Executive Summary / Key Takeaways

• Tootsie Roll Industries, Inc. (TR) is leveraging recent operational efficiency gains, including AI-driven improvements, to partially offset significant input cost inflation, particularly in cocoa and chocolate.
• Despite a challenging market marked by customer resistance to price increases, the company demonstrated improved adjusted gross and operating margins in Q1 2025 compared to the prior year, driven by higher price realization and manufacturing efficiencies.
• The company maintains a strong balance sheet and liquidity position, supporting a significant multi-year plant expansion project ($95M-$100M) aimed at increasing capacity and efficiency, funded internally.
• Key risks include persistently high cocoa costs expected to worsen throughout 2025 and into 2026, uncertainty surrounding a multi-employer pension plan's ultimate impact, potential tariff effects, and ongoing losses at the Spanish subsidiary.
• While facing larger, more diversified competitors like Hershey, Nestlé, and Mondelēz, TR's focus on heritage brands and operational cost control provides a distinct, albeit niche, market position.

Tootsie Roll Industries, Inc. stands as an enduring icon in the confectionery aisle, a company whose name is synonymous with classic American candies like Tootsie Rolls, Tootsie Pops, and Junior Mints. Operating primarily in North America, with a presence also in Mexico, Canada, and Spain, TR's business model centers on manufacturing and selling a portfolio of beloved, affordable, and nostalgic treats. This positioning places it in direct competition with global food and beverage giants, necessitating a strategic focus on operational excellence and brand loyalty to maintain its standing.

The competitive landscape is dominated by players with significantly larger scale and broader portfolios, such as The Hershey Company (HSY), Nestlé S.A. (NSRGY), and Mondelēz International (MDLZ). These competitors often boast higher revenue growth rates and superior financial margins. For instance, recent data indicates Hershey achieving gross margins around 47% and operating margins near 24%, compared to TR's TTM gross margin of 35.57% and operating margin of 15.65%. Similarly, Nestlé and Mondelēz also exhibit stronger profitability metrics and faster revenue growth trajectories. This disparity in scale and financial muscle means TR must find distinct ways to compete effectively.

A critical element of TR's strategy and a key differentiator in this competitive environment is its recent emphasis on operational efficiency, notably through technological adoption. The company has implemented an AI layer in its manufacturing operations, leading to a reported 28% improvement in Overall Equipment Effectiveness (OEE) and a remarkable 90% reduction in line data analysis time. This technological enhancement is not merely an incremental improvement; it translates into tangible, quantifiable benefits that directly impact the bottom line. By optimizing production processes, TR can potentially achieve lower manufacturing costs per unit—estimated to be 15-20% lower than less efficient processes—and faster production cycles. This operational edge is crucial for a company competing in a price-sensitive market, allowing it to potentially improve margins and offer competitive pricing despite its smaller scale relative to rivals. While competitors like Nestlé and Mondelēz invest heavily in R&D for new product innovation, TR's technological focus appears centered on optimizing the production of its established, high-volume product lines, a strategic choice that leverages its core strength in manufacturing efficiency.

This focus on operational improvement is further underscored by a significant planned investment in plant manufacturing operations. The company is undertaking a multi-year expansion project with an estimated total cost of $95 million to $100 million over the next seven years, with the majority of expenditures anticipated between 2025 and 2027. This investment aims to meet forecasted demand, improve product quality, expand capacity, and further increase operational efficiencies. This strategic capital allocation, funded from internal sources, signals a commitment to enhancing the company's manufacturing capabilities as a core pillar of its long-term strategy.

Turning to recent performance, the first quarter of 2025 presented a mixed picture, reflecting the ongoing market dynamics and the impact of strategic responses. Net product sales decreased by 3.3% to $146.5 million compared to $151.5 million in Q1 2024. This decline was more pronounced in foreign markets (down 16.3%) than in the domestic U.S. market (down 1.8%), with domestic sales still representing a significant 91.4% of the total. Management attributed the sales headwinds primarily to increased resistance from customers and consumers to higher price realization efforts implemented in prior periods.

Despite the top-line pressure, profitability showed signs of improvement, largely due to the aforementioned operational efficiencies and pricing actions. Adjusted product cost of goods sold decreased by 6.6%, leading to a favorable 2.3 percentage point decrease in adjusted product cost of goods sold as a percentage of net product sales, falling from 67.6% in Q1 2024 to 65.3% in Q1 2025. This improvement benefited from higher price realization, enhanced plant manufacturing operating efficiencies, and certain cost reductions. However, the specter of significantly elevated cocoa and chocolate costs looms large. The company anticipates incurring even higher costs for these critical ingredients during the balance of 2025 and into 2026 as older supply contracts expire and new, higher-cost contracts take effect. The use of the LIFO inventory method means these rising costs will increasingly pressure gross profit margins as the year progresses.

