Research: Rating Action: Moody’s affirms Hershey’s A1 senior

New York, July 05, 2022 — Moody’s Investors Service (“Moody’s”) today affirmed all ratings of The Hershey Company (“Hershey”), including the A1 senior unsecured and Prime-1 commercial paper ratings. The outlook is stable.

“Today’s affirmations recognize Hershey’s solid operating performance despite the effects of the COVID-19 pandemic, which demonstrates the strength of its brands, retail relationships, and its products that continue to resonate with consumers,” stated Moody’s Vice President/Senior Credit Officer Charlie O’Shea. “The affirmations also consider Moody’s favorable view of Hershey’s strong and stable free cash flow and predictable financial strategy, with tactical acquisitions that increase leverage swiftly-integrated and becoming accretive in a timely fashion, therefore restoring leverage metrics to within our band of tolerance for the A1 rating,” continued O’Shea.

Affirmations:

..Issuer: Hershey Company (The)

…. Issuer Rating, Affirmed A1

….Senior Unsecured Commercial Paper, Affirmed P-1

….Senior Unsecured Medium-Term Note Program, Affirmed (P)A1

….Senior Unsecured Regular Bond/Debenture, Affirmed A1

Outlook Actions:

..Issuer: Hershey Company (The)

….Outlook, Remains Stable

RATINGS RATIONALE

Hershey’s A1/Prime-1 ratings reflect its leading position in the U.S. confectionery market, strong and largely predictable profit margins, good liquidity, and stable demand for its products that results in sizeable free cash flow as demonstrated through myriad cycles. This view is tempered by Hershey’s more limited product and geographic diversification compared with other global food companies and its primary competitors, as well as leverage that can be impacted by acquisitions such as the 2018 purchases of Amplify Snack Brands, Inc., Pirate Brands and One Brands, and 2021 acquisition of Dot’s Pretzels/Pretzels Inc. About 92% of Hershey’s sales are generated in North America. Hershey is exposed to potential commodity cost fluctuations, especially cocoa and sunflower oil, both of which are currently experiencing increases and therefore pressuring margins. Such factors are among those that require Hershey to maintain stronger and more stable credit metrics than other A1-rated consumer products companies. Hershey’s scale and diversification will likely expand as it pursues both domestic tuck in acquisitions and international growth. However, scale will still be modest when compared with many A1 rated peers.

ENVIRONMENTAL SOCIAL AND GOVERNANCE CONSIDERATIONS

Hershey’s CIS-1 score, representing positive ESG impact on the company’s ratings, is based on Moody’s favorable view of the company’s governance, particularly the conservative financial strategy and risk management that is supported by a long-term investment orientation. The financial strategies lead to a higher rating than otherwise would occur based on the company’s size and business profile, and the moderately negative environmental and social risk exposure.

Hershey’s environmental score reflects Moody’s view that there is moderately negative impact (E-3) on credit risk exposure due to natural capital and waste and pollution risks. Natural capital risks relate to reliance on cocoa as a key input into a meaningful proportion of its products, with cocoa subject to variability surrounding cost and availability. Waste and pollution risks include byproducts of the manufacturing process and widespread use of packaging that creates waste. This view also considers Hershey’s stated goals surrounding sustainability and responsible sourcing. Hershey’s commitment to sustainability began with founder Milton Hershey, and has been core to the company’s mission since its founding.

Hershey’s social score reflects moderately negative (S-3) risk exposure that reflects health and safety and responsible sourcing risks. The company must cost-efficiently manage a broad and complex supply chain to minimize negative environmental effects of its vendors. The manufacturing process also presents moderately negative health and safety risks for employees. We consider customer relations and demographic and societal trend risks to be neutral to low despite the focus on health and obesity concerns related to confectionary products. Like other food companies, Hershey will face pressures due to changes in consumer preferences, and shopping habits as well as from a changing retail environment. Moody’s expects steady consumption of chocolate while Hershey’s expanding product portfolio and growing presence in faster growing regions helps to partially mitigate these risks. Hershey has been acquiring to diversify its product lines. Founder Milton Hershey believed in responsible citizenship through strong investment in local communities and the establishment of the Milton Hershey School for disadvantaged children. Philanthropy through the Milton Hershey school and other community initiatives continues to be a key mission today, with the company laser-focused on making a difference in local communities and helping children globally reach their full potential. The solid brand perception contributes to low to neutral customer relationship risk.

Hershey’s governance is considered positive for the rating as evidenced by its G-1 score. Driving the G-1 is Moody’s view that Hershey will continue to maintain conservative financial policies, reflected by generally low leverage and relatively modest leverage swings even after M&A. The Hershey Trust Company, as Trustee for the benefit of Milton Hershey School, controls approximately 80% of Hershey voting shares through its ownership of common stock and Class B shares. Three members of the Hershey Trust are on the twelve-member Hershey board. This control creates moderately negative governance risks from concentrated decision making, but Moody’s nevertheless views the influence of the Hershey Trust as somewhat unique given the long-term investment focus and focus on conservative financial strategies that it has exhibited.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody’s expectation that Hershey will continue to sustain solid operating performance over the next 12 to 18 months. The stable outlook also reflects Moody’s expectation that retained cash flow/net debt will rebound back over 30% as the debt incurred in the $1.2 billion November 2021 acquisition of Dot’s/Pretzels Inc. is repaid, abetted by a healthy portion of the financing consisting of commercial paper, reflecting management’s desire to repay the debt quickly.

Ratings could be upgraded if Hershey’s financial strategy reflects a commitment to a higher rating on all fronts, as well as greater scale, product and geographic diversification.

Given the affirmation, there is no downward rating pressure. Ratings could be downgraded if operating performance deterioration or a more aggressive financial strategy results in the EBIT margin sustained below 15%, or retained cash flow/net debt sustained materially under 25%.

The principal methodology used in these ratings was Consumer Packaged Goods published in June 2022 and available at https://ratings.moodys.com/api/rmc-documents/389866. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

The Hershey Company (“Hershey”) is the largest producer of chocolate in North America and a leader in chocolate and sugar confectionery products, with an ongoing expansion into salty snacks. Hershey is publicly traded, but The Hershey Trust Company controls approximately 80% of voting shares. LTM March 2022 revenues were around $9.3 billion.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of  the guarantor entity.  Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Charles O’Shea
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

John E. Puchalla, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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