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McCormick Q2 Sales Up On Increases in Consumer, Industrial Business

Posted: June 26, 2014

McCormick & Company Inc.'s fiscal second-quarter sales rose 3% with increases in both its consumer and industrial businesses. Also, the company backed its outlook for fiscal 2014. 

For fiscal year 2014, the company reaffirmed its plans to grow sales 3% to 5% and report earnings per share of $3.22 to $3.29.

View the press release below or click here.

Alan D. Wilson, Chairman, President and CEO, commented, "We achieved further growth in our business this quarter, with year-to-date increases of 5% in sales, 9% in earnings per share and nearly $50 million of additional cash flow from operations. Demand for flavor is growing globally and McCormick is meeting this demand with its range of products that include innovative new items, healthy recipe ideas, ethnic cuisine and family favorites. In the second half, we are expanding our product offerings with new skillet sauces, gluten-free recipe mixes, premium herbs and other items. We also plan an increase in marketing support to build our brand equity and drive sales. We are fueling this growth with our Comprehensive Continuous Improvement (CCI) program. Through CCI, we are improving productivity in operations around the world and are on-track to reach at least $45 million in 2014 cost savings.

"We continue to adapt to a changing environment as we pursue global growth opportunities and address competitive challenges in certain markets. We are making progress with our actions to drive sales and reaffirm our financial outlook for 2014. In addition to higher sales and profit, we continue to expect strong cash flow from our business and remain committed to a balanced use of cash to build shareholder return and invest in growth. Through the first half, we returned $223 million to shareholders in the form of dividends and share repurchases, up 22% from the first half of 2013. McCormick is well-positioned for the future, with a great business, effective growth strategies and employees around the world engaged in our success."

Second Quarter 2014 Results

McCormick's second quarter sales rose 3% from the year-ago period. The rate of growth in international markets was particularly strong this period, including incremental sales of Wuhan Asia Pacific Condiments (WAPC) that was acquired in May 2013 and added 3 percentage points to sales growth. The company reported lower sales in the Americas region, largely as a result of competitive pressure for its consumer business. This competitive pressure began in 2013 and the company has actions underway to build brand equity and more effective category leadership with retail customers. The company has had initial progress with these actions and anticipates improved performance in its U.S. consumer business toward the end of 2014.

Cost savings from the company's CCI program and the impact of higher-margin industrial products improved gross profit margin, which rose to 39.9% from 39.3% in the year-ago period. The company increased operating income 5% to $122 million in the second quarter of 2014, as the result of higher sales and improved gross profit margin. Earnings per share rose 8% to $0.64 in the second quarter of 2014 from $0.59 in the year-ago period, due to the increase in operating income, as well as lower shares outstanding and a lower tax rate. For the first six month of 2014 net cash provided by operating activities rose $49 million from the year-ago period, due in part to lower retirement plan contributions.

2014 Financial Outlook

McCormick reaffirmed its financial outlook for 2014. The company anticipates 3% to 5% sales growth in local currency, which includes the incremental impact of the WAPC acquisition in the first half of the year. In addition, the company continues to expect unfavorable foreign currency exchange rates to reduce sales by approximately 1% in 2014, based on year-to-date results and the prevailing rates. The company also reaffirmed its plans to invest at least $25 million in increased brand marketing support during the fiscal year to drive sales of new products, as well as core items. These investments, in brand building and innovation, are funded in part by McCormick's CCI program which is expected to deliver at least $45 million of cost savings in 2014.

The company reaffirmed projected 2014 earnings per share of $3.22 to $3.29. In this projection, higher sales, a favorable mix of business and CCI cost savings are expected to more than offset a significantly higher tax rate and an estimated $0.01 per share of special charges. The company has greater confidence in the upper end of its earnings per share range as it has lowered its expected tax rate for the fiscal year to approximately 29.5% from a range of 30% to 31%, based on the expected business mix. Another year of strong cash flow is anticipated in 2014, with plans to return a significant portion to McCormick's shareholders through dividends and share repurchases.

Business Segment Results

Consumer Business (in millions)

  • Consumer business sales rose 4% when compared to the second quarter of 2013. The WAPC acquisition contributed 6 percentage points of sales growth. The impact of currency exchange rates was minimal. Consumer sales in the Americas declined 5%, and in local currency decreased 4% from the second quarter of 2013. In comparison, consumer sales in this region rose 5% in the second quarter of 2013 from the second quarter of 2012. During the second quarter of 2014, higher pricing added 2% of sales growth, reflecting a U.S. price increase effective in late 2013 taken as an offset to higher material costs. Volume and product mix declined in the second quarter of 2014 and actions are underway to address the competitive environment in this region, including accelerated innovation, increased brand marketing support and more effective category leadership with retail customers. Improved sales of recipe mixes, new product placement and retail price adjustments are early indications of progress with these actions and the company expects improved performance toward the end of 2014.
  • Consumer sales in Europe, Middle East and Africa (EMEA) grew 7%. In local currency the increase was 2% and was attributable to pricing actions taken in response to higher material costs. Volume and product mix in this region declined 2%, due in part to a difficult retail environment in certain markets, including the U.K.
  • Second quarter consumer sales in the Asia/Pacific region rose 70%. In local currency, sales grew 76% with WAPC contributing 70 percentage points of the increase. Sales of the company's base business in China grew at a double-digit rate with new products and expanded distribution.

Operating income was $86 million for the consumer business, 2% lower than the second quarter of 2013. During the second quarter of 2014, the unfavorable impact of business mix and a $3 million increase in brand marketing support was offset in part by the favorable impact of higher sales and CCI cost savings. The company also had a favorable comparison in the year-ago period to $4 million of transaction costs related to the acquisition of WAPC that were recorded in the second quarter of 2013.

Industrial Business 

Industrial business sales rose 2% when compared to the second quarter of 2013, and in local currency the increase was 3%. Contributing to this growth were pricing actions, as well as higher volume and product mix that was driven by both product innovation and distribution gains.

  • Industrial sales in the Americas decreased 2%, and in local currency the decrease was 1%. In this region, a 2% decline in volume and product mix resulted from on-going weakness in demand from quick service restaurants. This decline was offset in part by pricing actions taken to offset the impact of higher material costs.
  • In EMEA, the company grew industrial sales 14% and in local currency the increase was 12%. Sales growth in this region remained robust, with higher sales to quick service restaurant customers driven by new products and distribution gains. In addition, the company passed-through to its customers 6% in higher pricing in response to increased material costs.
  • Industrial sales in the Asia/Pacific region rose 6% this quarter and in local currency the increase was 10%. Higher volume and product mix was mainly the result of improved sales to quick service restaurants in China. This compared to a year-on-year sales decline in China in the second quarter of 2013 that related to consumer concerns with poultry consumption.

In the second quarter of 2014, industrial business operating income rose 26% from the year-ago period to $36 million. Operating income margin reached 8.6%. The growth in operating income was mainly due to higher sales, CCI cost savings and increased margins within the product portfolio. The increase in industrial business operating income in the second quarter of 2014, compared to a 13% year-on-year decline in operating income when the second quarter of 2013 is compared to the second quarter of 2012.