Adjusted selling, marketing, and administrative expenses increased by 2.7% in Q1 2025, rising as a percentage of net product sales from 21.1% to 22.4%. This unfavorable increase reflects the impact of lower sales volumes on expenses that are generally fixed. Despite this, the improvements in gross margin flowed through to operating results. Adjusted earnings from operations increased by 5.7% to $19.4 million in Q1 2025 from $18.4 million in Q1 2024, resulting in a favorable 1.2 percentage point increase in the adjusted operating margin, from 12.1% to 13.3%. This demonstrates that higher price realization and gross margin gains effectively offset the adverse effects of lower sales volumes on operating profitability in the quarter.

Beyond operational earnings, other income components significantly impacted the bottom line. Investment income from available for sale securities and cash equivalents saw a substantial increase, rising from $1.9 million in Q1 2024 to $3.5 million in Q1 2025. This increase reflects the higher interest rate environment and larger average cash and investment balances held by the company. Net earnings attributable to Tootsie Roll Industries, Inc. increased to $18.1 million ($0.25 per share) in Q1 2025, up from $15.8 million ($0.22 per share) in Q1 2024, benefiting not only from improved operating performance but also from higher investment income and a reduction in average shares outstanding due to share repurchases.

The company maintains a robust liquidity position. Net working capital stood at $250.9 million at March 31, 2025, up from $246.3 million at December 31, 2024. The current ratio improved to 4.20 to 1.00. Aggregate cash, cash equivalents, and short and long-term investments totaled $507.6 million. While net cash provided by operating activities decreased significantly in Q1 2025 compared to Q1 2024, primarily due to changes in working capital (accounts receivable and inventory timing), the overall balance sheet strength provides ample resources for ongoing operations, dividend payments, share repurchases ($6.5 million in Q1 2025), and the planned capital expenditures for the plant expansion. The company also periodically contributes to a VEBA trust to fund employee benefits, with funds expected to cover costs through part or all of 2027.

However, several risks warrant close monitoring. The volatility and elevated costs in the cocoa and chocolate markets remain a significant concern, with expectations for costs to rise further. The company's ability to continue passing these costs onto consumers without negatively impacting sales volume is limited by the competitive environment. The multi-employer pension plan, despite receiving Special Financial Assistance, remains in critical status, and the ultimate outcome regarding the company's withdrawal liability is uncertain, potentially posing a material adverse effect. Tariffs on foreign-sourced ingredients and packaging, currently estimated at a $4.5 million annual adverse effect from temporary rates, could also impact costs depending on final permanent rates. Furthermore, the Spanish subsidiary continues to face competitive and business challenges, incurring operating losses expected to persist beyond 2025 and potentially requiring additional financing. Evolving food industry regulations, such as the potential phasing out of petroleum-based synthetic dyes, introduce additional uncertainty regarding future compliance costs and product formulations.

In the context of its larger, more diversified competitors, TR's strategy appears to be one of leveraging its strong brand heritage and focusing intensely on operational efficiency to defend its niche and manage costs in a challenging inflationary environment. While it may not match the growth rates or broad market reach of a Hershey or Nestlé, its operational improvements, particularly through technology, offer a quantifiable advantage in production costs. The significant investment in plant expansion signals a commitment to scaling this efficiency and meeting future demand for its core products.

Conclusion

Tootsie Roll Industries presents an investment narrative centered on a resilient heritage brand navigating a complex market through disciplined operational execution and strategic investment. The company's recent performance highlights its ability to improve margins through pricing and efficiency gains, even in the face of sales volume pressure and soaring input costs. The investment in AI-driven operational technology and the planned plant expansion are critical components of its strategy to enhance competitiveness and secure future capacity. While the strong balance sheet provides a solid foundation, investors must weigh the potential benefits of operational improvements and strategic investments against significant risks, including persistent commodity inflation, the uncertain outcome of the multi-employer pension liability, and challenges in foreign markets. The core investment thesis hinges on TR's ability to maintain brand relevance and translate operational efficiencies into sustained profitability and cash flow generation amidst intense competition and external cost pressures.