On the money: Solid Lindt outpaces chocolate peers
Lindt's premium sales grow ahead of chocolate market
Lindt & Sprungli, the upmarket Swiss chocolate group, today (19 August) underlined why it is a business seen as one of the better performers in the sector.
The Lindor maker reported a jump in half-year profits despite pressure from raw material costs, as it gained market share.
Lindt had already filed its sales for the first half of the year but its earnings numbers and the maintenance of its guidance for 2014 was welcomed by analysts.
Speaking to analysts after the numbers were published, Lindt CFO Dr Dieter Weisskopf was quizzed about the company's plans for its recent acquisition, the US confectioner Russell Stover Candies, and was asked about the pressure from raw material prices it - along with all confectioners - is facing.
Dr Weisskopf's comments on Lindt's plans for Russell Stover left analysts with some questions but, after only announcing the deal last month, it was perhaps understandable why he could not provide detailed answers on synergies.
Lindt's style is to be cautious, even conservative. Given Lindt's strong first-half sales, one analyst even asked why the company was simply sticking to its previous forecast for a 6-8% rise in organic sales. Dr Weisskopf quipped he was "not the most aggressive guy".
However, in the main, analysts praised Lindt's performance, with Bank Vontobel analyst Jean-Philippe Bertschy describing the results as "spotless".
"Everything's ticking right at Lindt, which further gained market share," Bertschy wrote in a note to clients today. "The 9.2% organic growth in the first half of 2014 compares with 3.4% for Nestle's confectionery division - [with 0.3% volume growth] - 1.4% at Mondelez International, and 4.2% at Hershey. [The] global chocolate market grew 4.3%. The operating costs are under control, in spite of increased marketing investments. The ramp-up of the capex is the logical consequence of strong volume growth and attractive prospects."
Lindt's 9.2% increase in organic sales was driven by a 8.5% rise in volumes, a notable performance. The company pointed to share gains in key European markets and said it was growing "considerably faster" than the overall market in North America. On the back of the growing volumes, Lindt has invested to expand production capacity at facilities in Switzerland, Germany, France and the US.
Questions on Russell Stover ranged from the US business' margins, on to synergies and production changes.
Dr Weisskopf said Russell Stover's operating margin was similar to Lindt, although he said he could not yet provide exact figures for any synergies it could make from the deal. In any case, he said synergies were not a key factor in Lindt's move for Russell Stover. "We have not integrated any synergies in order to justify the purchase price [for Russell Stover]," he said. "It is an ongoing, good, nice business. Once we know how it is ticking over, we are looking at the possibility of what we can do. We have a conservative approach. It's not that we buy the business and change it to run after synergies."
However, the Lindt finance chief did indicate the company could look at relocating some of its current production in the US to Russell Stover sites. "This is an open question. We have seen all the factories. We are not yet there that we can give you a clear answer. It's definitely an opportunity. We are looking at seasonal production. What, how much and when is still an open question," he said.
Strategically, Dr Weisskopf insisted the acquisition was good for Lindt. "Russell Stover is perfectly complementary to the Lindt US and Ghirardelli portfolio. We will be positioned as a clear number three in the single biggest chocolate market with a market share of a little bit over 10%."
Not all analysts are entirely convinced. Kepler Cheuvreux analyst Jon Cox, who labelled Lindt "a class act" after the first-half results were published today, nonetheless questioned the deal. "We have some misgivings about its recent acquisition in the US, where details remain sketchy at best and there are questions about the Russell Stover (more mainstream and therefore slower growing) brand compared to Lindt's premium offering," Cox wrote in a note to clients today.
Elsewhere, Lindt's premium positioning worldwide could help shelter its business more effectively against pressure from raw material costs than some of its competitors.
Dr Weisskopf spoke at length about the higher cocoa and nut costs Lindt was seeing. Increasing demand, climate and, the Lindt executive noted, speculation had pushed up cocoa prices, while frost in Turkey and drought in California had had an impact on hazelnut and almond prices.
Price and mix was only a small factor in Lindt's sales increases in the first half of the year, contributing just 0.7 percentage points to the 9.2% rise in organic sales. Dr Weisskopf said there had been resistance among some customers, notably in Europe, against passing on costs.
However, Lindt maintained its forecast for margins, which it said would be up 20-40 basis points, "well within" its medium- to long-term target range.
Nevertheless, Dr Weisskopf indicated Lindt would look to push up prices in 2015 in the face of what the company sees as continued pressure from raw material prices.
That said, at present, Lindt is a business growing ahead of the market and its performance is being well-received by analysts.
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