(Editing By Ryan Woo, Tim Dobbyn and Lisa Von Ahn)

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