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McCormick Finishes 2011 With Strong Fourth Quarter

McCormick & Company reported double-digit sales growth for its fourth quarter and fiscal year ended Nov. 30, 2011. For the year, higher sales and cost savings offset the impact of increased material costs for the company, leading to a 6% increase in operating income and earnings per share of $2.79. For the fourth quarter, the company grew sales 13% and reported earnings per share of $0.98, which included a $0.05 per share unfavorable impact from transaction costs related to the completion of its Kamis acquisition and its Kohinoor joint venture.

For its 2012 fiscal year 2012, McCormick expects to grow sales 9–11% in local currency and achieve earnings per share of $3.01–3.06.

Alan D. Wilson, the company’s chairman, president and CEO, commented, “Our fourth quarter financial results were a strong finish to fiscal year 2011. We grew fourth quarter sales at a double-digit rate and achieved increased operating income in an environment that remains difficult in many of our largest markets. This performance demonstrates the strength of our brands, our ability to innovate and excellent progress with CCI [the company’s Comprehensive Continuous Improvement program].

“At McCormick, 2011 was a year of significant accomplishment. We completed three acquisitions, and the integration of these businesses has gone well. These acquisitions are accelerating our sales and profit growth and have expanded our presence in emerging markets and across several growth platforms. In 2012 we expect at least 13% of sales to come from emerging markets, up from 6% in 2006. Innovation is another key avenue of growth and new products launched in the past three years added 9% to sales in 2011. Cost savings in 2011 from our Comprehensive Continuous Improvement program—CCI—totaled $65 million, ahead of our initial target. Along with our pricing actions, these cost savings provided an offset to increased material costs and also helped fuel a $20 million increase in brand marketing support. I want to recognize employees throughout McCormick for these achievements that drove our growth and helped us navigate a period of volatility in our material costs and weakness in the broad economic environment. During 2011, McCormick shareholders received nearly $150 million of the cash we generated through dividend payments, and in November, the board approved an 11% increase in the quarterly dividend, which was our 26th consecutive year of increase.

“Consumers around the world continue to demand great taste, and we are meeting this demand with our passion for flavor, innovative new products, in-store merchandising and creative meal ideas. Our outlook is for solid profit growth in 2012 driven by higher sales and further cost savings. We expect the weak economy and volatile material costs to persist, and we intend to continue adapting our pricing actions and marketing programs. We also plan to offset a portion of increased costs and fuel higher brand marketing support with our CCI cost savings and have set a goal to achieve at least $40 million in 2012,” Wilson concluded.

Looking into McCormick’s fiscal year 2011 results in more detail, the company grew sales 11% in 2011 with a 5% increase in pricing, 4% from higher volume and product mix, and favorable foreign currency exchange rates that added 2%. Approximately half of the increase in volume and product mix was driven by acquisitions, and half by sales of new products, distribution gains and increased brand marketing support. The company took price increases during the year in response to a double-digit increase in material costs. Operating income rose 6% to $540 million. The higher sales and $65 million of CCI cost savings more than offset the unfavorable impact of increased material costs, and helped fund $20 million of incremental brand marketing support, which was a 12% increase from the amount spent in 2010. The 6% increase in operating income also included an $11 million unfavorable impact of transaction costs related to acquisitions completed in 2011.

Earnings per share for the fiscal year were $2.79 compared to $2.75 in 2010. In 2010, the reversal of a significant tax accrual increased earnings per share $0.10 and excluding this impact, adjusted earnings per share was $2.65. On a comparable basis, 2011 earnings per share rose $0.14 with the increase due to higher operating income, which included the $0.07 unfavorable impact of acquisition-related transaction costs. The company also reported $340 million in net cash flow from operating activities in 2011 compared to $388 million in 2010. Cash flow in 2011 was affected by an increase in inventory that was primarily related to increased material costs, as well as strategic inventory positions of certain spices and herbs. During the year, $441 million of cash and increased borrowings were used to fund acquisitions and a joint venture. In addition, the company returned cash to shareholders through $149 million of dividends and $89 million of share repurchases.

