Tootsie Roll Industries, Inc. :TR-US: Earnings Analysis: Q3, 2017 By the Numbers : November 15, 2017

Tootsie Roll Industries, Inc. reports financial results for the quarter ended September 30, 2017.

We analyze the earnings along side the following peers of Tootsie Roll Industries, Inc. – Hershey Company, Rocky Mountain Chocolate Factory, Inc., John B. Sanfilippo & Son, Inc. and Mondelez International, Inc. Class A (HSY-US, RMCF-US, JBSS-US and MDLZ-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 183.02 million, Net Earnings of USD 26.93 million.
  • Gross margins narrowed from 37.87% to 37.07% compared to the same period last year, operating (EBITDA) margins now 31.94% from 23.11%.
  • Year-on-year change in operating cash flow of -60.44% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating margins contributed to decline in earnings.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-09-30 2017-06-30 2017-03-31 2016-12-31 2016-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 183.02 105.8 104.46 125.18 186.36
Revenue Growth (%YOY) -1.79 0.6 0.06 -11.05 0.94
Earnings (mil) 26.93 11.9 10.05 17.84 28.64
Earnings Growth (%YOY) -5.95 6.82 1.57 -9.46 9.42
Net Margin (%) 14.72 11.24 9.62 14.25 15.37
EPS 0.43 0.19 0.16 0.28 0.45
Return on Equity (%) 3.8 1.69 1.42 2.52 4.07
Return on Assets (%) 11.58 5.21 4.39 7.73 12.47

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Market Share Versus Profits

Revenues History
Earnings History

TR-US’s change in revenue this period compared to the same period last year of -1.79% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that TR-US is holding onto its market share. Also, for comparison purposes, revenues changed by 72.99% and earnings by 126.42% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s year-on-year earnings decline was driven by the drop in gross margins from 37.87% to 37.07%. This drop in earnings would have been worse were in not for operational cost control activities, which helped the operating margins (EBITDA margins) improve from 23.11% to 31.94%. For comparison purposes, gross margins were 38.98% and EBITDA margins were 18.37% in the previous period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

TR-US’s decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently 104.63 days, compared to last year’s level of 97.01 days.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

TR-US’s change in operating cash flow of -60.44% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 20.65% to 18.99% and (2) one-time items that contributed to a decrease in pretax margins from 22.12% to 21.28%

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Tootsie Roll Industries, Inc. engages in the manufacture and sale of confectionery products. Its services include wholesale distribution of candies to groceries, supermarkets, variety stores, dollar stores, chain grocers, drug and discount chains, cooperative grocery associations, warehouse and membership club stores, vending machine operators, the U. S. military, and fund-raising charitable organizations. Its principal markets include U.S., Canada, and Mexico. The company was founded by Leo Hirshfield in 1896 and is headquartered in Chicago, IL.

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