In the fourth quarter, McCormick achieved 13% sales growth. Pricing actions added 6% to sales and favorable foreign currency exchange rates added 1%. Volume and product mix grew 6% with 5% driven by acquisitions. New products, distribution gains and increased brand marketing support also grew volume and product mix. These increases were offset in part by a shift in sales that was due to retailer purchases in advance of pricing actions, which lowered sales volume by approximately 2% in the fourth quarter of 2011 compared to the year ago period. Operating income rose $7 million to $192 million, an increase of 4%. This increase included a $7 million unfavorable impact of transaction costs related to completed acquisitions, which lowered operating income by 4% in the fourth quarter. During the quarter, pricing actions and CCI cost savings more than offset the impact of increased material costs. Recognizing the importance of brand marketing support during the holiday season and in a period of increased pricing, the Company increased marketing by $10 million, including $4 million related to acquisitions. Excluding marketing support related to acquisitions, this was an 11% increase from the level of spending in the fourth quarter of 2010.

Earnings per share for the fourth quarter of 2011 was $0.98 compared to $0.99 in the fourth quarter of 2010. While higher operating income, including a $0.05 unfavorable impact from acquisition-related transaction costs, increased earnings per share, this was offset by an unfavorable tax rate, higher interest expense and lower income from unconsolidated operations. In the fourth quarter of 2010, the company had a more favorable tax rate due to increased U.S. foreign tax credits that resulted from the repatriation of cash from foreign subsidiaries. In 2012, the company expects to increase net cash provided from operations as a result of higher income and a reduction in inventory.

Looking at the company’s fourth quarter 2011 fiscal results by business segment, for its industrial business, McCormick saw sales rise 13% from the fourth quarter of 2010 as a result of favorable volume and product mix, as well as pricing actions. The impact of foreign currency exchange rates was minimal. Industrial sales in the Americas rose 11% with about 60% of the increase from pricing actions and 40% from higher volume and product mix. McCormick achieved strong growth in sales of snack seasonings, ingredients and other products sold to food manufacturers. A number of the new items developed feature all natural ingredients, reduced sodium and reduced calories for which there continues to be high demand. Demand in certain sectors of the food service industry remained weak, although sales rose this period primarily as a result of pricing actions. In EMEA (Europe, Middle East and Africa), industrial sales rose 12%, and in local currency increased 13%. Demand from quick service restaurants remained strong in this region for products supplied from operations in the U.K., Turkey and South Africa. Sales of snack seasonings were also strong this period. The impact from pricing actions was minimal in the fourth quarter of 2011. And in the Asia-Pacific region, sales rose 29% and in local currency grew 22%. Higher volume and product mix drove the majority of this growth with pricing actions adding about a quarter of the increase. Industrial business operating income rose 5% to $28 million largely as a result of strong sales growth. During this period, pricing actions and CCI cost savings more than offset increased material costs and a $1 million in increase in marketing support for branded food service products.

McCormick’s consumer business sales rose 13% from the fourth quarter of 2010. In local currency, sales grew 12% due to favorable pricing, and favorable volume and product mix, which includes the impact of acquisitions. In the Americas, consumer sales rose 7% due primarily to pricing. During the fourth quarter, the company also took pricing actions in this region to offset the impact of material cost increases. Sales from Kitchen Basics, acquired in July 2011, added 3% to volume and product mix, along with a 1% increase from sales of new products and from the impact of incremental brand marketing support. These increases in volume and product mix were offset by the unfavorable impact of customer purchases in advance of pricing actions that caused sales to shift between quarters and lowered volume and product mix by 4% in the fourth quarter. Also, sales of certain items were affected by the impact of higher prices this period. Meanwhile, consumer sales in EMEA increased 36% and in local currency rose 32%. Favorable volume and product mix was the primary driver of this increase with sales from Kamis adding 26% to fourth quarter sales growth. While McCormick continues to face a challenging environment in this region, it was able to selectively raise prices, which added 6% to fourth quarter sales. As to the Asia/Pacific region, fourth quarter sales rose 36% and in local currency grew 29%. Favorable volume and product mix was the primary driver of this increase with sales from Kohinoor, a majority-owned joint venture, adding 33% to sales growth. In the fourth quarter, pricing actions added 4% to sales in the Asia/Pacific region.

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